Business tax planning is the TCJA environment is very important. The Tax Cuts and Jobs Act (TCJA) enacted in December 2017 made many changes to business and individual taxes. This week we are discussing some to the major changes to business taxes. Next week we will talk about individual tax changes. There are enough major changes to both business and individual taxes that tax planning becomes very important.
The most significant of the business tax rule changes might be the new pass through business deduction. This is significant because so many small businesses are formed as pass-through entities such as partnerships, LLC’s and S-corporations. Sole – proprietorships also qualify for this deduction. The 20% deduction, if allowed in full, reduces the top individual tax rate on qualifying income to 29.6%. Because the tax on the income of pass-through entities is calculated at the individual level, this lower tax rate greatly reduces individual income tax.
Tax planning becomes extremely important. There are several limits on the deduction and proper planning may help you qualify for the full 20% deduction. The first limit to get past is business activity. In order to qualify, the activity must rise to the level of a trade or business. This is an important hurdle to get over, particularly for rental activities.
A second limit relates only to businesses classified as service businesses. If income is over $315,000 for joint filers or $157,000 for other filing statuses, then the deduction is not allowed.
There are also limits based on wages paid by the business and the deduction can also be limited by investment in tangible assets. The calculations can be quite complicated but also offer a myriad of planning opportunities.
The new tax law also imposes a limit on the amount of interest expense that a business can deduct. In general, the deduction for net interest expense is limited to 30% of taxable business income after various adjustments are made. There are various exceptions to this limit. Planning and proper structuring of financing is important to ensure that a business receives optimal tax results.
Bonus depreciation under the provisions of TCJA increases to 100%, allowing full expensing of business property placed in service through 2022. This can mean a significant tax benefit for companies that make investments in their businesses.
To ensure that you receive the most optimal tax results under TCJA, proper planning is pertinent. With only a month left in the year it is important to finalize your 2018 tax planning. Please Contact Us to make an appointment to analyze the impact of the new tax law on your business.