Here are some of the key points for entrepreneurs, owners and founders. Always consult a tax professional!
Corporate tax rate reduced to 21% freeing up more of YOUR money for investment, expansion, hiring, etc.
New deduction for pass-through business income reduces effective maximum tax rate to 29.6% versus new maximum individual rate of 37%.
Pass through individual deduction of 20% is available for certain income earned from a partnership, S corporation, wholly-owned disregarded LLCs or sole proprietorship subject to limitations. Businesses with multiple owners need to provide additional information on the following for each owner:
- The net income of your US business (excluding your compensation or guaranteed payments)
- Dividends from a REIT that are taxable at ordinary income rates.
- Investment income from dividends, short-term capital gains, long-term capital gains, and interest income not allocable to the business are excluded.
- Income limitations if earn over $157,500 individually or $315,000 jointly.
- Limits on service businesses (legal, accounting, and investment management services)
- Deduction limited to greater of 50% of paid wages OR 25% of paid wages plus 2.5% of unadjusted cost basis of depreciable tangible business property.
Interest deductions limited to 30% percent of adjusted taxable income. Indefinite carry forward of interest in excess of 30%.
Bonus Depreciation extended to used property and may be fully expensed in year the property is placed in service until 2023. Does not apply to structural improvements or to real property if you elect out of the 30% limitation on interest deductions
Section 179 Expense increased to $1 million. Types of eligible property now include qualified improvement property and certain improvements to nonresidential real property.
Net Operating Losses deduction limited to 80%. NOL carrybacks are eliminated but carry forward indefinitely.
Corporations’ Dividends Received Deduction reduced to 65% from more than 20% owned corporations and 50% for less than 20% owned corporations. The 100% DRD for 80% owned corporations is not affected.
AMT for corporations repealed.
S Corp Conversions. Easier transition rules for S corp conversion to C corp for next 2 years. Requires same ownership on date of enactment and conversion.
Cash Method limit increased to average 3 year gross receipts than $25 million.
Long Term Contracts entered after 2017. Requirement to use Percentage of Completion Method increased to 3 year average gross receipts under $25 million
Deduction for domestic production activities repealed.
No more parties! No more deduction for entertainment, social club dues, etc. under Meals and Entertainment.
Deduction for employer provided commuting and transportation costs eliminated.
Sorry, I am no longer deductible! Legal fees to defend violation or investigation of possible violation related to fines and penalties no longer deductible. Fines and penalties were never deductible.
The Hollywood and Politician Provision: No deduction for settlement payments or attorney fees in connection with sexual harassment or abuse if the payments are subject to a nondisclosure agreement. Will cost to keep it private!
No deduction for LOCAL lobbying or political expenditures, including Indian tribal governments.
No capital gains treatment for gain/loss from sale of self-created patents, inventions, models, designs, or secret formula or process.
US is more competitive with territorial system of international taxation. NO US federal income tax on foreign corporate subsidiaries, even if repatriate profits as dividends. Think already seeing benefits of this!
These are just some of the key provision highlighted for entrepreneurs, owners and founders and those contemplating expansion in 2018. Consult with your tax professional for specifics!
If you are starting a new business, be sure to carefully compare S corp election (or LLC) versus an C corporation. Some considerations:
- Estimates are that combined effective corporate (C) rate net to shareholder is roughly 38% based on 21% corporate rate and 20% tax on qualifying dividends.
- The highest individual rate is now 37%, which applies to individual shareholders of S corps and individual members of LLCs making Subchapter S election.
- So roughly a wash if you are in highest rate, except if you are at a lower individual rate.
- Consider differences in allowed expenses, benefits and retirement options for C corp vs. S corp or LLC.
- Consider deferring dividends for C corp and reinvest earnings to reduce current rate to 21% – great time to for expansion or asset acquisition. Plus lower long-term capital gains rate would further lower tax burden.
- The new Section 199A pass-through business deduction could lower the effective rate for individuals from maximum 37%.
- If you live an a state with high individual tax rates, the analysis changes.
Again, consult with your CPA or accountant for on your specific tax situation.
If you are starting a business consult with an attorney that can help you maximize liability protection and minimize taxes. Want more detailed explanations of legal issues effecting your business, sign up for our free newsletter to get more in depth analysis and insight.
Until then, Keep it Legit!
Bob