The Tax Cut and Jobs Act of 2017 (TCJA) made major changes to the US tax code - the most significant changes in over thirty years! Although signed by President Trump in 2017, much of the Act remains in the interpretation stage - uncodified by Treasury regulation. This article shares 2018 tax changes impacting businesses and business owners.
Changes Impacting Small Business
The Section 199A Qualified Business Income Deduction: Section 199A created a 20% deduction of qualified business income from the owner’s taxable income. It is a deduction that over 95% of small business owners qualify for, making it the most substantial middle-class tax cut in history!
It’s such a big deal that I wrote a separate article about it. Click here to read the article.
Business Net Operating Loss (NOL): If your business has a bad year and loses so much money that you have an NOL on Form 1040, you used to have the option of carrying the loss back a year or two when beneficial. This carryback is no longer allowed. All individual NOLs now carry forward indefinitely.
179 Expense Boost: Businesses can now expense (rather than depreciate) up to $1 million in new qualifying property in the year of purchase as long as the business purchased less than $2.5 million worth of qualifying property during the year. MAJOR CHANGE FOR COMMERCIAL REAL ESTATE: Qualifying property related to lodging now qualifies for the Section 179 Expense, as do improvements such as roofs, HVAC, alarm, and fire suppression systems!
Bonus-Bonus Depreciation: The ability to expense more depreciation than standard rules allow has been drastically expanded. Business owners can now write off 100% of qualifying property placed in service after September 27, 2017, and before January 1, 2023. Bonus depreciation is now available for USED property as well as new items!
Entertainment Deduction Wiped Out: Businesses can no longer deduct taking clients to the theater, on golf outings, or impressing them with super-fancy box seats – even those at college stadiums. After much confusion, deducting business meals with a customer or prospect remains deductible. Meals for employees for the benefit of the owner (feeding them, so they work more hours or remain on the job) remain intact but are now limited to 50%. Before 2018, these meals were 100% deductible.
Depreciation Boost for Luxury Autos: I wish they would stop using the term luxury! For practical purposes a luxury vehicle is a car – nearly any car. The TCJA increases the first year maximum depreciation expense to $10,000, $16,000 for year two, $9,000 year three and $5,670 for following years (vehicles have a five-year depreciable life). First-year vehicle bonus depreciation remains $8,000.
Like-Kind Exchanges – Major Change: A like-kind exchange, also known as a Section 1031 Exchange, is used by businesses and investors to defer (not escape) capital gain income by trading one property for a different property that performs a similar function. Starting in 2018, only real property qualifies for a like-kind exchange. The change substantially impacts commercial real estate transactions (especially properties utilizing accelerated depreciation via segregation analysis) and industries where “trading-in” vehicles and equipment is common.
Changes Impacting Corporations & Larger Business
Corporate Tax Rate Reduced: The TCJA drops the corporate tax rate from a maximum of 39% (formerly paid by small corporations with taxable income between $100,000 and $335,000) to a flat 21%.
Economically, the flat rate has two benefits: First, it simplifies tax planning by eliminating the tax rate ping-pong that bounced from 15%, up to 39%, down to 34%, up to 35%, then 38%, before finally ponging down to 35% for corps earning $18.3 Million or more (no, I did not make this up).
Second, and most importantly, the 21% tax rate aligns US Corporate tax policy with that of other nations, nations who have used lower corporate rates to attract US jobs. Before the TCJA, the US corporate tax rate was the fourth highest in the world! Now, its somewhere near the middle.
Personal service corporations (PSCs), those providing services such as health care, legal counseling, or accounting, paid a flat rate of 35% before the TCJA. The PSC rate is now the same as other corporations, a flat 21%!
Note - Beware of Changing: While, on the surface, it may seem like a corporation is the way to go for the tax-conscious business owner, this may not be the case. As of right now, the 21% rate is temporary. Additionally, there are only two realistic ways an owner can get money from a corporation: as salary or dividend, and both are taxable!
Killing the Corporate Alternative Minimum Tax: Starting in 2018 the corporate minimum tax is eliminated.
Cash Method of Accounting Expanded: An excellent simplification for small business! The accrual accounting requirement was an easy (and expensive) trap to fall into. The TCJA makes cash (basis) king for all businesses generating revenues up to $25 million per year.
Interest Deduction Limited for Large Businesses: Businesses with average revenues over $25 million (averaged) may now have to reduce their deduction for certain forms of interest.
Keep Learning: We believe that understanding taxes is cutting taxes and hope this article has helped you better understand 2018 business tax changes. Our course library has a variety of courses designed to help you understand tax laws and reduce your tax liability. Check it out!
Need More Help? Brett Hersh is an instructor and author for Overnight Accountant. He is also a tax professional who specializes in helping real estate agents, investors, and businesses in related industries. If you would like to schedule a consult with Brett or inquire about his services, please feel free to email him.
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
Great course!- Donna L, Phoeniz, AZ, 1099-NEC & 1099-MISC Training Course Course
This course package is thorough and will give you a solid handle on how to optimize your business expenses to minimize your taxes and keep appropriate records to handle any IRS challenges. Only want to dive into a particular topic? Jump to that video and scan forward to where your issue is addressed. Or watch the whole series to learn it all!- Josh, Charles Town, WV, Real Estate Agent Tax-Cut Library, Agent Edition Course
The course did meet my needs and clarified several fine points that the IRS instructions did not make clear to my brain.- Joe, VT, 1120-H Basics Course
The course was excruciatingly detailed, which I appreciate. I definitely recommend this course to anyone who even thinks they may need it.- Greg, Brookfield, IL, 1099-MISC Basics (Training Edition) Course
I haven’t practiced in the accounting field in quite some time and wanted a refresher. The Overnight Account course 1099-Misc Basics was very helpful! It was simple to follow along and understand each section. I would highly recommend this course! Staff were quick to answer my question as well. I love that I can review the modules again, if needed, at any time. I will definitely be using them again for more classes.- Tammy, Anchorage, AK, 1099-MISC Basics Course