Businesses have seen numerous tax changes as a result of the Tax Cuts and Jobs Act of 2017. Some changes apply only to C corporations, some only for owners of pass-through entities, and others for all types of businesses. All businesses would be wise to review the applicable changes so they can take advantage of opportunities and avoid surprises when they file their income tax returns.
The most important change for C corporations is the reduction in their tax rate to a flat 21 percent. This rate applies whether the C corporation is a local mom-and-pop business or a multinational corporation. Fiscal-year corporations, however, continue to apply previous graduated rates to the portion of their year prior to January 1, 2018; the flat rate applies to the portion of the year beginning on this date.
C corporations are also relieved of their obligation to figure the alternative minimum tax because the AMT been repealed as of January 1, 2018. This change benefits larger C corporations because small ones were already exempt from the AMT. Like the blended tax rate, fiscal year corporations may also have to figure the AMT for the portion of their year prior to January 1, 2018.
The 21 percent tax rate is so appealing to many businesses that some which are operating as other than a C corporation have changed or are considering a change to become a C corporation. For example, some S corporations have revoked or are thinking about revoking their S election to be taxed as a C corporation. Clearly the decision to change a business's entity choice is a complex one involving both tax and nontax considerations.
Publicly held corporations are subject to a cap on the deduction for executive compensation. The amount of the cap--$1 million--is unchanged but the scope of its application has been expanded.
There are also a number of new rules specifically applicable to corporations with foreign operations. These rules are part of a shift in the taxation of multinationals and include a tax on the repatriation of foreign earnings and a base erosion anti-abuse tax, known as BEAT.
The biggest tax change for owners of S corporations, partnerships, limited liability companies, and sole proprietorships (including independent contractors) isn't a new business write-off. Instead, it's a new personal deduction based on qualified business income (QBI). More specifically, owners may be able to take a 20 percent deduction on Form 1040, which effectively reduces the tax that's paid on their share of business income.
The bad news is that this new tax break has numerous restrictions that may limit or prevent any deduction for certain business owners. The good news is that owners may qualify whether they are mere investors (passive owners) or active in the business.
To complement the break for successful pass-through businesses, the new law restricts deductions for losses. More specifically, "excess business losses" cannot be deducted currently. Instead, they become net operating losses (NOL). And due to a law change in the NOL rules, losses can no longer be carried back (with an exception for farming businesses); they are carried forward to offset up to 80% of taxable income (rather than the old rule allowing for a full offset).
Tax breaks common to all businesses
The new law liberalized some tax rules while restricting or eliminating others. For example, tax rules for deducting the cost of buying equipment and certain other property--through the Section 179 deduction (first-year expensing) and bonus depreciation--have been greatly enhanced. However, the deduction for business-related entertainment costs has been repealed.
The best advice is timeless
Because of the scope of the changes and the complexity involved, taxes for most businesses are not a do-it-yourself activity. Working with a certified public accountant or other tax professional is typically well worth the fees, so you can learn what actions to take to use the new tax breaks and minimize your tax bill.