Here are a few things we learned:
- This act may be the exact opposite of tax simplification.
- Yes, the new 1040 is postcard-sized … if you don’t count the six new schedules.
- You can never drink enough coffee.
While complicated, the Tax Cuts and Jobs Act provided a lot of new tax benefits to businesses, especially those that conducted tax projections and planning.
The biggest benefits were the new 21 percent federal tax rate for C corporations and the new 20 percent qualified business income (QBI) deduction for small businesses. In a nutshell, the deduction allows qualified small-business owners to not pay income taxes on 20 percent of their income in tax years 2018 through 2026.
The deduction is available to owners of sole proprietorships, partnerships, S corporations, LLCs, and estates and trusts. After reaching certain income thresholds, the deduction is limited to wages paid and percentage of depreciable property.
A business, therefore, might increase its wages by converting independent contractors to employees, assuming the benefit isn’t outweighed by higher payroll taxes, employee benefit costs, and similar considerations. Single-member LLCs or sole proprietorships might want to think about making a subchapter S election to get an increased QBI deduction.
For owners of multiple businesses, it’s worth exploring whether you can aggregate your businesses to potentially claim a larger QBI deduction. If you own an interest in one business with high QBI but little or no W-2 wages and an interest in another business with minimal QBI but significant W-2 wages, aggregating the two could result in a greater QBI deduction. Keeping them separate could result in a lower deduction, or maybe no deduction at all.
Increased depreciation options
The Tax Cuts and Jobs Act also included increased accelerated depreciation options. Like with QBI, we saw many business owners benefit from this expanded tax-saving opportunity if they underwent strategic tax planning.
Such planning includes timing purchases of equipment with your budget to maximize tax savings using the Section 179 business expensing election and bonus depreciation. Business owners also need to weigh the benefits of using increased asset depreciation with the tax savings they can get through the QBI deduction. Using accelerated depreciation reduces taxable income, which in turn reduces the QBI deduction, so tax projections should be run both with and without accelerated depreciation methods.
For individuals, mixed results
This tax season was more of a mixed bag for individuals. While tax rates were reduced and the standard deduction doubled, the loss of personal exemptions and other now-extinct personal deductions resulted in a higher tax bill for some. This was especially true for those with many dependents or who itemize deductions. The capping of state and local tax deductions at $10,000 was another hardship for those taxpayers with high property taxes.
Some taxpayers also got an unpleasant surprise if they didn’t adjust their federal income tax withholding properly to align with the new tax rates. This is another example of why tax projections are worthwhile.
Since many taxpayers didn’t calculate their withholding correctly, the IRS expanded its penalty relief for any taxpayer who paid at least 80 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments, or a combination of the two. The usual percentage threshold is 90 percent to avoid a penalty.
On a positive note, the expansion of the child tax credit both in dollars and eligible income levels did minimize the loss of exemptions and itemized deductions for some taxpayers.
Andrew Desiderio is a senior manager at Concannon Miller, a CPA and business consulting firm in Hanover Township, Northampton County. He is also a member of the Pennsylvania Institute of Certified Public Accountants and he can be reached at firstname.lastname@example.org or (610) 433-5501.