"I cannot wait to learn the intricate details of all the new tax changes this filing season!" said no one—ever. Fortunately, certified public accountants have been poring over the 500+ pages of the Tax Cuts and Jobs Act of 2017 (TCJA). Considered the largest federal tax reform in 30 years, the main takeaways for business owners include: changes to tax bracket rates and income limits; standard deductions nearly doubled; some popular exemptions received new restrictions; and other deductions disappeared altogether.
Despite the 35-day partial government shutdown resulting in a slim January IRS workforce, the IRS doesn’t expect any delays and says its workers will begin processing all filed returns on schedule. Tax returns supposedly began being processing in late January. Below is a brief rundown of five items worth checking into with your CPA:
1. The standard deductions increase will be the greatest change for most taxpayers. Single taxpayers who were eligible for $6,350 as the standard deduction last year can claim a $12,000 deduction for the 2018 tax year. Married couples will go from a $13,000 deduction to $24,000, and standard deductions for head of the household will go from $9,550 to $18,000.
However, personal and dependency exemptions were eliminated (along with 11 other common deductions). So if you’re accustomed to filing itemized deductions, you’ll probably need to run the numbers both ways and consult your CPA on which route is right for you—standard deduction versus itemized.
2. There might be a lot more whining and dining when taxpayers learn of the changes to meals and entertainment deductions. You can still deduct the cost of meals you host with a bona fide business purpose (which means conversations with clients, prospects, referral sources and business colleagues). But in the past, you could deduct entertainment expenses for events such as ball games, concerts or movies, if they took place directly before or after substantial, legitimate discussion directly related to the active conduct of your business. We’re talking deducting face value of tickets to events, food, drinks, parking, taxes and tips. But now that deduction is off the table.
3. New rules on net operating loss (NOL) are likely to raise questions (and possibly blood pressure rates) of business owners. An NOL is the amount by which a taxpayer’s business losses exceed its income. Before now you were allowed to carry it back, and the unused portion could be forwarded to the next year. Not anymore, folks.
For tax years prior to Jan. 1, 2018, NOLS were able to offset 100 percent of taxable income. And you could carry back two years and carry forward for 20 years. Now, however, an NOL can only offset 80 percent of taxable income in any given tax year — and they can no longer be carried back. They can only be carried forward.
4. The standard mileage section of the tax code changed a bit as well. But taxpayers have always had the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. But they may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System or after claiming a Section 179 deduction for that vehicle.
5. Sweeping changes to the qualified business income (QBI) deduction could mean big benefits, depending on the type of business you’re in and the amount of your taxable income. You may be entitled to a deduction of 20 percent of QBI earned, but there are a lot of either or’s involved with this deduction. Depending on your type of business or industry, there are also phase-outs. (For example, attorneys making more than $415K don’t qualify.)
The TCJA lowered the top tax on C corporation income from 35 percent to 21 percent, which is a lot less than the maximum 37 percent tax on pass-through income from sole proprietorships, partnerships and S corporations. To equalize the tax treatment between taxable and pass-through businesses, the new QBI income lets you deduct 20 percent of that income (calculated on an activity-by-activity basis, from your taxable income for the year).
Remember, consult your tax professional on how the QBI deduction and other items outlined above could affect you now and how to manage them.
If you picked up pointers here, perfect! Just remember: We’re all navigating uncharted territory, so please be sure to thank your CPA.
Shelley Johnson, CPA, CTC, CGMA, is owner of Allman Johnson, an Indianapolis CPA firm.