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New tax law improves many, not all, business deductions

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No matter the type of business you own, the new federal Tax Cuts and Jobs Act offers benefits – many of them significant.

Much has been made about the tax rate reduction for C corporations. It is, without a doubt, a big tax break, but it is far from the only substantial benefit for businesses.

For small businesses – specifically pass-through entities – the new 20 percent qualified business income deduction could be one of the biggest tax benefits in more than 60 years.

It’s worth taking a deeper look at QBI and several other new or changed business deduction provisions.

<QUALIFIED BUSINESS INCOME DEDUCTION

This new benefit for owners of pass-through entities shelters taxable income that would otherwise be taxed as ordinary income, which is subject to the marginal individual tax rates. As with many Internal Revenue Service rules, the bigger the tax benefit, the more complicated the qualifications.

In a nutshell, the QBI deduction allows a qualified small-business owner to not pay income taxes on 20 percent of his or her income in tax years 2018 through 2026.

Restrictions kick in to reduce the benefit when a taxpayer’s income rises, and there are a different set of qualifications for so-called service businesses, including doctors, lawyers, accountants, performing artists, athletes and financial and brokerage services.

The calculation is complicated, but it is worth undertaking to obtain the maximum benefit. Your Certified Public Accountant can determine if you qualify for the deduction and suggest steps to increase your benefit.

<INCREASED ASSET DEPRECIATION

Both bonus depreciation and the Section 179 expensing election were greatly increased in the new tax act.

Both methods can be used to accelerate write-offs of business asset purchases, including qualified building improvements, computer systems, vehicles, machinery, equipment, office furniture and so forth.

First-year bonus depreciation was increased from 50 to 100 percent, and now can be taken for both new and used qualifying property through 2022.

For Section 179 expensing elections, the maximum deduction was increased from $510,000 to $1 million, with the phase-out threshold increased from $2.03 million to $2.5 million.

<DOMESTIC PRODUCTIONS ACTIVITIES DEDUCTION

The tax reform act is not all good news for businesses that take advantage of the domestic productions activities deduction.

This deduction had allowed businesses that manufacture or produce products in the United States to take a 9 percent deduction of qualified production activity income.

The domestic productions activities deduction was repealed as of Jan. 1.

<NET OPERATING LOSSES

Businesses that use net operating loss deductions to their advantage could be disappointed.

For 2018 and beyond, the maximum amount of taxable income you can offset with net operating loss deductions will be 80 percent instead of 100 percent.

Also, you can no longer carry-back net operating loss deductions, but you can now carry them forward indefinitely.

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While these are some of the most significant changes, they are far from the only tax alterations to affect businesses.

The Tax Cuts and Jobs Act is the most sweeping tax overhaul in 30 years. It is best to consult your CPA on how the new rules will affect you and how to best position your business to take advantage of the changes.

Certified Public Accountant Tony Deutsch is a shareholder and head of tax services at Concannon Miller, a CPA and business consulting firm in Hanover Township, Northampton County. He can be reached at tdeutsch@concannonmiller.com.

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