27 Mar Tax: Big Changes for Businesses
Businesses see big changes under the new tax law. Top news is a new 21% flat corporate tax rate, with most other business forms getting new deductions that reduce their tax rates as well. Unlike changes to the individual tax brackets, which are temporary and somewhat piecemeal, the changes to the business tax are permanent and fairly comprehensive. Below are the primary changes we wanted to highlight:
- Expensing business property is expanded, with higher amounts, plus used property can be expensed too. Faster depreciation is also allowed for some forms of investment real estate.
- Other deductions were cut back: business lost the deduction for Income Attributable to Domestic Production Activities, the 50% deduction on entertainment expenses, and net operating losses (NOLs) can only offset 80% of the next year’s income with excess NOLs carried forward (no more carry backs).
- The Alternative Minimum Tax (AMT) is repealed with special rules allowing unused AMT credits to be used in 2018, 2019 and 2020.
Investors who receive dividends from US companies that use foreign subsidiaries to shelter income will pay ordinary income rates on those dividends, instead of capital gain rates. We would suggest meeting with a tax specialist if you or your company conducts business internationally.
Tax Planning Ideas:
- The current deduction allows “pass-through” businesses (those taxed as proprietorship’s, partnerships, and S Corporations) an approximate 20% tax liability, but special rules apply when computing the deduction; companies with small payrolls and large profits, and specific service companies, are least likely to benefit from the new deduction. Unlike most business tax changes, this one has an 8-year window; the deduction is currently set to expire for tax years beginning after Dec. 31, 2025.
- Many corporations will consider reversing their S elections to take advantage of the 21% flat tax and avoid the complexity of the pass-through deduction. Don’t forget to consider the PHC and AET tax rules, as well as the tax shareholders pay on regular corporation dividends. These are “old” tax rules that haven’t been paid much attention, but they are now key to this decision.
No matter which variation or formula applies to you and your business, it is important to review these changes with your tax advisor in order to ensure you are fully prepared for the changes ahead.