Tax Reform for Dummies – What Small Companies Need to Know

Tax Reform for Dummies – What Small Companies Need to Know

By Nick Dmitrovich with special thanks to the Indiana CPA Society and Katz, Sapper & Miller

New tax reform laws have been approved for the first time in over 30 years, and, understandably, many business owners haven’t had the time to look into how these changes will impact their companies. We’ve seen the headline-grabbing items about businesses receiving an important cut, but things are quite a bit more complex than that. So complex, in fact, we’ve launched off a few signal flares to call in help from Indiana’s experts in accounting.

Doug York, a CPA, partner with Rodefer Moss & Co, PLLC, and member of the Indiana CPA Society, and Chad Halstead, a partner with Katz, Sapper & Miller’s Tax Services Group, answered our call for assistance. Both of them were quick to empathize with the convoluted nature of the new reforms.

“The Tax Cuts and Jobs Act of 2017 (TCJA) will have a profound impact on business owners, investors, and professionals alike,” Chad Halstead said. “Defining the impact is another issue altogether. The legislation was passed with breakneck speed, leaving many questions unanswered.”

To which Doug York agreed, “The new law promised simplicity, but that is anything but true for most businesses. Proper planning and advice from professionals will be necessary for businesses to take full advantage of the new law.”

Based on blended responses from the two experts, here are a few of the topics small businesses need to be aware of to mitigate negative economic impact and find benefits in the new tax law. Take a look.

 

The QBI Conundrum

Small businesses (pass-through entities, sole proprietors, etc.) might not be aware they could receive a deduction equal to 20 percent of Qualified Business Income (QBI) under the new “Code Section 199A,” a less publicized attribute of the new reforms. The situation differs widely among company types though.

“The 20 percent deduction for Qualified Business Income sounds simple, but there are several limitations and factors that can limit the deduction,” said York.

Halstead elaborated, “Once taxable income exceeds a threshold, certain professions are excluded from the 20 percent deduction. Condolences to doctors, accountants, financial advisers, brokers, lawyers, or the ambiguous ‘any business where the principal asset is the skill of its employees.’ (Kudos to engineers and architects, who are specifically unscathed.) Even outside of the ‘blacklisted’ professions, there are many other limitations.”

 

The C Corporation Option

The C corporation tax rate reduction was one of the elements of the reforms that got the most attention in the press; it has been reduced from 35 percent to a flat 21 percent. Small companies (pass-through entities) can convert themselves to file as a C corporation, but would that be a wise move? Once again, the experts agreed it’s rather situational.

“The short answer: It depends, but probably not,” said Halstead.

York agreed, saying, “The lower tax rate for C corporation might sound like a great option, but careful planning is needed to determine the right entity choice.”

It all depends on what a business owner is planning to do with their cash. Converting your company’s status to a C corporation might be reasonable if you’re planning to continually reinvest your cash into the company. If you need those funds in the short term, as many small business owners likely will, remaining a pass-through entity is probably the better option.

 

Maybe It’s Time to Buy?

Both of our experts commented on changes the new reforms bring to taxation on property, specifically fixed assets, income-producing real estate, and investments into publicly traded partnerships.

Halstead explained the previously-mentioned 20 percent pass-through deduction can apply to qualified real estate investment trust (REIT) dividends and to qualified income from publicly traded partnerships (PTPs) plus gains on the sale of a PTP interest. He explained there are some caveats with those two examples, but said, “Strictly from a net-tax standpoint, these investments will now be more desirable than under prior law.”

Also, those considering making purchases of new property or equipment soon should know certain aspects of the reforms may help support the investment.

“Purchases of fixed assets can be 100 percent deductible,” York said. “The taxpayer must elect out of the 100% deduction treatment.”

 

Maybe Just Order the Salad

There’s been several changes added to the sections of business tax codes pertaining to deductions to things like meals, entertainment expenses, transportation, and other associated benefits that business owners should definitely understand.

For meals and transit, York explained, “An employer’s deduction for fringe benefit expenses is limited. The current 50 percent limit on the deductibility of business meals remains intact. However, employer-provided meals will no longer qualify for 100 percent deductibility. In essence, all meals associated with business will be limited to 50 percent deduction. Additionally, deductions for employee transportation (parking and mass transit) are denied.”

On the subject of entertainment expenses, Halstead said, “Previously, a business could’ve deducted 50 percent of expenses incurred for entertainment, amusement, or recreation. The new tax bill would eliminate this deduction, meaning that no amount of these expenses would be deductible by a business.”

 

Keep an Eye Out, There’s More

This is only a partial list of all of the tax changes that could have an impact on companies. There are many other topics on the books that could possibly affect your bottom line. Every company is going to have unique criteria to consider when filing under the new rules, so it’s going to be more important than ever to ask lots of questions, work with a trusted tax advisor, and pay attention to the little details that could add up to big dollars.

 

 

 


Disclaimer: This article has been prepared for informational purposes only and should not be relied on for tax or other accounting advice. Consult your own professional advisors before performing any transactions or tax filings.

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