Change is in the air, at least when it comes to taxes. There is both good and bad within the new Tax Cuts and Jobs Act (TCJA) that was signed into law in late 2017; however, for most businesses a positive impact is expected. You have probably heard a lot about tax reform in the past month, but what are the things your business should know about right now to proactively plan for your 2018 tax return?
Below are four items in the TCJA your business should be aware of and what you can do right now in preparation of the tax law change.
- Employee payroll withholding tables have been updated due to the change in the individual tax brackets in the TCJA. The IRS released the updated tables in late January. Many accounting software programs, like QuickBooks, have updated their systems for the change. However, employees also need to be aware of this change so they can adjust their withholding appropriately for their 2018 income taxes. Expect your employees to want to change their withholding amounts by filling out new Form W-4s, especially when the IRS releases a calculator in mid-February to better help individuals determine their tax liabilities.
- If your business is an S-corporation, there may be tax savings in converting to a C-corporation. One of the biggest changes in the tax reform bill was that of the C-corporation tax rate dropping from 35% to 21%. S-corporations are still taxed at your individual tax rate; however there is also a valuable 20% deduction available to provide some tax relief to business owners (sole proprietorships, partnerships, and S-corporations). Unfortunately, there is not a clear-cut answer on when an S-corporation should switch to a lower tax rate C-corporation. It may be worth your time to discuss your specific situation with our CPAs to determine if there are tax savings in converting from an S to a C-corporation.
- Deducting the cost of property and equipment in one year became easier under the TCJA. Section 179 limits have increased and 100% bonus depreciation is now available. In 2017, Section 179 allowed for a $510,000 deduction with a phaseout beginning at $2 million of assets placed in service. Under the TCJA, Section 179 increased to $1 million with phaseout beginning at $2.5 million. In addition, the new law allows for 100% bonus depreciation for both new and used assets placed in service after September 27, 2017. This gives businesses the green light to invest in equipment and receive a full deduction in the same year. As a reminder, there are phaseouts to be aware of along with tax strategy for future years, so discuss with our CPAs prior to making any major purchases.
- One downside of the TCJA is that entertainment expenses are no longer deductible. Activities related to amusement and recreation for a client including dues to social, athletic, or sporting clubs are no longer deductible. Meals are still subject to the 50% deductibility rules. In addition, meals provided on the employer’s premises for convenience are also now subject to the 50% rule whereas before they were 100% deductible. Many business entities have historically grouped meals and entertainment into one account. With the difference in deductibility for meals and entertainment, it would be best to split these into two separate and distinct accounts. This will prevent you or your accountant from having to dig through this account next year to determine what is and is not deductible.
While there are many changes in the TCJA, the above is a good start in helping your business prepare for the new tax law. Let McGowen, Hurst, Clark, and Smith be your resource in navigating these changes and finding tax saving strategies for your business.
A little more about us:
Located in West Des Moines, Iowa with a branch office in Winterset, Iowa, McGowen, Hurst, Clark & Smith, P.C. celebrates 65 years of extending excellent service to our clients, providing them with accounting, auditing, consulting and investment expertise.
Established in 1946, our staff has grown from 3 to 60 employees, making us large enough to provide our clients with a broad base of experience and resources, yet small enough to offer very personalized service—which we feel makes us stand apart from other CPA firms. In addition to the traditional services of Accounting, Tax Preparation, Audit and Business Consulting, MHC&S offers our clients specialized services including Estate Planning, Business Valuations, Cost Segregation Studies, Retirement Planning, QuickBooks Training, Financial Advisory Services, Fraud Detection and Deterrence, Business Succession Planning, Litigation Support and more.
MHC&S is a member of CPAmerica International, Inc., a national association of accounting firms offering membership to only 90 firms throughout the United States. This association offers a wide pool of additional technical expertise to the members firms, as well as continuing professional education necessary to maintain the degree of excellence which MHC&S feels is vital in today’s business environment.