The new GOP tax plan, also known as the Tax Cuts and Jobs Act, is final as of December 2017. This sweeping reform of the U.S. Tax Code will affect your business, in more ways than you may realize. This major tax act is one of the most significant reforms for businesses and corporations, with the elimination of the Alternative Minimum Tax (AMT) among other changes.
While this new legislation may result in a reduction of taxes for families and individuals, the changes may affect businesses in different ways. Here are a few of the ways that your business may be impacted:
If you’re a US corporation, you will benefit from a large tax cut
If your business is registered as a U.S. corporation, you’re in luck! The new tax reform actually grants a generous tax cut to corporations registered in the US. Instead of a maximum corporate tax rate of 35%, C corporations that are personal service corporations, such as legal and accounting firms for instance, will now have a 25% rate.
Note that personal service corporations are corporations performing services in the fields of health, engineering, accounting, architecture, actuarial science, consulting, performing arts, and law. This lower tax rate is particularly attractive for corporations because it will ultimately make them more profitable. It also is a great incentive for foreign businesses to move to the U.S.
The corporate AMT no longer exists!
Prior to this tax reform, the corporate Alternative Minimum Tax (AMT) consisted of a 20% tax rate that applied in case a company’s tax credits resulted in the business’ effective tax rate dipping below that level. Under this new reform, the Alternative Minimum Tax (AMT) no longer exists.
Your corporation’s ability to deduct its interest expense is now limited
This new tax bill actually limits any corporation’s ability to deduct their interest expense up to 30% of their income. This also means that your firm may face more challenges when it comes to borrowing funds. It may also result in businesses issuing less bonds and buying back their stock.
There are new limits on deducting Net Operating Losses (NOL)
If your business’ expenses exceed its income, your business may incur a Net Operating Loss (NOL). Under the previous tax law, this Net Operating Loss would be carried back two years. This would result in a refund of the taxes paid in the past two years, in partiality or in their entirety.
The new tax regulation eliminates carrybacks of any Net Operating Loss. The only exception applies to small businesses in case of disaster and casualty losses. In addition, taxpayers would be able to deduct any Net Operating Loss (NOL) only up to 90% of the business’ taxable income.
Increase in Section 179 Personal Property Expensing
Prior to this new tax regulation, business owners may have been able to deduct up to $510,000 of personal property cost purchased and used for business in a single year. Now, this amount is increased to $5 million for property acquired and placed in service between 2018 and 2022.
If your business has depreciable assets, you can now deduct their cost in one year!
Instead of amortizing any depreciable assets your business may have over the course of several years, you can now take one deduction in one year! However, the depreciable equipment must be purchased after September 27, 2017 and before January 1, 2023.
In addition, this 100% bonus depreciation applies to both new and used property, whereas previously it was only available to new property only. The bonus depreciation for automobiles would reflect an increase from $8,000 to $16,000. However, you should note that depreciation may not be used for real property.
If you’re a pass-through service business making less than $315,000 per year, you may get a 20% deduction!
Pass-through businesses, including sole proprietorships, partnerships, and S corporations, now get a 20% deduction. This is a great benefit to small businesses, since such a deduction would lower your business’ taxable income. In turn, it will allow these businesses to reinvest any money saved back into the company’s operations.
However, this deduction only applies to service businesses making less than $315,000 per year. This is to avoid potential tax loophole, by limiting certain service-based businesses from taking advantage of lower taxable income.
No more taxes on your overseas profits
Prior to this new legislation, corporations engaged in business abroad were taxed on the profits they incurred in foreign territories. However, the new regulation includes a shift in what is known as the “territorial” tax structure. As a corporation, you may now have to retrieve profits previously held in foreign territories with a one-time tax of up to 15.5%.
Offering health insurance to your employees may cost you more!
This new tax regulation also results in the elimination of one of the major tenets of the Affordable Care Act. This requirement consisted in mandating all individuals to purchase health insurance. This also means that insurance premiums will more likely be raised by insurance companies. In return, your health insurance costs as related to your employees could skyrocket as well!
You may be able to choose between the accrual and cash method of accounting
Under this new tax reform, more businesses are now allowed to use the cash method of accounting instead of the accrual method of accounting. The cash accounting mandates that a business record income when it is received, and expenses when they’re paid. However, under the accrual method of accounting, both expenses and income are booked when owed, as opposed to when they’re received or paid.
As of now, businesses with average revenues of $25 million or less are exempted from using the accrual method of accounting, which is a $5 million increase from the prior tax law.
Your employees’ withholdings will change!
Considering the standard tax deduction has actually doubled and personal exemptions have been eliminated, what you withhold from your employees’ paychecks will need to be modified. Additionally, any bonus, commission or supplemental wages are now subject to automatic withholdings of up to 28%. This is a 3% increase from the original 25% rate. However, these changes will not be in effect until 2018.
Watch those employee perks!
Prior to this tax regulation, businesses were able to deduct the cost of food and beverage provided to employees. However, only 50% of these costs are now allowed to be deducted. Additionally, please also note that this provision is only effective until 2025. After this date, you may no longer be able to deduct any of these expenses.
Other deductions and credits for your business will no longer exist
The new tax law also eliminates the following deductions and credits:
- Deduction for domestic production activities
- Local lobbying expenses deduction
- Childcare tax credit provided by employers
- Historic structures Rehabilitation Tax Credit
- Work Opportunity Tax Credit
- Credit for access to disabled individuals
While these changes will only take effect at the start of 2018, it will most likely take a few months for corporations and businesses to implement the related changes. Considering that many businesses have already set their budgets and outlined their growth plans for the new year, this may also result in significant delays.
What’s your opinion on these changes?
To Your Success,
The Corporate Sister.