**Photo by Chuck Fitzgerald
Tax Cuts and Jobs Act of 2017
Lower Federal Taxes for Businesses
As the name implies, the Tax Cuts and Jobs Act of 2017 (TCJA) is focused on reducing business taxes to encourage capital investment and create jobs. Many of the changes provide opportunities for tax savings, but with them they bring a host of complications. The following list is a brief explanation of some of the changes businesses will see for 2018 tax filing:
20% Deduction For Qualified Business Income:
The 20% deduction is provided to non-corporate taxpayers receiving "Qualified Business Income" (QBI) from pass-through entities, sole proprietorships and rental activities is the most complicated tax change in many years. This new deduction is calculated on the owner's individual tax return and comes with a variety of limitations. Most taxpayers with income below $315,000 on a joint return (or $157,500 for others) will not have to make complicated calculations to determine their deduction. Income from a "Specified Service Trade or Business" (SSTB), which is any activity involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services, will have a phase-out above these levels. Other businesses may be impacted by a W-2 wage and capital investment limitation. QBI does not include the reasonable compensation of owners of S-Corporations and the Act specifically identifies a partner's guaranteed payments as not qualifying for the 20% deduction.
Corporate Tax Rates:
"C" Corporations will have a flat 21% tax rate for years beginning after 2017. Corporations with a fiscal year will be able to pro-rate the new rate in the year that includes January 1, 2018. Previously, the corporate tax rates were graduated with the first $50,000 of income being taxed at 15%, the next $25,000 at 25%, and the next $25,000 at 34%. Therefore, with the new flat tax corporations with taxable income under $100,000 will have an increase in federal income tax. Corporations with greater income will have reduced taxes.
Larger Depreciation Deductions:
The new rules have raised the limits for deducting capital items and expanded the types of allowable property. The limit for IRC Section 179 property has increased to $1 million. "Qualified Improvement Property", which generally is an improvement to the interior of a commercial building, now has a 15 year recovery period and may be eligible for an immediate write-off. Also added are roofs and HVAC, fire protection, alarm and security systems. First year bonus depreciation has increased from 50% to 100% and now includes used equipment. The Act also increases the allowable depreciation deduction for passenger vehicles. When bonus depreciation is used, the maximum deduction is $18,000 in year 1, $16,000 in year 2, $9,600 in year 3 and $5,760 in later years.
No Deduction For Entertainment Expenses:
Entertainment, amusement or recreational activities and club membership dues will no longer be deductible. However, the IRS issued a notice stating that taxpayers may deduct 50% of an otherwise allowable business meal (food and beverage) expense if:
The expense is an ordinary and necessary expense
The expense is not extravagant under the circumstances
The taxpayer or an employee is present when the meal is served
The food and beverages are provided to a current or potential business customer, consultant or similar business contact
If the meal is provided during an entertainment activity it must be purchased separately or be stated separately from the entertainment activity on the bill or receipt.
Pass-Through Entity Tax
Public Act 18-49 has created a new "PE Tax" that applies to partnerships (excluding publicly-traded partnerships) and S Corporations. This tax shifts the Connecticut income tax burden from the individual business owners to the business itself. The intent is to provide a full deduction of state income taxes paid that otherwise would be limited on the individual's personal tax return. The tax is 6.99% of the PE's Connecticut source income. The individual taxpayer will then be allowed to claim a refundable credit on their personal tax return equal to their pro-rata share of the tax multiplied by 93.01%.
Pass-through entities are required to make estimated tax payments starting in 2018. Owners of PEs may elect to re-characterize CT estimated taxes that they paid personally and apply them to the PE's liability. The form electing the re-characterization must be filed by December 31, 2018. Any shortfall should be paid by December 31st to be able to deduct the payment in 2018.
Decoupling Of Bonus Depreciation
On May 31, 2018 legislation was passed with an effective date of January 1, 2017 which disallows the federal "bonus" depreciation deduction. Instead, 25% of the disallowed bonus depreciation will be deductible over the next four years. Since this legislation is retroactive to 2017, businesses may need to amend previously filed Connecticut tax returns.
Decoupling Of The
IRC Section 179 Deduction
For taxable years beginning on or after January 1, 2018, taxpayers must add back 80% of the IRC Section 179 federal deduction. They will then be allowed to deduct 25% of the disallowed portion of the deduction in the four succeeding tax years.
A word of caution: this is a very brief summary and does not include all of the details that may impact your individual situation. Please contact us if you would like more information.
About Lewitz, Balosie, Wollack,
Rayner & Giroux, LLC
We provide accounting, tax, and financial services to individuals, businesses, nonprofit organizations, estates, and trusts. Our services include tax return preparation, software consulting, and compilations, reviews, and audits of financial statements. We have been located in the shoreline community of Old Saybrook, Connecticut for over 50 years. Feel free to contact us if we can be of service. We can be reached at 860-388-4451.
** Thank you to Chuck Fitzgerald for the use of this photograph.