Tax season is upon us and as a business owner, it’s in your best interest to make yourself familiar with the many accounting changes that took place under the 2017 Tax Cuts and Jobs Act. While some changes will involve your overall method of accounting, several others affect only certain types of businesses. Either way, you’ll want to understand what these changes will mean to you, and together we can create a plan of action.
The changes brought on by the 2017 Tax Cuts and Jobs Act will allow more businesses to utilize the cash basis method of accounting. All businesses (except tax shelters) with average gross receipts of less than $ 25 million over the previous three tax years can now use the cash basis method of accounting.
For tax years beginning after 12/31/17, up to $1,000,000 of qualifying purchases can be made and immediately written off as a section 179 deduction. In addition, a business owner may purchase up to $2.5 million in qualifying business property, however, the deduction will be phased out for those who purchase more than the allowed $2.5 million. If your total asset purchases exceed $2,500,000, the $1,000,000 will begin to phase out, meaning the full $1,000,000 will not be available for a write-off. Fiscal years will continue with the previous Section 179 expense deductions of $ 510, 000 for one year. Qualifying assets include certain types machinery, construction equipment, furniture, computers, software, or technology equipment. New this year are tangible personal property in lodging facilities (including rental properties and hotels), roofs, HVAC, fire protection systems, alarm systems, and security systems. Because certain restrictions do apply, its best to get in touch with us so we can go over all qualifying purchases with you.
C Corporations are going to see a major change as the flat tax rate has dropped to 21%, starting in 2018. Because this new tax rate could mean big changes for business, we recommend having an analysis done to make sure that being structured as a partnership, S-Corporation or disregarded entity is still the best option for your business. In addition, the net operating loss rules for C Corporations have changed as well. Under previous tax laws, a loss could be carried back 2 years and forward 20. The use of the loss was not limited to a percentage of income. Under the new tax law there is no option to carry back the net operating loss, it must be carried forward but is limited to 80% of the current year income.
Previously 50% deductible, entertainment expenses will no longer be deductible at all. Entertainment expenses include athletic events, concerts, and certain club dues. The good news is that the 50% deduction for meals has not changed.
The changes that have gone into effect as part of the new tax reform bill, have left many asking: “how do I calculate the 20% deduction for my business?” The new 20% flow through deduction is available for qualifying pass thru entities, schedule C’s, some schedule E’s and F’s; although not available for C corporations. While pass-through income will continue to be taxed at ordinary income tax rates, many small business owners will be eligible to deduct 20% of their qualified business income (QBI) starting in 2018. In other words, some pass-through entities will only be taxed on 80% of their pass-through income. To calculate the deduction take 20% of the lesser of qualified business income or adjusted taxable income. Note that there are limitations for those with incomes greater than $315,000 (MFJ) or $157,500 (others).