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Here at Tax Help Advisors, LLC we enjoy sugary treats and seeing creative Halloween costumes as much as anyone. But let us not forget Halloween marks the end of the first month in the last quarter of the year.
The Tax Cuts and Jobs Act included a few dozen tax law changes that affect businesses. Most of the changes in the new law take effect in 2018 and will affect tax returns filed in 2019. To avoid getting “spooked” when filing your 2018 tax return for your business, it is a good time to review the highlights of Tax Reform for businesses.
The information here summarizes some of the changes for businesses:
The Tax Cuts and Jobs Act changed the way tax is calculated for most taxpayers, including those with substantial income not subject to withholding, such as small business owners and self-employed individuals. Among other reforms, the new law changed the tax rates and brackets, revised business expense deductions, increased the standard deduction, removed personal exemptions, increased the child tax credit and limited or discontinued certain deductions. As a result, many taxpayers may need to raise or lower the amount of tax they pay each quarter through the estimated tax system.
Because of the far-reaching tax changes taking effect this year, all employees, including those with other sources of income, should perform a Paycheck Checkup. Doing so now will help avoid an unexpected year-end tax bill and possibly a penalty. To assist with the calculations, a Withholding Calculator is available on IRS.gov.
A companion publication, Publication 505, Tax Withholding and Estimated Tax, has additional details, including worksheets and examples, which can help taxpayers determine whether they should pay estimated tax. Some of those groups that should consult Publication 505 are those who have dividend or capital gains income, owe alternative minimum tax, or have other special situations.
Form 1040-ES can also help taxpayers figure these payments simply and accurately. The estimated tax package includes a quick rundown of key tax changes, income tax rate schedules for 2018, and a useful worksheet for figuring the right amount to pay.
More information about tax withholding and estimated tax can be found on IRS.gov Pay As You Go.
1) Eligible taxpayers may be entitled to deduct up to 20 percent of their qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. For taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business, and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
2) Eligible taxpayers may be entitled to deduct 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This component of the section 199A deduction is not limited by W-2 wages or the UBIA of qualified property.
The sum of these two amounts is referred to as the combined qualified business income amount. Generally, this deduction is the lesser of the combined qualified business income amount and an amount equal to 20 percent of the taxable income minus the taxpayer’s net capital gain.
The deduction is available for tax years beginning after Dec. 31, 2017. Most eligible taxpayers can claim it for the first time when they file their 2018 federal income tax return in 2019. The deduction is available regardless of whether an individual itemizes their deductions on Schedule A or takes the standard deduction.
Meal and entertainment expenses. The new law largely eliminated the deduction for any expenses related to activities generally considered entertainment, amusement, or recreation. However, under the new law, taxpayers can continue to deduct 50 percent of the cost of business meals if the taxpayer – or an employee of the taxpayer – is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant, or similar business contact. Food and beverages that are purchased or consumed during entertainment events will not be considered entertainment if purchased separately from the entertainment, or if the cost is stated separately from the entertainment on one or more bills, invoices, or receipts.
There are important changes to fringe benefit deductions that employers need to know. These changes can affect a business’s bottom line and its employees’ deductions.
The Tax Cuts and Job Act changed some laws regarding depreciation and expensing. These changes can affect a business’s tax situation. Here are some of the highlights:
Small businesses. The new tax law allows small business taxpayers with average annual gross receipts of $25 million or less in the prior three-year period to use the cash method of accounting. The law expands the number of small business taxpayers eligible to use the cash method of accounting and also exempts these small businesses from certain accounting rules for inventories, cost capitalization, and long-term contracts. As a result, more small business taxpayers are allowed to change to the cash method of accounting starting after Dec. 31, 2017.
S corporation to C corporation. An eligible terminated S corporation that is required to change from the overall cash method to an overall accrual method of accounting because of a revocation of its S corporation election that makes this method change for the C corporation’s first taxable year after such revocation must use a 6-year section 481(a) adjustment period.
Like-kind exchanges. Under the new law, deferral of gain or loss now applies only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange. To qualify as a like-kind exchange, a taxpayer must hold the real property for productive use in a trade or business or for investment. Real property held for sale does not qualify. A transition rule in the new law provides that an exchange of personal or intangible property may qualify as a like-kind exchange if the taxpayer began the exchange by transferring property or receiving replacement property on or before Dec. 31, 2017.
International business. The Tax Cuts and Jobs Act changed some things related to international businesses. Learn more on the tax reform page for international taxpayers and businesses.
Wrongful IRS levy. Individuals and businesses have more time to file an administrative claim or to bring a civil action for wrongful levy or seizure. The new law extended the time limit for filing an administrative claim and for bringing a suit for wrongful levy from nine months to two years.
If all of this seems a bit overwhelming, don’t worry. Tax Help Advisors, LLC can help. Our tax professionals stay current on all tax laws and we can help you sort out the changes that apply to your business.