5 key Tax Cuts and Jobs Act considerations entrepreneurs must know
When considering the recent passage of the Tax Cuts and Job Act (TCJA), two expressions come to mind, “A stitch in time saves nine” and “It’s not what you earn, it’s what you keep.” While the new tax law brings favorable tax breaks for businesses, it adds layers of complexity that require careful guidance from seasoned tax professionals. As 2018 quickly comes to a close, business entrepreneurs need to examine significant changes under TCJA that will impact their overall tax strategy.
Key items for consideration include:
- Business Structure – Entrepreneurs should evaluate how their business structure is set-up and note the differences between a C Corporation and S Corporation. Under TCJA, C Corporation tax rates have been reduced to a flat 21%, and state and local taxes remain fully deductible to such companies. Whereas with S Corporations, future capital gains may also be excludable from taxes—if such gains qualify for Section 1202 treatment. So, if structured correctly, your business can reduce annual taxes for future growth and possibly pay fewer taxes upon the ultimate sale of the business.
- Code Section 199A – This new provision offers tax cuts to those individuals who derive their income from a pass-through entity and have qualifying business income (“QBI”). While the income earned by doctors, lawyers, accountants and consultants is not considered QBI, many of these professionals can shelter their taxable income down a level. This level is $315,000 for joint filers and $157,500 for single filers for the maximum benefit. It is important to properly plan the timing of income and deductions, purchasing property to obtain bonus depreciation, and/or maximizing pension contributions.
- Entertainment Expenses – New businesses that incur significant entertainment expenses, for example, golf outings, sports team or Broadway tickets will now find these expenses non-deductible in 2018. In prior years, entertainment expenses were 50% deductible.
- State Tax Nexus – This is a major consideration, especially in light of the recent Wayfair decision. There are two major types of state tax nexus: income tax and sales tax. A business might not have income tax nexus with a certain state, but if it reaches a certain metric, it may have sales tax nexus, even when it has no physical presence in that state. So, it is very important to identify your tax exposure, as non-filing in a particular state can subject your business to many years of back taxes, as the statute of limitations “clock” does not “tick” until the actual returns are filed.
- Estate Tax – Why mention estate taxes when discussing business? It’s because the TCJA has doubled the estate tax exclusion to over $11 million per individual. This can provide owners with established businesses more gift planning opportunities for a more robust succession plan that will shelter more tax dollars from estate taxation. There are other important non-tax reasons for gifting, such as asset protection.
As a business owner, you shouldn’t wait until year-end to contact your tax advisor for a financial checkup. You will want to get a head start on understanding your current tax standing to see if there are any items in the tax law you can benefit from.