The Tax Cuts and Job Act (TCJA) will affect every type of business in America, regardless of its organizational structure. With the dizzying number of changes in the TCJA, some people are wondering if any types of businesses will get more favorable treatment. As a business owner, you might want to discuss the new laws with a business organization lawyer.
Most of the significant changes will not affect large businesses. Experts anticipate small and medium-size businesses will feel the majority of the impact, for better or worse. Since every company is different, it is impossible to state whether you should change from your current organizational structure to a different one because of the TCJA. You will have to learn about the tax changes and decide how they will affect your business.
Changes That Affect Corporations
C corporations used to have graduated federal income tax rates of 15, 25, 34, and 35 percent under the old tax law, unless you owned a personal service corporation, for which the tax rate was 35 percent. Beginning January 1, 2018, corporations (including personal service corporations) will pay a 21 percent corporate tax rate. If your company is not a corporation and the 21 percent rate would be beneficial for your business, you might consider incorporating.
Corporations subject to the corporate alternative minimum tax (AMT) had to pay a 20 percent tax rate under the old rules. Beginning January 1, 2018, there is no more corporate AMT.
New Rules That Impact Pass-Through Businesses
Beginning January 1, 2018, there is a new deduction for the net taxable income passed through to owners of sole proprietorships, partnerships, certain LLCs, and S corporations. The owner gets a deduction of 20 percent of his or her qualified business income (QBI). The TCJA includes numerous restrictions and limitations for the QBI deduction, including higher income levels. Special rules apply to owners of service businesses, such as doctors, lawyers, accountants, and other professional practices, which reduce the value of this deduction for income that is more than $157,500 for an individual taxpayer or $315,000 for a joint return.
TCJA Changes That Can Impact Any Type of Business Structure
There are numerous new rules in the TCJA that affect businesses. A few of the highlights include:
- You will no longer be allowed to deduct the full amount of business interest beginning January 1, 2018.
- You are, however, more likely to be able to utilize the cash method of accounting instead of having to use the more labor-intensive inventory method of accounting.
- Depreciation rules are more generous than in the past. Previously, you were limited to a maximum of $510,000 in depreciation deductions for qualifying property. Beginning January 1, 2018, you can deduct up to $1 million of depreciation. Another bonus is that more categories of property will qualify as eligible property.
- Unfortunately, the TCJA slashes business entertainment deductions. Beginning January 1, 2018, there will no longer be a deduction for business-related entertainment expenses. The old tax code allowed a 50 percent deduction.
- The TCJA has a Scrooge-like approach to business net operating losses (NOLs). Previously, NOLs were 100 percent deductible, but now, you can only deduct 80 percent of your losses, which compounds the misery of business losses.
Schedule a consult with a business organizations lawyer at Willcox, Buyck & Williams, P.A. today to discuss the business structure is most advantageous for your company.