As of the writing of this article, the House of Representatives and the Senate have just reconciled and passed the Tax Cuts and Jobs Act. With the tax cuts and changes confirmed, the act is ready for the president to sign. Now, Southern Nevada businesses are wondering how these changes will ultimately affect their 2018 taxes.
In 2018, it will be critical to collaborate with your accountant and plan for ways to understand and possibly lower your tax liability while simultaneously filing your 2017 taxes. It will be important to plan, estimate and forecast effects, while coordinating 2018 required estimated tax provisions.
Here are the new tax laws that will be particularly impactful for local businesses:
TAX RATES: PRO BUSINESS
The tax rate changes for businesses represent real dollars, right away. For tax years beginning after Dec. 31, the corporate tax rate is now a flat 21 percent rate. Previously, corporations were subject to graduated tax rates of 15 to 35 percent, depending on the amount of taxable income. Changes to personal tax rates will have the most impact since most business owners operate within the pass-through entities arena as a partnership LLC or S-Corporation, including sole proprietorships. The c-corporation structure still has double-tax exposure because of dissolution factors and non-deductible dividends. The ending tax rates are close to the highest individual tax rates after planning scenarios. Entity selection for new businesses should be carefully analyzed. Just because the C-corp entity has a lower tax rate it may not be the best model for your business.
TIME TO INVEST IN NEW EQUIPMENT, TECHNOLOGY AND PROPERTY
With the changing rules for bonus depreciation, 100 percent of qualified property is deductible in the first year of service. This provision applies to new and used property acquired after Sept. 27, and before Jan. 1, 2023. This can even be true for companies with taxable losses, which could create operating losses to partially offset other income. Business owners will want to consider purchasing new equipment and technology with the aggressive depreciation provisions. This also allow startups to invest in their business without deferring tax deductions and absorbing tax deductions.
In addition to 100 percent bonus depreciation, the act changes Section 179 to allow property placed in service in tax years beginning after Dec. 31 to be expensed up to $1 million, and the phase-out threshold amount is increased to $2.5 million. The Tax Act also changes the tax lives for depreciation for real estate activities.
DO BUSINESS OUTSIDE OF NEVADA? YOU MAY PAY TWICE
If a Nevada company also pays taxes in another state (i.e. has multiple locations in states with income tax), it may experience loss of tax benefit, with less tax deductions available on a personal tax return.
Careful coordination is needed related to another negative effect: the slashing of allowable real estate and state income tax deduction. The combined deduction is $10,000 and will need proactive tax planning to allow pass-through items that report to individuals. This may result in an unusual loss of tax benefits for taxpayers who have income in another state.
Pass-through state tax deductions could further be effected, so stay tuned for clarification.
NO FREE LUNCH
The new tax laws will limit all business meals to a 50 percent deduction, even for company events and employee meals, which were previously 100 percent deductible. This will especially affect employers with employee cafeterias like casinos and hotels, or other companies that feed their employees at special events, celebrations or even during busy times of year when employees work longer hours and eat at work more often.
STANDARD DEDUCTION INCREASE
With the standard deduction for personal taxes increasing to $24,000 for married filers, itemized deductions for real estate taxes, mortgage interest and charitable giving may not lower an individual’s tax liability as it did in prior years. If a couple is close to the $24,000 deduction threshold, they should plan carefully with a tax advisor for cross year planning options to maximize tax deductions.
The president has promised to sign this tax act into law soon, and when he does, many businesses will experience a tax savings immediately. However, businessowners will need plan, plan, plan with their CPA for all possible scenarios so they can take advantage of some complex provisions and coordinate the timing of deductions.
Scott Taylor, CPA is a shareholder with Piercy Bowler Taylor & Kern, the a local accounting firm with offices in Reno and Salt Lake City. Although he is a Brigham Young University graduate, he cheers for his hometown Runnin’ Rebels and has had season tickets for the past 40 years. Contact Scott at firstname.lastname@example.org.