Government & Politics  March 30, 2018

Tax Cuts and Jobs Act: What should businesses be considering now?

On Dec. 22, 2017, the Tax Cuts and Jobs Act, Public Law No. 115-97, was signed into law introducing tax reform for business and individual taxpayers. Most of the provisions in the act applied to tax years beginning on Jan. 1, 2018. Below is a discussion of considerations businesses should be making now as it relates to some of the act’s key business provisions. 

Evaluate your eligibility for the pass-through 20 percent qualified business income deduction. Pass-through entities should review their structure to enable them to fully use the 20 percent qualified business income deduction. This would include a thorough review of compensation and business entity selection. This review is especially important in closely held businesses as there is more flexibility to incorporate changes in 2018. The pass-through  deduction becomes limited at the individual taxpayer level once the taxpayer’s total income exceeds $315,000 if married ($157,500 single). Once the income limit is exceeded the pass-through deduction is limited to 50 percent of taxable wages or 25 percent of taxable wages plus 2.5 percent of the unadjusted basis of all qualified property. Taxpayers with pass-through income from specified service business are not eligible for the deduction if their income exceeds the imposed limits, however, architect and engineering firms are specifically excluded from the specified service business definition. Below are two examples illustrating how an increase in compensation will affect the amount of the deduction for a single employee/owner business (without considering the payroll tax impact).

Example 1: In 2018 a business (a non-specified service business) has $450,000 in qualified business income before taxable wages and the single owner receives $50,000 in reasonable compensation. The pass-through deduction would be limited to the lesser of: 20 percent of qualified business income of $400,000 or 50% of taxable wages of $50,000. The pass-through deduction would be limited to $25,000.

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Example 2: The same facts as example one except that the owner receives $100,000 in reasonable compensation. The pass-through deduction would be limited to the lesser of: 20 percent of qualified business income of $350,000 or 50 percent of taxable wages of $100,000. The pass-through deduction would be limited to $50,000.

Consider increased expensing of the costs of certain qualified business property. The act allows full expensing for qualified business property placed in service after Sept. 27, 2017 until Dec. 31, 2022. It also removed the “original use” requirement, which allows used assets to be fully expensed. Prior to the act taxpayers used Internal Revenue Code Section 179 to immediately expense qualified business property, however, Section 179 has overall limitations on the total cost of assets that may be taken in a given year. Further, the Section 179 deduction was limited to the amount of taxable income from the active conduct of any trade or business calculated at the taxpayer level.

Evaluate your business meals and entertainment expenses. Business should evaluate how they account for meals and entertainment as some of the rules for deducting these expenses have changed. No deduction is allowed for entertainment, amusement or recreation even if the expense is directly related to the active conduct of a trade or business. Business meals remain 50 percent deductible as long the expense is directly related to the active conduct of a trade or business. Further, the 50 percent limit is expanded to include meals provided to employees meeting the de minimis fringe requirements. Employee holiday parties and summer picnics remain 100 percent deductible and should be accounted for separately.

Consider the new rules regarding net operating losses. Historically businesses have been able to carry back or carry forward a net operating loss to fully offset 100 percent of taxable income (90 percent of alternative minimum tax). Beginning Jan. 1, 2018, any net operating losses generated will only offset 80 percent of taxable income. Two-year net operating loss carrybacks, except for farming losses, have been eliminated, however, net operating losses can now be carried forward indefinitely.

Example: In 2018 a business has a $10 million net operating loss. In 2019 a business has taxable income of $5 million. The net operating loss deduction would be $4 million (80% of $5 million). This would result in taxable income of $1 million and a net operating loss carry forward of $6 million. 

Navigating the Act can be overwhelming and we are here to help. Please contact us to analyze how the Act will impact you.

Christine Ludwig, CPA, is senior tax manager for Anton Collins Mitchell LLP, an accounting firm with offices in Fort Collins and Boulder.  She can be reached at cludwig@acmllp.com.

On Dec. 22, 2017, the Tax Cuts and Jobs Act, Public Law No. 115-97, was signed into law introducing tax reform for business and individual taxpayers. Most of the provisions in the act applied to tax years beginning on Jan. 1, 2018. Below is a discussion of considerations businesses should be making now as it relates to some of the act’s key business provisions. 

Evaluate your eligibility for the pass-through 20 percent qualified business income deduction. Pass-through entities should review their structure to enable them to fully use the 20 percent qualified business income deduction.…

Katherine Stahla
Katherine Stahla is a reporter covering business, real estate, agriculture and energy in Northern Colorado. Katherine loves covering stories that matter to communities all across the state. Katherine also likes making videos supplementing the news, and fun short films on the side.
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