The Tax Cuts and Jobs Act shook up the U.S. tax system for businesses in more ways than one. Depending on the type of business you own or operate, these tax changes may be more positive or negative. Where does your business stand on this complex spectrum?
As the largest piece of tax reform legislation passed by Congress in more than three decades, familiarizing yourself with each and every provision can be time consuming. To help you out, we selected the top four tax changes that may impact your business.
Tax change #1: Reduced corporate tax rate
The Tax Cuts and Jobs Act dropped the corporate tax rate from 35% to 21% effective in tax years beginning in 2018 – a quick and direct benefit businesses can enjoy.
Tax change #2: Repealed corporate alternative minimum tax
Companies are now only subject to the corporate tax, due to the tax law’s repeal of the corporate alternative minimum tax (AMT). Before the Tax Cuts and Jobs Act was signed into law, every company had to determine taxes owed under the standard corporate tax and the corporate AMT and pay the higher of the two.
Tax change #3: Limited pass-through losses
One major tax change limits the net business losses that active business owners of pass-through entities can deduct on their tax returns. Now, owners of businesses operating as pass-through entities (including sole proprietors, partnerships and S-corporations) are allowed a maximum loss of $500,000 if married and $250,000 if single.
Before the tax law was passed, owners of pass-through entities were not subject to this limitation. Suspended losses in excess of these amounts will be converted to net operating losses (see tax change #4 below), deferring the use of pass-through losses against other items of income.
Tax change #4: Reduced net operating loss deduction
Net operating losses (NOLs) are generated when a business’ permissible tax deductions exceed its taxable income.
The tax reform legislation allows businesses to carry NOLs forward indefinitely; however, the law lowers the use of NOLs to 80% of the business’ taxable income. Moreover, the legislation does not permit businesses to carry back NOLs. Formerly, taxpayers could carry back NOLs two years or forward up to 20 years and offset 100% of taxable income.
This modification of the NOL deduction may defer your business’ ability to benefit from NOLs and increase current tax liability.
Note that this list is not all-inclusive; other tax bill provisions may affect your business as well. Please contact me or another Kaufman Rossin professional with questions on how these tax changes may impact you and your business. Don’t forget to keep the 2017-2018 tax planning guide handy as well.