The Tax Cuts and Jobs Act was signed into law by President Trump in December 2017, ushering in a new wave of tax rules. The tax code is thousands of pages long, full of obscure rules on topics that don’t apply to most Americans. It’s likely that you don’t need to know expensing costs for replanting citrus plants, net operating losses for life insurance companies, and limits on FDIC premiums that banks with more than $10 billion in assets can deduct. With all the new tax law changes, what you need to understand is how the Trump tax plan affects you, and how you can take advantage of these new rules to keep more of what you make. At Quartermaster Tax Management we know that, in the end, it’s what you keep that counts.
UNDERSTAND HOW THE TRUMP TAX PLAN AFFECTS YOU
STRATEGIC TAX PLANNING FOR BUSINESS
The meat of the new tax law is in the new rules it introduces for businesses. Thankfully, that is also where you will find the most actionable strategic tax plan strategies. There are four different tax classifications for businesses: sole proprietorships, partnerships, S corporations, and C corporation. Your tax strategy will depend on what type of business you own. If you’re confused because you have an LLC, LLCs are a type of business entity, not a tax classification. LLCs can choose to be taxed as whatever entity they want.
Regardless of your tax classification, you will still follow the same basic process. You will need to add up your income from all sources, subtract cash expenses, and then subtract non-cash expenses. If you are taxed as a C corporation, you will pay taxes on that bottom line result, or you will pass it through directly to the owners if you are taxed as a proprietorship, partnership, or S corporation.
For 2017 taxes, the corporate tax system had three statutory rates: 15% on the first $50,000 of income, 25% on the next $50,000, and 35% on anything above that. Though as you moved up the income ladder, lower levels phased out, and in the end, there was a complicated eight-layer cake of corporate tax rates. Things become much simpler under the new tax law, with a single flat rate of 21%, regardless of whether you make $25,000 or $25,000,000. The new law makes C corporations far more valuable to business owners with tax strategy possibilities that include traditional income shifting, qualified plan alternative, and a stepped-up basis shelter.
A NEW KIND OF INCOME
The new law’s biggest change for most business owners is a new kind of income from pass-through businesses. While the tax law has always recognized that there are different kinds of income, and treated those kinds of income differently, Congress has created a new kind of income with this tax law, Qualified Business Income.
While the new tax law lowered the top tax rate on C corporations, other businesses including sole proprietorships, partnerships, and S corporations are still faced with paying a maximum of 37% tax on pass-through income. To equalize the tax treatment between taxable and pass-through businesses, the new tax law created this new category of income, qualified business income or QBI. These businesses can deduct 20% of that income, calculated on an activity-by-activity basis, from their taxable income for the year.
Businesses who want to maximize this new QBI benefit will have several opportunities. Creating W2 income, “cracking and packing” strategies, segregating side income, segregating real estate, moving contractors to employees, and even quitting your job are all ways to take advantage of the new rules put in place with the Tax Cuts and Jobs Act.
SAY GOODBYE TO THESE DEDUCTIONS
While the new tax law offers many new tax-saving opportunities for businesses, there are also some deductions that are going away, though they might not have applied to your business to begin with. Previously, businesses were able to write off an unlimited amount of interest they used to finance assets. The new law limits deductions for business interest, though the limits don’t apply unless your business averages $25 million or more in gross receipts.
The new law also repeals the Domestic Production Activities Deduction. This deduction was part of the American Jobs Creation Act, promoting jobs in domestic manufacturing. While the rules for this deduction were complicated, they were also substantial. However, they are no longer applicable.
Business entertainment expenses are also impacted by the Tax Cuts and Jobs Act. Previously you could deduct 50% of the cost of any entertainment expenses that took place directly before or after a substantial business conversation. The new tax law repeals that deduction, regardless of what type of business entity you operate. In addition, the new law also tightens rules for deducting business meals. Before you could deduct 100% of the cost of providing food and beverages to your employees, but now that deduction has been cut to 50%. To learn how to make the New Tax Law work for you and your business give us a call at 704-490-411, and see what we can do for you.