The Tax Cuts & Jobs Act: Key Provisions Affecting Businesses
Submitted by Reby Advisors | Certified Financial Planners | Danbury, CT on April 19th, 2018By Howard D. Burtis, CPA and Kate Johnson, CPA (from the Spring 2018 Edition Newsletter)
The Tax Cuts & Jobs Act is the biggest federal tax law change in over 30 years. Below are some significant changes affecting businesses.
- Flat corporate tax rate of 21% replaces the graduated corporate tax rates ranging from 15% to 35%.
- Repeal of the 20% corporate alternative minimum tax (AMT).
- Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets.
- Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million.
- Disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income.
- New limit for the deduction of net operating losses (NOLs) to 80% of taxable income and elimination of the two-year carryback provision. NOLs will be allowed to be carried forward indefinitely.
- New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025.
Section 199A – Qualified Business Income Deduction
Under the new law, an individual taxpayer generally may deduct 20% of qualified business income from a partnership, S corporation, LLC, or sole proprietorship. In the case of a partnership or S corporation, the deduction applies at the partner or shareholder level. The business must be conducted within the United States.
The deduction reduces taxable income, not adjusted gross income (AGI), so the deduction does not affect limitations based on AGI. Also, it does not reduce self-employment income (or self-employment tax). The deduction is available to both non-itemizers and itemizers.
Generally, the deductible amount for each qualified trade or business is 20% of the taxpayer’s qualified business income with respect to that trade or business. The deduction cannot exceed taxable income (computed without regard to this deduction) reduced by net capital gain.
For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the owner’s share of:
- 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
- The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.
Another restriction is that the QBI deduction generally isn’t available for income from specified service businesses. A specified service trade or business means any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.
The new law specifically excludes engineering and architecture services from the definition of a specified service trade or business.
The W-2 wage limitation and the specified service business limitation don’t apply as long as your taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.
For 2018, the threshold amounts are when the taxpayer’s taxable income exceeds $157,500 ($315,000 MFJ). The phase-in range is $50,000 ($100,000 MFJ). The full wage and specified service limitations apply once taxable income exceeds $207,500 ($415,000 MFJ). The threshold amount is indexed each year for inflation.
This 20% qualified business income deduction is one of the most talked about provisions of the entire tax law. It has the potential to be of significant value to many individuals. Its application at the owner/shareholder level means it will affect each person’s tax situation differently. Many of its elements have not been sufficiently defined and we expect additional guidance to be forthcoming.
You may learn more about Howard D. Burtis, CPA and Kate Johnson, CPA at www.HBurtisCPA.com.
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