As 2017 drew to a close, Congress passed the Tax Cuts and Jobs Act—tax reform legislation that affects both individuals and businesses.
"Businesses are seeing significant tax savings. How you use those benefits will leapfrog you into a better 2018–19," said John Pridnia, CPA CGMA, tax director for Rehmann, who has extensive experience in the areas of tax and accounting for corporate enterprises.
Pridnia notes that, despite the anticipated benefits, the legislation also comes with a lot of "what if's."
When Congress last reformed the tax code in 1986, the legislative process took over two years. This time? Congress passed the legislation in two months.
"There was no guidance. In every single tax reform I've ever lived through, you always get a chance to be able to listen to the hearings, listen to the debates, and get a feeling as to why they're making the changes," Pridnia said. "This rolled out in a matter of a very short time, with extreme polarized support or lack of support."
Pridnia is not sure if, when and how taxpayers will get further guidance from Congress—likely within the next six to 12 months—and many of the legislation's provisions expire within 10 years. In the meantime, he offers his own guidance on how the Act affects businesses in West Michigan, and what actions business owners and leaders should take to ensure they reap the benefits.
New Corporate Tax Rate and Pass-Through Tax Deductions
The Act reduces the corporate tax rate from 35 percent to 21 percent.
Smaller businesses not organized as C corporations—including sole proprietorships, limited liability companies, partnerships and S corporations—may now be eligible to deduct an amount up to 20 percent of their net business income.
The new pass-through tax deduction, however, only applies primarily to non-service businesses. Owners of personal service businesses—which the Act defines as entities providing financial, brokerage, health, law, accounting, actuarial or consulting services—may claim the deduction only if the owner's joint income is less than $315,000. The ability to claim the deduction is phased out for incomes between $315,000 and $415,000, and owners of a personal service business who have taxable incomes over $415,000 may not claim the deduction at all.1
For those the deduction does apply to, Pridnia notes it requires four or five different calculations to determine the deduction. "It's important to run through all those [calculations] and make sure you're maximizing your deduction, but it's not going to be an easy, back-of-an-envelop kind of calculation."
The Act allows all businesses to deduct capital expenditures immediately through 2022, rather than over the prescribed life of the asset. The new legislation expands the deduction to 100 percent and can include used property.
Meals and Entertainment
The game has changed for entertaining clients. Under prior law, meals and entertainment were deductible by 50 percent, with 100 percent for the convenience of the employer. Under new legislation, all meals, including for the convenience of the employer, are deductible by 50 percent. Entertainment expenses are nondeductible, regardless of the purpose.
What should businesses do?
"Get with your advisor," Pridnia said. "As a business owner, you just have to have a better understanding of what the changes are and how it impacts you and your business. Half- to three-quarters of the law doesn't impact you. Don't spend time trying to figure that out. Work with advisors to find out which one hits you."
Pridnia notes many businesses wonder if they should change organizational structures as C corporations or pass-through entities. Yet every business situation is different, the interpretation of the law isn't black and white, and many of the provisions expire within 10 years.
"Spend time understanding what we know. Talk about what we don't know and how it might impact your organizational structure. Does the answer make sense on a 10,000-foot view?"
Most businesses, he notes, will reap some financial benefit from the Act.
"I think the biggest challenge is getting an understanding of the tax reform impact on you as a business owner and getting that handle, that understanding, soon enough. The sooner you can understand the impact as a business and an individual, the better you'll be able to position yourself for 2018."
Written by Cassie Westrate, staff writer for West Michigan Woman.