Introduced as the Tax Cuts and Jobs Act, the “Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal year 2018,” P.L. 115-97, was signed into law by the President on December 22, 2017. There are an incredible amount of changes and alterations, but we've combed through to find a few major changes that will effect most small businesses.
C-Corps Corporate flat tax rate of 21%, thus eliminating the progressive corporate tax system.
Pass-through entities Small business pass-through entities, like S Corps, most LLCs, sole proprietors, and partnerships – millions of small firms – will get a 20% deduction on “qualified business income." However, many small service-based business owners, like attorneys, accountants, and consultants – will only qualify for the deduction if their income is below the top of the phase-out ranges (MFJ - $315K-$415K, others - $157.5K-$207.5K). All other businesses will be subject to other limitations (i.e. 50% of the W-2 paid or the sum of 25% of W-2 + 2.5% of the unadjusted basis of depreciable property.) Is your head spinning yet? Much of these items are yet to be further interpreted as well guidance to be released. So stay tuned on further clarifications and changes...
All business entities Remember "Meals and Entertainment"? It is no longer. Meals will continue to be deductible at 50%. However, this is yet another area that further guidance is needed since currently there are many interpretations by different accounting firms on the deductibility of meals floating around.
Here's the kicker...entertainment related expenses will no longer be deductible at any rate. Writing off tickets to sporting events, golf outings, etc. are no longer. For relationship-based businesses, this could have a significant impact on their tax liabilities and potentially the way in which they do and build business. They'll have to consider that taking a client to say a Dodgers game paid for by the business may actually cost you nearly .40 on the dollar as a pass-through entity. It will be important to take a look at the cost of these events as a marketing strategy and ensure that they result in a positive ROI for your business.
These changes and more will effect millions of businesses and their owners. L.A. Financial will continue to research the effects on small businesses as further details become available. We'll transition this info into our clients' forecasting strategy, as well as compliance.
To learn more contact us today by visiting www.lacpa4u.com.