FINALLY….a decision has been made! The House and Senate made a combined effort to get one of the biggest tax reforms to the President before the holidays in over 30 years! The tax reform started months ago and has gone back and forth deciding on what goes, what stays, and what changes.
Do you understand how the tax reform affects your business? The good news is nearly all of this law does not take effect until 2018 or beyond which means we have time to plan! It’s very important you visit with a tax professional in order to understand the changes, understand how they apply to your business, and make sure you are taking full advantage of any benefits.
Let’s take a look at the major business changes in the tax reform bill effective after 12/31/17:
- Immediate expensing and depreciation. Changes related to Section 179, improvements, qualified property, and short-lived assets. (See Carrie Christensen’s article, Tax Reform- Expensing and Depreciation).
- Pass-through business income, which is income from sole proprietorships, S Corporations, partnerships, and LLCs passed to the individual owners,
- A deduction equal to 20% of business income is limited to 50% of W2 wages, among other limitations. The wage limitations don’t apply to certain small businesses.
- Most entities in the business of providing “professional services” are excluded from the deduction. However, there are exceptions to the rule as well as phase-out limitations to consider.
- This is by far the most complicated legislation affecting our South Dakota clients. (See Paul Thorstenson’s article, New 20% Deduction For Businesses)
- Corporate tax rate is now a flat 21%, which is a considerable drop from the 35% rate under the previous law.
- Net Operating Loss (NOL) two year carryback rule is repealed except for certain farmers and ranchers.
- The NOL is then limited to 80% of taxable income. Carryovers take this limitation into account and carried forward indefinitely.
- Alternative Minimum Tax (AMT) is repealed for corporations
- Domestic Production Activities Deduction (DPAD) is repealed for non-corporate taxpayers. C Corporations will be repealed after 12/31/2018.
- Research and experimentation expenses (R&E) paid or incurred after 12/31/2021 must be capitalized and amortized over a 5 year period.
- Interest deductions have been limited except for businesses with average annual gross receipts of less than $25 million. Taxpayers do have an option to elect out of being limited on interest but that will require extended depreciation lives.
- 1031 Exchanges are still in effect for real property, but no longer tangible personal property disposed of or purchased after 12/31/17.
- Meals and Entertainment: Entertainment expenses paid after 12/31/17, will need to be classified separately and are disallowed. Business meals as well as meals provided on employer premises are both limited to being 50% deductible. After 12/31/2025, expenses for meals will also be disallowed.
There are several other items listed in the tax bill – too many to list. That’s why it’s important you contact us as soon as possible to start planning for 2018!