The much-discussed federal “Tax Cuts and Jobs Act” includes many changes that may affect businesses of all sizes. The Conference Report transmitting the new law is over 1,000 pages, and the legislation itself exceeds 500 pages. Needless to say, there are many areas of the new law that will need additional clarification through regulations or otherwise. This law is still very much a work in process. We are advising business clients to be cautious about structuring transactions and entities in reaction to the new law too hastily. You should definitely seek advice from a tax professional before making any moves.
Following is a brief summary of some of the most important provisions which may impact your business:
New Qualified Business Income Deduction
Sole proprietors and owners of LLCs, partnerships, and S corporations may be able to take a deduction equal to 20% of their net income from the business. The calculation of this deduction requires an understanding of several exclusions and exceptions, some of which depend on the amount of taxable income reported by the business owner. Generally, salary or guaranteed payments made to the owner reduce the amount of the deduction. It may, therefore, be beneficial to convert S corporations to LLCs in some cases or to re-think the structure of guaranteed payments.
Deferral of Restricted Stock and Stock Option Income
The recipients of restricted stock or stock options from small businesses will now have the option to defer recognition of the compensation for up to five years after it has vested. Employers must notify the affected employees of this option, and face a penalty for not doing so. Employees or businesses who receive or grant restricted stock or stock options should consult with a tax advisor to ensure compliance with this new provision.
New Corporate Flat Tax Rate
The new corporate flat tax rate of 21% may have a beneficial or detrimental effect on a business, depending on the circumstances. For example, a C corporation with taxable income of $90,000 or less will actually experience a tax increase under the new law. In this case, it may be a good time to consider converting to an S corporation. Note that this is one move that is time-sensitive. A calendar year C corporation must convert to S status by March 15 in order for the conversion to be effective for this tax year. Otherwise, the conversion will not become effective until the following tax year.
Like-kind exchanges are now only for real property. A business that regularly trades-in equipment or vehicles may now have to recognize income if these transactions are not structured properly.
The new $1 million dollar limit on Code section 179 deductions and 100% bonus depreciation will generally permit businesses to write off the entire cost of personal property (i.e., equipment and vehicles) through 2022. However, when both sections apply, there are important considerations in choosing between the two. For example, there are different consequences under the two provisions if the business use of the property drops below 50%. Careful planning is in order.
Limitation on Business Interest Deductions
The new 30% limitation on business interest deductions is complex. The good news is that it generally does not apply to businesses with less than $25 million in average annual gross revenues. Also, certain real estate businesses can avoid the application of this deduction limit.
Other Deduction Changes
Entertainment expenses (i.e., taking clients to a ballgame or concert) are no longer deductible. Note that entertainment tickets provided to employees on an occasional basis may still be deductible as a de minimis fringe benefit. Employer-paid parking and commuter transportation benefits can no longer be deducted.
Our tax counsel, Chuck Borek, holds an MBA and has been practicing tax law as an attorney and CPA for over 25 years. He follows developments in tax law closely and has already presented seminars on the new tax law to other professionals around the country. Please contact him if you have any questions about possible business strategies for dealing with the consequences of the new tax rules.