When President Trump announced the 2017 Tax Cuts & Jobs Act (TCJA) that was signed into law in December 2017, he outlined the key goals and elements of the bill to include:
- Corporate Tax Cuts
- Redrawn Tax Brackets
- Increased Standard Deduction
- Increased Business Deduction
- Elimination of the Obamacare Personal Mandate
How could TCJA affect your business? Your employees? You?
For starters, we cannot emphasize enough the importance of having clear communication with your CPA and being in a position to understand and follow-through on their advice.
We will repeat this vital directive numerous times throughout the post.
Sherman Oaks Accounting & Bookkeeping powered by One Source Services, Inc. has compiled some of the ways that your business and employees could be impacted by the tax reform.
Again, please consult your CPA for information relevant to your specific circumstances.
C-CORPORATIONS
The tax reform lowered the corporate tax rate for C-Corporations from 35% to 21%.
This 14% reduction could have a huge impact on a C-Corporation’s bottom line, giving them more money to invest back into their business and employees or to distribute to shareholders.
PARTNERSHIPS, S-CORPORATIONS, & SOLE PROPRIETORSHIPS
Partnerships, S-Corporations, and sole proprietor businesses are not taxed directly like a C-Corporation, but are subject to “pass-through” taxation that is passed-through to shareholders and owners.
TCJA introduced a new 20% tax deduction for businesses with pass-through taxation.
The deduction is applied on a business owner’s personal tax return because pass-through taxation models apply taxes at the personal income level instead of the business income level.
Businesses should always be looking for tax savings opportunities. The new TCJA 20% deduction for pass-through income from sole proprietors, LLCs, partnerships, and S corporations is a big one!
The new deduction is taken “below the line,” meaning that it reduces taxable income and not adjusted gross income.
The deduction does not include investment-related items including capital gains or losses, dividends, and interest income.
Furthermore, the 20% deduction doesn’t apply to all pass-through tax scenarios. For example, taxable income caps may disqualify you.
Talk to your CPA to confirm eligibility and maximize your qualified deductions.
LLCs
LLCs may benefit from either the 14% tax cut or the 20% tax deduction, but not both.
LLCs chose either C-Corporation taxation or pass-through taxation on IRS Form 8832 when the business was established.
LLCs that elected C-Corporation taxation can take advantage of the 14% tax cut, whereas LLCs that elected pass-through taxation can take advantage of the new 20% tax deduction on their personal income tax return.
Clear communication with your CPA is key! They can confirm how your LLC was setup and determine what deductions you may or may not be eligible for.
TAKE-HOME INCOME
The new tax bill may have affected overall personal income, as well.
The new tax bill rewrote tax brackets that not only changed tax rates, but also changed the income ranges applicable to the new tax rates.
Additionally, the personal exemption was entirely eliminated for 2018, and the standard deduction was increased from $4,050 to $12,000 for single filers and from $8,100 to $24,000 for joint filers.
The bill also changed rules and thresholds on itemized deductions. However, the standard deduction increase may actually discourage many filers from itemizing deductions and instead encourage them to take the larger standard deduction for 2018.
Communicating with your CPA clearly and often will ensure that you’re on the best path for reducing your tax liability as much as legally possible.
PAYROLL
In early January 2018, the IRS released the 2018 Withholding Tables and gave employers until February 15, 2018 to implement them.
The new tables included tax bracket changes, the standard deduction increase, and the personal exemption elimination.
The IRS has been encouraging employees in all industries to revisit their W-4s and double-check their paychecks for accuracy. After all, change often results in errors.
Hopefully, your business budgeted for the extra expenses of researching, discussing, and correcting paycheck errors as the new tax law took effect.
BUSINESS EQUIPMENT
Thanks to the new tax reform, qualified business equipment can now be deducted up to $1,000,000.
The TCJA also increased the depreciation deduction for cars being used for business.
MEAL EXPENSES
A big change enacted by The Tax Cuts and Jobs Act was the elimination of many tax advantages to business meals and entertainment expenses for 2018.
Employers used to deduct 100% of the cost of providing food and beverages to employees from a qualified eating facility. That’s because meals and housing provided to employees on a business’s premises for employer convenience were excluded from income.
Businesses were also allowed to deduct 50% of food and beverage expenses related to the operation of their trade or businesses, including traveling employees’ meals.
This has changed for 2018.
The 50% limit on business meal deductions was expanded to include employer expenses related to providing food and beverages to employees through an eating facility.
And, after Dec 31, 2025, they will no longer be deductible at all.
But, meals that are provided to an existing or potential customer, client, consultant, or similar business associate are still deductible if the requirements are met and the expense is supported.
We’ll say it again: clearly communicate with your CPA to ensure that you are compliantly minimizing your tax liability.
ENTERTAINMENT EXPENSES
Previously, businesses deducted up to 50% of expenses associated with meals and entertainment. Meals were treated as a subgroup of entertainment expenses as long as they were directly associated with business requirements.
Beginning in 2018, however, the tax reform eliminated the 50% deduction for entertainment, recreation, or amusement, even if they’re directly related to the business. There’s an exception for entertainment that benefits employees, though, such as office parties.
Gone are the days of deducting 50% of the cost of sporting events, private boxes, golf club dues, theater tickets, etc.
However, the IRS clarified on Oct. 3, 2018 that food and beverages provided during entertainment events will not be considered entertainment if they’re purchased separately from the event.
To better analyze these costs in the new tax environment, Sherman Oaks Accounting & Bookkeeping powered by One Source Services, Inc. suggests that you separate these expenses on your profit and loss statements.
However, we more strongly suggest that you confer with your CPA to determine the best way for you to move forward with the tax reform and to gain a thorough understanding of the new meal and entertainment deduction rules.
Sherman Oaks Accounting & Bookkeeping powered by One Source Services, Inc. understands how important it is to know your business, and that includes being prepared for and knowledgeable about taxes.
Our QuickBooks Pro Advisors are ready to answer your questions or refer you to a Tax Professional who can.
If you do not already have a trusted CPA, then we would be happy to connect you with one. Our carefully curated CPA Directory includes professionals who fit every budget, circumstance, and personality.