The Tax Cut and Jobs Act is the greatest tax change to the US tax law since 1986. This article will go over the changes for sole proprietors, partnerships, LLC's, and C and S corporations for federal income taxes.
All Entity Types
Section 179
For 2017, a taxpayer could elect to take $500,000 of Section 179 depreciation on assets placed in service that year. Section 179 is depreciation expense that a taxpayer elect to take the full cost of an asset.
In 2018, a taxpayer can elect to take $1,000,000 of Section 179 depreciation on assets placed in service that year. Read on as assets over the $1,000,000 purchase price will have 100% bonus depreciation on them. There maybe state tax differences between Section 179 vs bonus depreciation expenses. You will need to analyze which method of depreciation would be best for your state tax situation.
Bonus Depreciation
Assets placed in service in both 2017 and 2018 will be allowed 100% bonus depreciation. In other words, the amount of assets purchased and started to be used in 2017 and 2018 taxpayers can take as depreciation expense all in one year.
Meals & Entertainment
For 2017, a taxpayer could deduct 50% of the expense of meals and entertainment for business purposes. For example going to a baseball game with a client you got to dinner and buy hot dogs in the stands. The price of the tickets, dinner and hot dogs would be deductible at 50%.
For 2018, meals are deductible at 50% and entertainment is not deductible. Taking the example above, you could deduct the dinner and hot dogs at 50%, but the tickets to the baseball game is not deductible. Meals during travel are still 50% and office holiday parties are still 100%.
Pass-through Entities (Sole Proprietors, Partnerships, S Corporations, LLC's)
20% Pass-Through Tax Deduction
New for 2018! For Sole Proprietors, Partnerships, LLC and S Corporations, taxpayers get a 20% deduction of Qualifying Business Income. So if you make $100,000 in you business, you will get a deduction of $20,000 resulting in an AGI of $80,000. There are many limitations to this deduction as you may have guessed. The basic ones are the greater of 50% of wages the business paid to employees or 25% of wages the business paid to employees + 2.5% of qualified property (basically depreciable assets used by the business). There will be another post that gets into the details of this calculation as there are income limitations, business services etc. that are beyond the scope of this article.
Excess Business Loss Limitation
This limitation relates to business that the owner that materially participates. Generally, materially participates means:
* You work more than 500 hours a year in the business.
* You work substantially more than others in the business.
* You work at least 100 hours a year in the activity and at least as much as another individual.
* You had significant participation in the business for the tax year for more than 500 hours.
* You materially participated in the business for any 5 of the prior 10 tax years (not necessarily consecutive).
* The business was a personal service activity and you materially participated in the business for any 3 prior tax years (not necessarily consecutive). A personal service activity involves the performance of personal services in the field of health, law, engineering, architecture, accounting, performing arts, actuarial science, consulting, and any other trade or business where capital is not a material income producing factor.
* Based on all of the circumstances and facts, you participated in the business on a regular, continuous, and substantial basis for more than 100 hours during the tax year.
For 2017, individuals were not limited on the excess business losses that they incurred during a tax year. They were allowed to offset these losses against other income such as wages, interest and dividends, etc.
For 2018, the loss for the business is limited to $500,000 for Married Filing Joint and $250,000 for other filers. The loss over the threshold amount is carried forward as an NOL. The NOL will be carried forward indefinitely, no carryback allowed, and will only be allowed to offset 80% of taxable income.
C Corporations
21% Tax Rate
In 2017, C Corporations were taxed based on their tax bracket up to a maximum of 35%.
For 2018, C Corporations are taxed at a flat tax rate of 21%.
The double taxation of dividends still exists. The corporation is taxed on its business income and the recipient of the dividends will be taxed on their income tax return.
NOL Limitation
In 2017 if an C Corporation the tax deductions were more than income, this would result in a Net Operating Loss (NOL). This NOL would be required to carry the loss back 2 years (unless an elections not to was made) and forward for up to 20 years. In those carryback or carryforward years, the corporation would be allowed to offset 100% of the taxable income with the NOL.
For NOL's created in 2018 and forward, the NOL cannot be carriedback and the carryforward period is unlimited. The hitch is you can only offset your taxable income by 80% with NOL's created in 2018 and forward. If corporation has an NOL that was created 2017 and before, the corporation will be allowed to offset 100% of the income with the NOL. Going forward, a detail tracking of NOL's by year will be imperative to know which NOL's will offset 100% and 80% of taxable income. This is also important to remember that a corporation that may have had losses in the past and have always utilized NOL's to reduce taxable income to zero may now need to make estimated tax payments as they will need to pay tax on 20% of their income.
AMT Tax
For 2018, the Alternative Minimum Tax (AMT) has been eliminated.
If you have any questions or want to learn more, email barb@calc-you-later.com
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