The new tax reform law — commonly referred to as the “Tax Cuts and Jobs Act” — is the most significant tax legislation in decades. Now businesses and individuals are trying to digest the details and evaluate how the changes will impact their tax situation. Fortunately, Smith Schafer can help you figure things out. Let’s start with a basic overview of what is covered in the new law. (Except where noted, these changes are effective for tax years beginning after December 31, 2017.)
In general, the law significantly reduces the income tax rate for corporations and eliminates the corporate alternative minimum tax (AMT). It also provides a large new tax deduction for owners of pass-through entities and makes major changes related to the taxation of foreign income. But it also reduces or eliminates many business tax breaks.
Some of the key business-related changes include:
Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
Repeal of the 20% corporate AMT
New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — only through 2025
Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
Other enhancements to depreciation-related deductions
New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
New limits on net operating loss deductions
Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
New rule limiting like-kind exchanges to real property that is not held primarily for sale
New tax credit for employer-paid family and medical leave — only through 2019
New limitations on excessive employee compensation
New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation
FOR INDIVIDUALS AND ESTATES
The new law makes small reductions to income tax rates for most individual tax brackets, and it significantly increases individual AMT and estate tax exemptions. But there is also some bad news for individuals: The Tax Cuts and Jobs Act eliminates or limits many tax breaks. In addition, much of the tax relief for individual taxpayers will be available only temporarily.
Here are some of the key changes; except where noted, these changes will sunset after 2025:
Reductions in individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately)
Elimination of personal exemptions
Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit
Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for only 2017 and 2018
New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers)
Reduction of the mortgage debt limit for the home mortgage interest deduction, to $750,000 ($375,000 for separate filers), with certain exceptions
Elimination of the deduction for interest on home equity debt
Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters)
Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses)
Elimination of the AGI-based reduction of certain itemized deductions
Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances)
AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers
Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing)
In addition, the new law permanently eliminates the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty. The elimination of the individual mandate is effective for months beginning after December 31,2018. Also permanent is the expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year.
The new tax law is broad-reaching and complicated. And more tax reform may be coming. Other proposals discussed would address retirement and education savings, reorganize the IRS, delay some taxes funding the Affordable Care Act (such as the medical device tax and the health insurance provider fee), prevent abuses of the earned income tax credit and extend the benefits of some tax credits for renewable energy property, nuclear energy production and biodiesel.
Whether you are setting up a new company or you have been in business for years, you need to evaluate which legal structure is best for your enterprise. No one option is best for every type of operation. The right choice depends on several factors including the number of owners, taxes and your business goals. These concerns lead many business owners to organize as S corps. The legal structure is similar to a C corporation, but S status provides an escape from double taxation. Since choosing a business structure may be a complicated process with long-range consequences, you should consult your Smith Schafer tax professional. Here are some of the pros and cons of S corps:
ADVANTAGES of S Corporation
Like any corporate organization, an S corp allows you and any co-owners to restrict personal liability. If, for example, your company is unable to pay its debts, the business assets would be open to creditors but your personal belongings would be off limits. However, you do not have total protection from liability — if your company is in the business of offering advice, for example, you won’t be protected if the advice you personally offer is wrong.
Avoid Double Taxation
An S corporation allows you to avoid two-tiered taxation — that is, paying corporate taxes and then paying personal taxes on the same income. An S corp pays no federal taxes. Earnings — and losses — are passed through to the owner. And because income is taxed to the owner, you can avoid problems arising from the corporate alternative minimum tax. An S corporation must, however, still file a tax return, and some states impose taxes.
Treatment of Losses
If you think you might have operating losses in the first couple of years in business, an S corp may be a wise choice. Let’s say you invest $100,000 in your venture and wind up with a loss of $25,000. The deficit is passed through to you and any other owners — on a pro rata basis — so you can take the loss against other income on your personal tax returns. However, you cannot take current-year losses that exceed your adjusted basis in the company.
A corporation’s S status may be terminated either voluntarily or involuntarily. Voluntary termination requires a vote of shareholders owning more than 50 percent of the company’s total outstanding voting shares. Involuntary termination can result from not following the restrictions placed on S corps.
Pro rata taxable income and dividend distributions are free of FICA taxes (Medicare and Social Security). Company contributions to a retirement plan on behalf of a shareholder-employee are also generally not subject to FICA taxes. In a family business, you may be able to get some tax advantages by shifting the owners’ income to other family members by making them employees or shareholders or both.
Warning: The prospect of major employment tax savings may tempt you to cut your compensation and take large dividend distributions instead of salary. But the IRS keeps a keen eye on “reasonable compensation.” If the tax agency finds that compensation is inadequate, it can recharacterize your dividend distributions as wages, which means you become liable for unpaid employment taxes, penalties and interest.
DISADVANTAGES of S Corporations
If your company owns any assets that have appreciated, they cannot be distributed to you and your co-owners without generating a tax bill.
Taking money or assets out of an S corporation may be an administrative headache. For example, the withdrawal must be characterized for tax purposes as compensation, a dividend, a loan or other payment. Compensation means payroll taxes are due and W-2 forms and payroll tax returns must be filed. A loan requires a loan document.
Single Stock Class
It can be difficult to raise cash through a stock offering because an S corporation can issue only one class of stock, which must have identical rights regarding dividends and the distribution of company assets if the business is liquidated.
OTHER S STATUS RESTRICTIONS
The corporation must be domestic.
There must be no more than 100 shareholders.
The shareholders must be U.S. citizens, resident aliens, estates, certain types of trusts or tax-exempt entities.
Ultimately, an S corp provides a good option for a small enterprise that would otherwise be significantly taxed under the traditional corporate model. When selecting or considering a new legal structure, business owners should always review their options with your Smith Schafer professional. For additional details on legal entity analysis and selection or to learn more about how we can help, please contact a Smith Schafer professional. Click here to contact us. We look forward to speaking with you soon.
The new tax reform law is the most significant tax legislation in decades. Now businesses and individuals are trying to digest the details and evaluate how the changes will impact their tax situation. Fortunately, Smith Schafer can help you figure things out.
One of the major impacts of the Tax Cuts and Jobs Act (TCJA) are the changes to the standard deduction amounts.
What is a standard deduction? The standard deduction is a deduction of a fixed dollar amount, adjusted each year for inflation, reducing a taxpayer’s taxable income.
Under the new the tax reform act, the standard deduction amounts available for each filing status have increased significantly compared to 2017. In addition, the act retains additional deductions for the elderly and the blind.
STANDARD DEDUCTION (FOR YEARS 2018-2025)
Married Filing Joint or Surviving Spouse – $24,000 ($13,000 in 2017)
Head of Household – $18,000 ($9,550 in 2017)
Married Filing Separately or Single – $12,000 ($6,500 in 2017)
Age – If you are age 65 or older, you may increase your standard deduction by $1,600 if you file Single or Head of Household. If you are Married Filing Jointly and you OR your spouse is 65 or older, you may increase your standard deduction by $1,300. If BOTH you and your spouse are 65 or older, you may increase your standard deduction by $2,600.
Blindness – If you are legally blind, you may increase your standard deduction by $1,600 if filing Single or Head-of-Household. If you are Married Filing Jointly and you OR your spouse is blind, you may increase your standard deduction by $1,300. You may increase your standard deduction by $2,600 if BOTH you and your spouse are blind.
While the standard deduction under the new tax reform is higher, it may not mean the taxpayer’s deductions will be higher than pre-tax reform years. In addition to changing the standard deduction amount, the act includes several provisions modifying deductions many taxpayers are used to. Below are samples of changes to taxpayer’s individual tax returns impacted by the standard deduction.
A taxpayer is allowed to claim the standard deduction if their total itemized deductions for the year are less than the standard deduction amounts listed above. Along with changes to the standard deduction under TCJA, other itemized deductions have been changed, eliminated or restricted by the new tax reform. For example:
a maximum of $10,000 allowed for state and local tax deduction,
unreimbursed medical expenses exceeding 7.5 percent of adjusted gross income (taxable income plus standard/itemized deduction) and
modified mortgage interest limitations on mortgage debt.
The result of the changes to itemized deductions and the higher standard deduction is that many taxpayers may not receive a benefit from itemized deductions and will instead utilize the standard deduction.
Prior to the TCJA, taxpayers were required to file a tax return if their income reached the amount of the standard deduction, plus the personal exemption amount. Under the TCJA, taxpayers are required to file if their income reaches the new increased standard deductions.
As the end of the year approaches, we want to remind you of various payroll and Form 1099 related changes, as well as other items to consider when processing your year-end forms.
Form 1099 Reporting
Forms 1099 are due to recipients by January 31, 2019. The forms are also due to the IRS by January 31, 2019, in most cases. If you are interested in having a Smith Schafer professional to prepare Forms 1099 for you, please forward the information to our office by January 15, 2019. Information should include a completed W-9 Form for each payee (for a blank W-9 form click here), the type of payment issued to payee (i.e. rent, interest, dividends, miscellaneous services) and total amount of payments for the year
Certain transportation, commuting and parking benefits (changed for 2018)
It is required to electronically file of Forms W-2 and Forms 1099 for the year 2018, if you have more than 10 forms. Submit Forms W-2 and Forms 1099 using your Minnesota e-Services online account.
Health Insurance Premiums
The Affordable Care Act includes a provision requiring employers to disclose on each employee’s annual Form W-2 the cost of employer-sponsored health coverage. For 2018, if you are an employer who issued 250 or more Forms W-2, you are required to disclose this information in box 12 with code DD. Employers with fewer than 250 employees are exempt from this disclosure requirement.
The amount an employee can contribute to a flexible spending account (FSA) of a cafeteria plan for health expenditures is limited to $2,650 in 2018 and $2,700 in 2019.
The maximum contribution amount an employee can make is $5,000 per year. Employers offering this benefit as part of their cafeteria plans need to be aware that there is additional reporting required on the employee W-2.
Health Savings Accounts (HSA)
Health savings accounts may only be used in conjunction with a high deductible health insurance plan. The total amount an employee or employer can contribute to an HSA account is limited to $3,450 for single coverage and $6,900 for family coverage in 2018 and $3,500 and $7,000, respectively, for 2019. Taxpayers age 55+ can make an additional catch-up contribution of $1,000 for both 2018 and 2019. For 2018, in order for plans to qualify as high deductible plans, they must have minimum deductibles of $1,350 single coverage and $2,700 for family coverage and maximum out-of-pocket costs for single coverage of $6,650 and family coverage $13,300. The minimum deductibles for 2019 are unchanged, but the maximum out-of-pocket costs have increased to $6,750 for single coverage and $13,500 for family coverage. In some cases, the HSA contributions amounts should be reported on the W-2 with a code W.
If you provide company autos to owners or employees, who also use the vehicle for personal use, a value needs to be added to the employee W-2.
The Tax Cuts and Jobs Act passed on December 22, 2017 made some changes to the treatment and destructibility related to certain transportation, commuting and parking benefits. Contact a Smith Schafer professional to determine what, if any, additional information will be needed for reporting.
Federal Unemployment Tax (FUTA)
The standard FUTA (Federal Unemployment Tax) rate is 6.0%; generally employers receive a credit of 5.4% when they file their Form 940. This results in a net FUTA rate for most states of 0.6%. However, some states are subject to a FUTA credit reduction if they have not repaid loans from the federal unemployment trust fund. For 2017, Minnesota is not a credit reduction state and is eligible for the full credit of 5.4%. For a full list of credit reduction states, visit the IRS website and search FUTA Credit Reduction.
The 2018 social security wage base is $128,700, but will increase to $132,900 for 2019. The employee and employer social security tax rate is unchanged at 6.2%. The Medicare tax rate is also unchanged at 1.45%
If you have questions regarding your tax situation, click here to contact us. We appreciate your continued business and look forward to serving you in the coming year.
We are proud to announce we have been named one of the FASTEST-GROWING ACCOUNTING FIRMS in the U.S. by The Platt Group/Inside Public Accounting. We rank 2nd in the Great Plains region with a 29.8 percent all growth rate! This marks the first year in which we have received this recognition.
“Our growth since 1971, is a testament to our longstanding technical excellence, passion to serve our clients and dedication to our internal culture. This achievement would not be possible without our talented staff, who are committed every day to making a positive impact in our business and helping our clients grow. This awards would also not be possible without our incredible clients. The growth we have achieved is exciting and we sincerely appreciate everyone who has helped us earn this recognition!”
The Fastest All-Growth firms are ranked by the change in a firm’s net revenue from the previous reporting year, and includes both organic and revenue growth from mergers. The rankings are compiled by analyzing the more than 550 responses received this year for IPA’s Survey and Analysis of Firms. Firm leaders have trusted IPA with their firms’ financial and operational data for more than 30 years to compile one of the longest-running, most comprehensive benchmarking reports within the profession.