With sweeping tax changes brought on by the Tax Cuts and Jobs Act, businesses have many changes to navigate as they prepare their 2018 tax return. Here is a checklist of the biggest things that business owners should be mindful of that could affect their returns.
- 20% Deduction for Self-Employed Individuals and Owners of Pass-Through Businesses
This new deduction is claimed on Line 9 of Form 1040. There is a need to determine qualified business income, and taxpayers may also need to know if the income is from a specified service trade or business, and their share of W-2 wages and the unadjusted basis of qualified property immediately after acquisition. For owners of partnerships and S corporations, business information should be provided in Box 20 of Form K-1.
- Business Interest
The new limit on deducting business interest is generally 30% of adjusted taxable income, unless the business has less than $25,000,000 in average annual gross receipts for the prior three tax years.
- Entertainment and Meal Expenses
There is no longer a deduction for entertainment expenses. The 50% deduction for meal expenses associated with operating a trade or business generally is allowed if the taxpayer can identify meal expenses separately from entertainment expenses.
- Sexual Harassment Settlements
Effective for amounts paid or incurred after December 22, 2017, the Act disallows a deduction for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if the payments are subject to a nondisclosure agreement.
- Net Operating Loss (NOL)
There is no longer a carryback of NOLs to prior years, except for farmers and certain insurance companies. The Act limits the NOL deduction for NOLs arising in tax years beginning after December 31, 2017 to 80% of taxable income, but allows any unused portion to be carried forward indefinitely.
- Paid Family and Medical Leave Credit
Employers who offer paid family and medical leave to their employees are eligible for a new tax credit. Read more here. This credit is only available for tax years beginning in 2018 and 2019.
- Corporate Tax Rate
For tax years beginning after December 31, 2017, the corporate tax rate is a flat 21%.
- Corporate Alternative Minimum Tax (AMT)
The corporate AMT is repealed for tax years beginning after December 31, 2017.
- Qualified Opportunity Zones
Tax on capital gains can be deferred and reduced in some cases by reinvesting the amount of the gain in a Qualified Opportunity Fund within 180 days. Read more in our recent blog article by clicking here.
Other Business Changes
- Business Expensing of Fixed Assets
There are higher expensing limits for capital purchases under Code Sec. 179 and bonus depreciation (currently 100%). Be careful because higher expensing is likely to reduce the 20% deduction for owners of pass-through businesses
- Carried Interest
There is a new three-year holding period for gains attributable to carried interest in order to obtain long-term capital gain treatment.
- Transportation Exclusions
Many transportation fringe benefits have been eliminated. Read the IRS Rules here.
- Sale of Partnership Interests
A 10% withholding requirement applies upon the sale of a partnership interest, unless the transferor certifies in an affidavit that it is not a nonresident alien individual or foreign corporation.
- Technical Termination of Partnership
The Act repeals the technical termination rule for partnership tax years beginning after December 31, 2017. Thus, a partnership is treated as continuing upon a sale or exchange of 50% or more of the total interest in a partnership’s capital and profits within a 12-month period, and new elections are not required or permitted.
- Like-Kind Exchanges of Real Property
The Act limits the non-recognition of gain to like-kind exchanges of real property that is not held primarily for sale.
- Businesses Under $25,000,000 in Average Gross Receipts
In general, if a business has less than $25,000,000 in average annual gross receipts for the prior three tax years, the business may:
- -Use the cash method of accounting
- -Avoid the requirement to account for inventories
- -Be exempt from the UNICAP rules
- -Refrain from using the percentage-of-completion accounting method for long-term construction contracts entered into after December 31, 2017
The taxpayer may have to file Form 3115 for a change in accounting method if choosing to implement any of the above.
Business Tax Law Uncertainties:
- Expired Provisions
Over thirty tax breaks have expired for the 2018 tax year and have not yet been extended by Congress. They include many energy-related provisions and specific industry provisions. For individuals, they include the tuition and fees deduction, the mortgage insurance premium deduction, and the forgiveness of mortgage debt exclusion.
With all of the changes related to the Tax Cuts and Jobs Act, many regulations are not yet final or require further clarification from Congress or the Internal Revenue Service. MCB Advisors continue to monitor these developments as they occur and will communicate them to you as soon as we can.
If you have questions about these changes, contact an MCB Advisor at 703-218-3600 or click here. To review our tax news articles, click here. To learn more about MCB’s tax practice and our tax experts, click here.