The Tax Cuts and Jobs Act approved by Congress late last year and signed into law by President Trump gets somewhat mixed reviews, although it is generally considered good for business. Like any major piece of legislation, there are winners and losers. And it is important to consult with your tax professional to see how the new measures will affect your business.
A recent survey of self-employed businesses found that 83% did not have a complete understanding of how the legislation will affect their business. The new law could have some major changes, particularly if your business is a pass-through entity — like an S corporation, limited liability company, sole proprietorship or a partnership. In such circumstances, you may even want to reconsider the legal structure of your business because of changes in the tax code.
The National Association of Manufacturers (NAM) was unabashedly in favor of the Tax Cut and Jobs Act. “President Trump and Congress have delivered on their promise to pass tax reform that will empower manufacturers to create jobs, improve the quality of life and build more in America,” said NAM president and CEO Jay Timmons.
NAM does quarterly surveys of manufacturers, and the results of its first quarter survey were very upbeat. Optimism among manufacturers was at the second-highest level ever recorded (93.5%) in the 20-year history of the survey. In addition, optimism among small manufacturers was at its highest level ever (94.5%). The survey also registered all-time highs for projected employment growth, capital spending and inventories. Projected wage growth was the fastest pace in 17 years, and projected sales growth reached its second-highest reading.
“Empowered by tax reform and regulatory relief, manufacturers are now investing in our people through new jobs, higher wages, bonuses and growing our operations right here in the United States,” said Timmons in a statement released with the first quarter survey results.
The new tax law significantly reduces the tax liability of a business. The tax rate for regular or ‘C’ corporations was cut from 35% to 21%, and corporate alternative minimum tax was eliminated.
That single change is going to make the U.S. a tax haven for businesses, according to Tom Wheelwright, CEO of ProVision, a CPA firm that specializes in entrepreneurial taxes. “You’re going to have companies that move their headquarters to the United States to avoid taxes in their countries,” he told Business News Daily. “I think that’s going to be the biggest consequence of this legislation.”
Wayne Winegarden, senior fellow in business and economics at the Pacific Research Institute, said the lower corporate tax rate will make the U.S. more competitive in the global economy. “There’s a lot less drive for corporations to move overseas,” he told Business News Daily “and you have greater incentives to bring overseas money back home.”
Most small businesses are organized as ‘pass-through’ entities: the profit (or loss) is passed through to the owner, who reports it on his personal tax return. The business does not pay federal income tax.
Owners of pass-through entities will be able to deduct 20% of their earnings before paying taxes on it. There are exceptions, though. The deduction is linked to an investment in the business of some kind, and it is capped by a formula that takes into account wages and capital investment.
Some other provisions of the new tax law will save business owners money and others may cost them money; mostly they delay a tax obligation.
The new law expands and extends bonus depreciation. Companies can deduct 100% of the cost of qualified property through 2022. After that, it decreases by 20% until the provision sunsets in 2027.
The new law expands a second expensing rule tailored to small businesses, known as Section 179. A company can immediately expense up to $1 million in qualified property each year, an amount that begins to phase out once the business has invested $2.5 million in new property. The new law also expands the kinds of property that can be expensed under the section to include furnishings for lodgings (think beds, refrigerators, and the like), as well as new roofs, HVAC systems, and fire and security alarms for commercial buildings.
The new law allows business owners to write off more of the purchase price of a luxury car — about $47,000 over five years, up from about $15,000.
The net operating loss deduction is limited. Net operating losses can only be used to offset up to 80% of the business net income in any particular year. In the past, losses could be used to offset income in the previous two years or up to 20 years going forward.
Deductions for state and local income taxes are scaled back. Businesses will no longer be able to fully deduct the cost of food and beverages provided to workers, only up to 50%.
Corporations that do business abroad will no longer be taxed by the U.S. on profits they earn overseas.
The new law also makes converting to a C corporation a little easier for companies that do so in the next two years. For family businesses, the new law doubles the lifetime estate and gift tax exemption to $11,180,000. The estate tax rate remains 40%. The annual gift tax exclusion has raised to $15,000 per donee.
A major tax requirement of the Affordable Care Act is gone: the mandate that individuals buy health insurance or pay a fee. Without the mandate, insurance companies likely will raise premiums on individuals and their employers, so a group health insurance program could become much more expensive for a business.
The new law allows more businesses with less than $25 million in annual sales to use simpler accounting methods, including the cash method of accounting.
Winegarden predicted that, with reduced taxes, the Federal Reserve may raise interest rates and try to offload some assets that it has accrued since the financial crisis. In fact, the Fed raised interest rates in March and again in June.
The Tax Cuts and Jobs Act was the first major tax overhaul in nearly 30 years. The tax cuts will benefit businesses. Corporations and small companies may reinvest tax savings into their business, prompting growth.
