Year-End Tax Planning Opportunities for Your Business

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This blog post was originally published on February 13, 2018. It was updated on November 28, 2018.

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. Regardless of where your business stands on this spectrum, you can’t afford to delay year-end tax planning for 2018.

Some of the changes will automatically roll out, such as the lower corporate tax rate, but other changes require you to take action before December 31, 2018, in order to reap the full benefits.

Most urgent: Maximize the new deduction for qualified business income (QBI).

The new tax law includes a QBI deduction break for owners of certain pass-through entities, which may reduce your maximum effective tax rate for 2018. Pass-through entities include subchapter S corporations, partnerships and some limited liability companies.   

Owners of qualifying entities will now receive a 20% deduction on qualified business income, effectively reducing their maximum effective tax rate from 37.0% to 29.6% in 2018.  The deduction may be limited to 50% of the W-2 wages paid, or the sum of 25% of the wages plus 2.5% of certain depreciable basis. There’s another plus for pass-throughs: they keep the deduction on entity-level state and local taxes. 

The QBI deduction limitations and restrictions are set at the owner level. Planning for year-end 2018 should include discussion of salaries, timing and distribution of income.

You automatically benefit from the reduced corporate tax rate and repealed corporate AMT.

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 right away.

Moreover, companies are now subject only to the corporate tax as a result of the tax law’s repeal of the corporate alternative minimum tax (AMT). Prior to 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.

Limits on interest expense deductibility will increase cost of borrowing. 

Companies whose capital strategy is largely reliant on borrowing may see negative effects from tax changes related to interest expense deductibility. For net interest expense that exceeds 30% of adjusted taxable income, deductibility is now limited. A phase-in through 2021 means adjusted tax income is computed without accounting for depreciation, amortization or depletion; however, beginning in 2022 those items will be included in the calculation. 

Planning should include consideration of other capital strategies. 

You can fully depreciate “new” assets placed into service this year. 

The Tax Cuts and Jobs Act increased Bonus Depreciation, allowing businesses to fully depreciate property placed into service. This incentivizes companies, especially in the technology, manufacturing, and construction sectors, to invest in their business.

Previously, bonus depreciation was calculated at 50% of the basis of qualified property, and only brand new property qualified. For property acquired after September 27, 2017, and through the end of 2022, 100% of the basis can be depreciated, and the property only has to be “new to the taxpayer,” meaning used property can qualify. 

It is important to note that some states have decoupled and disallowed this bonus depreciation, so you will need to consider whether your state is following federal or state tax laws as it relates to bonus depreciation when filing your 2018 tax return.

Year-end planning should include assessing any property purchased during the year. You may also want accelerate purchases to this year, if it’s advisable.

Tax changes could be costly for U.S. companies with outbound operations.

The Tax Cuts and Jobs Act includes several changes affecting companies that do business overseas, including a a new foreign income tax category, Global Intangible Low-Taxed Income (GILTI). U.S. taxpayers operating outside the U.S. through foreign corporations should consult their tax advisors to take appropriate actions and plan accordingly.

Pass-through loss deductions are limited.

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, deferring the use of pass-through losses against other items of income. 

Net operating loss deductions are reduced.

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.

Contact your tax advisor to learn how these and other tax changes may affect you and your business and what you can do now to reduce your 2018 tax bill.

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