We thought it prudent to list the tax law changes specific to businesses separate from the changes to individuals. Please review our previous blog post indicating all the other changes for 2018. While there are also provisions for very large corporations, we have not included them here.
CORPORATION TAX RATE
Reduced to flat 21%, was scaled up to 35% in the old law.
Personal Service Corporation no longer has a special high rate, so they get to enjoy this new lower rate.
NOTE: Some may think that due to the lower corporate rate they should change their entity structure to a C Corporation. While this can make sense for reasons other than this low rate, you need to remember that C Corporations create the potential for double taxation. You get taxed on the profits and then you get taxed a second time on the dividends when you take the money out of the Corporation.
PASS-THROUGH ENTITIES – A SPECIAL DEDUCTION REDUCING TAXABLE INCOME
For pass-through entities, defined as Sole proprietors, S Corporations, and Partnerships, there is a 20% deduction on income. For example, if your net income is $100,000 then there is a $20,000 deduction against that income on the return.
Wages of the owner and guaranteed payments to the owners do not count toward this special deduction.
There is a limitation based on W-2 wages and capital when the income exceeds $157,500 for a single taxpayer and $315,000 for married filing joint.
Certain service businesses that exceed $207,500 single or $415,000 Married Filing Joint have a phase-out of this deduction as well. Service businesses are defined in the law specifically and include a business that relies on the owner’s skill and reputation and specifically includes law, accounting, and medicine. So Real estate agents, for example, still get this deduction below the income threshold.
NOTE: we are still reviewing if a service business not specifically excluded that has a substantial staff can disqualify from this exception based on the skill and reputation exclusion
CAUTION: this deduction does not reduce AGI or the calculation of Self Employment income.
INCOME TAXES ALLOCATED
While state income taxes are limited to $10,000 in itemized deduction, there is a provision in the law that allows a deduction for State income taxes paid on earnings of your business.
DEPRECIATION OF EQUIPMENT (EXPENSING)
Businesses will be allowed to fully expense qualified equipment in the year of purchase acquired and placed in service after September 27, 2017 as bonus depreciation.
NOTE: Residential and Commercial rental property will not qualify
Section 179, which also allows full expensing of equipment (separate tax code), is increased to $5 million.
NET OPERATING LOSS – (NOL)
Net operating losses ARE limited to 90% of the current year profit.
Therefore, you cannot write down any profit completely to zero even if your loss is sufficient to do so.
ENTERTAINMENT EXPENSES ARE GONE, MEALS ARE MODIFIED
In the past, both Meals and Entertainment were deductible items up to 50% of the cost.
Now, any activity considered to be for entertainment is specifically excluded and non-deductible.
Meals for onsite eating facilities, which were deductible, are now 50% deductible and become totally non-deductible after December 31, 2025.
TRADE IN OF BUSINESS VEHICLE IS NOW TAXABLE
In the past, when you traded in a business vehicle you would move the net gain or loss to the next vehicle and depreciate the new vehicle under Section 1031.
Section 1031 is now only available for real estate.
So you now MUST pay a tax for a net gain even when you used the mileage rate.
NOTE: We think this could actually be a plus for those who have a net loss on trade-in, now that the luxury auto limits have been substantially increased.
BUSINESS INTEREST IS LIMITED
For businesses whose annual gross income exceeds $25 million, there is a limit on Interest paid on business debt to 30% of the adjustable taxable income.
DOMESTIC PRODUCTION ACTIVITY DEDUCTION IS GONE.
There had been a special additional deduction for manufacturing based on the cost of manufacturing a good limited to wages. This deduction is now gone.