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Business Changes Due to Tax Cuts and Jobs Act November 2018
Late last year, a new tax act called Tax Cuts and Jobs Act (or TCJA, for short) was enacted and has resulted in the most sweeping changes in the Internal Revenue Code since at least 1993.
These provisions, while codified earlier this year, are still being updated by additional revenue procedures and IRS guidance. We have outlined the changes that we felt were most relevant to our clients with regard to corporate tax returns beginning with the 2018 tax year. Of course, should you have specific questions related to your personal situation, we encourage you to reach out to your Furrer & Associates, Inc. advisor in November to get those questions answered.
Corporate Tax Rate
TCJA has established a new C-Corporation corporate tax rate. Replacing the old, bracketed corporate tax structure is a single rate of 21% for all corporate taxable income. This rate is effective beginning January 1, 2018, regardless of your C-Corporation year-end.
Domestic Production Credit
The TCJA has done away with a fairly common and popular deduction - the domestic production credit. All eligible corporations and partnerships were eligible for this deduction prior to 2018. Eligible entities could deduct 9% of their income before computing their tax for a given period. The TCJA has removed this deduction.
Much in the same way the TCJA has removed the domestic production credit, but with a positive effect for the taxpayer this time, it has removed the C-Corporation requirement to compute Alternative Minimum Tax (AMT). For years 2018 and forward, C-Corporations will not be required to compute an AMT and pay it, if higher than regular tax. Only the regular tax will be calculated. S-Corporation and partnership owners could still be subject to the AMT on their personal returns, but as we explained in a prior communication, even those rules have been expanded to ease the burden on individuals.
Cash Basis Expansion
Prior to 2018, the IRS had placed certain limitations on entities wishing to use the cash basis to file their tax returns, such as certain industry types, namely those that maintain inventory, and sales levels, specifically averaging $10 million in sales for three years. Well, the TCJA has effectively eliminated the inventory issue, and it has raised the sales limit to a $25 million average for three years. This will potentially open up cash basis filing to taxpayers who have never used it before or who may have been previously phased out.
Prior to 2018, the IRS had a requirement that manufacturing companies that hold inventory needed calculate an amount of costs related to production to add to its inventory each year for tax purposes. This was known as the Uniform Capitalization Rule. It allocated a share of costs to ending inventory and was adjusted each year as inventory changed. The TCJA has also eliminated this calculation effective Jan 1, 2018. So, there is no longer a need to annually compute this, and any amount from a prior calculation may be expensed on the company's 2018 tax return.
Qualified Business Income Deduction
The Qualified Business Income Deduction (QBI) is probably the most complicated of the new tax regulations of the TCJA. It is an individual tax item, but affects income earned from S-Corporations, Partnerships, Rental Properties, and sole proprietorships. The QBI is a multi-level deduction that was added to balance out the effect of the drop in the C-Corporation rates with the non C-Corporation entities. While most non C-Corporation entities are eligible for this deduction, there are a group of businesses that are not. These are termed to be specified service trade or businesses (SSTB). SSTB is generically defined as "any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, and any trade or business that involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities."
Now, even though there are limitations on the type of business, if your overall taxable income is below a certain threshold ($315,000 for joint filers/$157,500 for others), you are eligible to take this deduction. Once you cross these limits there are phaseouts that begin, up to $415,000 for joint filers and $207,500 for others. Once these thresholds are met, an SSTB will get ZERO QBI deduction, whereas a non SSTB will be eligible, but the allowance will be subject to additional potential limitations.
The intricate calculation and limitations are beyond the scope of a general recap such as this. Your Furrer advisor will be able to better answer your specific questions and provide you with the best way forward.
In addition, due to these changes from the TCJA and a shift in IRS emphasis on reasonable compensation and other issues, now may be a good time to reassess your current entity structure (C-Corporation, S-Corporation, or Partnership). A review of your current structure may be warranted, so that any desired changes and any necessary implementation can be in place for next year.
As we prepared tax returns last spring, we tried to project 2018 taxes under the new TCJA, however, most situations change over the course of a year. If you would like our professional staff to revisit those projections and prepare revised or new projections, please contact us in November as that is the time that we can best accommodate those discussions.
Again, should you have any specific questions about your personal situation, please contact your Furrer & Associates, Inc. advisor at 440-899-7116. Thank you.
*This information is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this post should not be acted upon without specific professional guidance.
Steve | 11/07/2018
Furrer & Associates, Inc. | 28045 Clemens Road Suite B , Westlake, OH 44145 | Phone: (440) 899-7116 | Fax: (440) 899-7182 | email@example.com