by Louis Benjamin Carpenter, III, CFP®,CPA
Happy Holidays to all.
As you already know, the Tax Cuts and Jobs Act of 2017 (TCJA) was enacted at the end of last year and generally takes effect for 2018 and later years. The changes affect almost every business and most individuals.
Many of the business provisions are permanent, while many of the individual tax cut provisions take effect for seven years, then revert to the prior law and tax rates. Below is a brief summary of the provisions most likely to affect you:
The tax rates have been lowered somewhat and will be applied to your tax returns. The focus of this letter however is on the changes you can consider and execute some planning before year end.
Section 179 and bonus depreciation expense
You can generally write off 100% of the cost of new equipment or tangible business property that is placed in service before year end. Thus if you need additional business equipment you can purchase it now and benefit from the tax deduction right away rather than depreciating it over the next five or seven years.
Additional Depreciation of Automobiles
We can generally deduct up to $18,000 this year and up to $16,000 in the second year for the business portion of luxury automobiles purchased in 2018. This first year limit increases to $25,000 if the gross vehicle weight is over 6000 pounds.
New Deduction for Qualified Business Income
If you are a sole proprietor, a partner in a partnership, or a shareholder in an S corporation, you may be able to exclude up to 20% of your pass through income from taxation. There are few limits on this exclusion if your taxable income is under $315,000 for a joint return, or $157,500 for a single taxpayer.
If your taxable income is over that limit, then there is a very complicated formula to determine how much income gets excluded. Part of that formula is based on the amount of W-2 wages the business pays to employees, and part of the formula is based on the type of income or business you are in and is not available for most professional service businesses. In certain cases, it may make sense to pay yourself more salary by year end in order to maximize the pass through income exclusion.
Elimination of Entertainment Deduction
The new tax law also eliminates business deductions for entertainment. Business meals are still 50% deductible, but entertainment and sporting events with clients are no longer deductible. This section also appears to cut out deductions for business organizations such as the Chamber of Commerce although we have not yet seen regulations clarifying this.
Retirement plans are usually very attractive at tax time as that income is excluded from your income until you pull it out in retirement. This year there may be an additional benefit if the retirement plan can get your taxable income down low enough so that you qualify for the full 20% pass through from business income exclusion.
W-2 and 1009 Forms
The due date for some of these forms has been moved up to January 31, 2019 (they used to be due at the end of February). The bigger change here is that if you do not file your 1099 Forms on time for independent contractors, you may get tagged for paying penalties of up to $1060 per Form 1099.
Contact your trusted tax advisor today to determine if the tax law changes apply to you.