Big business entities, including multinational corporations, are expected to reap the main tax rewards under the TCJA.
Alert: The new law doesn't ignore small businesses. Beginning in 2018, it provides plenty of tax-saving opportunities for small business owners, although you'll also face some tax obstacles.
Unlike the tax provisions for individuals, most business-related provisions in the TCJA are permanent. Here are 10 key tax changes that deserve your immediate attention.
1. Pounce on lower tax rates. Prior to the new law, corporations were taxed under a graduated tax-rate structure with a top rate of 35%. The new law replaces this rate structure with a flat rate of 21%. Thus, the effective tax rate for the majority of C corporations is lowered.
Tip: The TCJA also reduces the dividends-received deduction from 80% to 65% if a corporation owns 20% of the stock of another corporation (from 70% to 50% for others).
2. Max out on Section 179. The TCJA almost doubles the maximum Section 179 expensing allowance from $510,000 for tax years beginning in 2017 to $1 million for 2018 and increases the deduction phaseout threshold from $2.03 million for tax years beginning in 2017 to $2.5 million for 2018. Thus, many small businesses will be able to currently deduct the entire cost of qualified property placed in service in 2018.
3. Seize bonus depreciation. For the next five years, your business can claim 100% bonus depreciation, up from 50% in 2017, for qualified business property placed in service. After 2022, the deduction is reduced incrementally, as shown below, before it disappears completely after 2026.
4. Ride in tax luxury. Depreciation deductions for so-called "luxury cars" for business drivers are limited to relatively modest amounts. However, under the new law, the annual limits for luxury cars are boosted. For example, if you acquire a used business car in 2018, the maximum first-year deduction for 100% business use is $10,000. (It was $3,160 in 2017.)
Tip: A business car may also be eligible for bonus depreciation of $8,000.
5. Pass through a deduction. For the first time ever, the owners of many pass-through entities—such as partnerships, S corporations, limited liability companies and sole proprietorships—can deduct 20% of net business income on their personal returns. In effect, you're only taxed on 80% of your small business income. But this provision includes restrictions against gaming the system. Notably, the deduction is phased out for owners of most service businesses, other than architects and engineers. Everyone else— from photographers to plumbers—is covered.
Tip: This restriction doesn't apply to single filers with taxable income up to $157,500 and up to $315,000 for joint filers.
6. Reimburse employee business expenses. Generally, employees could previously deduct unreimbursed business expenses as miscellaneous expenses on their personal tax return, subject to a deduction threshold of 2% of AGI. But the TCJA eliminates the deduction for these miscellaneous expenses. As a result, your company may choose to reimburse employees tax free for expenses under an accountable plan. If certain requirements are met, the reimbursements are deductible by the employer and tax free to the recipient employees.
Tip: The tax exclusion for job-related moving expense reimbursements is repealed.
7. Rethink transportation benefits. In the past, employers could provide qualified transportation benefits tax free to employees, up to certain limits. These benefits, which were deductible by employers and tax free for recipient employees, included mass transit passes and similar vouchers, parking fees and commuter van sharing. But now the TCJA generally denies business deductions for these transportation benefits. Factor this change into your decisions about what fringe benefits your business is willing to provide to employees.
Tip: Deductions are still allowed for paying for commuting costs that are necessary to protect the safety of employees (such as hiring a car service to take late-working employees home at night).
8. Snack on business meal deductions. In a key change that has largely flown under the radar, deductions are completely eliminated for business-related entertainment expenses. However, the new law retains the 50% deduction for meals while you're away from home on business.
Tip: The deduction for meals provided at company cafeterias and similar eating facilities is reduced to 50% through 2025 before it disappears.
9. Adopt new family leave credit. The new law creates a new tax credit for wages paid to employees while on family or medical leave. To qualify for this tax break, you must offer at least two weeks of paid family or medical leave annually to your full-time employees. The credit is generally equal to 12.5% of wages if an employee is paid 50% of normal wages while on leave, increasing to a maximum of 25% for higher payment amounts.
Tip: The family leave credit expires after 2019.
10. Switch to cash accounting. Generally, small business owners prefer to use the simpler and more-flexible cash method of accounting for tax purposes. But some businesses could not use the cash method if average gross receipts for the prior year exceeded $5 million. The new law multiplies the gross receipts test by five to $25 million (based on average annual receipts for the preceding three years), clearing the way for many more businesses to be able to use the cash method.
Tip: Personal service corporations and most pass-through entities can use the cash method without regard to their gross receipts.