Guest article by Eide Bailly LLP
The Tax Cuts and Jobs Act marks the largest tax act in more than 30 years. The bill has far reaching implications for individuals, corporations and businesses of all sizes. On March 6, Eide Bailly LLP sponsored a special Eggs & Issues to help us break down the implications of tax reform.
The event featured Adam Sweet, principal in Eide Bailly’s National Tax Office, who discussed the impact of tax reform on businesses. “Businesses large and small need to consider the numerous changes that may affect them in relation to tax reform,” said Sweet.
Sweet highlighted several of the key business-related provisions, including:
Corporate Tax Rate
As of January 1, the corporate tax rate has been reduced to a flat 21%. This change replaces the previous tiered rate structure that had a maximum tax rate of 35%.
The act introduced a new deduction for individuals, trusts and estates, known as Section 199A. Sec. 199A provides a deduction equal to 20% of domestic qualified business income generated by certain sole-proprietorships and pass-through entities (partnerships, S corporations and LLCs).
“In light of these tax rate changes, pass-through owners may want to re-evaluate the pros and cons of their current business structure,” he said.
One of the key components of Sec. 199A is the definition of “qualified business income.” This income is made up of income and expense items of a qualified trade or business during the year. However, a qualified trade or business excludes “specified services” such as the performance of services in the field of health, law, accounting, financial services, etc. Sweet was quick to mention that this will be a key point to watch as the IRS looks to flush out definitions related to tax reform in the coming months.
Another point regarding pass-through income are the limits on the Sec. 199A deduction. For taxpayers with taxable income above the “threshold amount,” the deduction can be limited in relation to W-2 wages and, for some businesses, investment in depreciable tangible property.
Full expensing of business assets
Qualifying business property acquired and placed in service after September 27, 2017, and before January 1, 2023, qualifies for 100% expensing, regardless of if it’s used or new. The act phases down expensing amounts over four years from 2023 to 2026.
The act also increases the maximum amount a taxpayer can expense under section 179 to $1,000,000 and increases the phase-out threshold amount to $2,500,000, for taxable years beginning after 2017. This includes tangible personal property used in furnishing lodging and certain improvements to non-residential real property.
Meals and Entertainment Expenses
The act eliminates deductions for entertainment, amusement or recreation expenses and membership dues for clubs “organized for business, pleasure, recreation or other social purpose.”
“This provision will affect a number of businesses. It’s important to review employee reimbursement policies and set up accounts to capture limited amounts,” Sweet said.
Employer provided eating facilities will be subject to the 50% deduction limitation through 2025. The act also disallows deductions for qualified transportation fringe benefits and certain expenses to provide commuting transportation for employees.
Sweet was then joined by a panel of speakers to discuss other implications of tax reform. Patrick Kautzman, partner in Eide Bailly’s Fargo office, discussed the impact on individuals, including:
- The standard deduction is increased to $24,000 for married filing a joint return and $12,000 for single filers.
- Unreimbursed medical expenses will continue to be deductible. The Act lowered the adjusted gross income limitation to 7.5 percent for 2017 and 2018.
- Tax reform repealed the itemized deduction for state and local taxes, effective after 2017, with the exception of a $10,000 annual allowance.
- The deduction for interest on a personal residence is now subject to lower debt limitations. The home equity debt interest deduction is “suspended” from 2018 through 2025, but that doesn’t necessarily mean the interest on that debt is not deductible. The key element in making the determination of interest deductibility appears to be the use of the loan proceeds. Interest on debt to acquire, build or substantially improve a personal residence, meeting the debt level limitations, should still be deductible, regardless of whether the loan is called a mortgage loan or a home equity loan (or line of credit). Debt secured by a personal residence and used for a purpose other than to acquire, build or improve the home, like buying a car or paying for a vacation, would not be deductible. And, acquisition debt incurred on or before December 15, 2017, is grandfathered and is not subject to the lower debt limitations introduced by the act.
Ava Archibald, Co-Director of Wealth Transition Services for Eide Bailly, Sarah West, CFO for Roers, and Dan Kadrmas, President of TrueNorth Steel, also joined the panel to talk about tax reform considerations and implications.
The moral of the story
The new tax reform act is incredibly complex. All the panelists encouraged attendees to take tax reform into consideration as they plan and not be afraid to reach out for help.
“As you go forward, be careful in planning and talk with your CPA about what next steps you should be taking in relation to tax reform,” Sweet said.
— Katie Hutton (@KatieMHutton) March 7, 2018
Grateful the presenters and panelists spent time discussing the implications on charitable giving like was said, “It will test the resolve of taxpayers if they were giving for true charitable purposes or for tax benefits. Time will tell” #fmwfeggs @FMWFChamber @MStateFndation
— Caitlin Stoecker (@MStateFdnCait) March 6, 2018
— Eide Bailly Fargo (@ebFargo) March 6, 2018
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