The Tax Cuts and Jobs Act, signed by President Donald Trump in December of 2017, was touted as a business-friendly reform package. Business owners are now evaluating how to best take advantage of the new law. In addition to reduced tax rates, there are also long-term strategies for companies to consider. Here are some of the possibilities:
Invest in equipment and property
Several provisions in the law make it more advantageous for businesses to invest in themselves. Under what’s known as Section 179 expensing, businesses can deduct the full purchase price of certain types of equipment and software, rather than simply depreciating them. If you buy (or lease) a piece of qualifying equipment, you can deduct the purchase price from your gross income. The new tax law doubles the maximum allowance to $1 million from the previous limit of $500,000.
Similarly, bonus depreciation allows a business to take an immediate deduction on the purchase of eligible new business property. The new law raises the bonus depreciation deduction from 50% to a full 100% for the next five years, before gradually phasing it out over the following five years. The law also now allows used property to be deducted.
In addition, the research and development tax credit has now been made permanent. The costs of developing software for internal use and third-party interaction are newly eligible for this tax credit. Software that is commercially sold or marketed to third parties remains eligible as well.
Reclassify your business
The new law introduced changes to the tax rates for businesses based on how they’re classified. Pass-through entities — sole proprietorships, partnerships, limited liability companies, and S corporations — will be able to claim a 20% deduction straight off the top of their business income. Meanwhile, C corporations will have a top tax rate of 21% starting in 2018.
Which makes more sense for you? Is it worth switching from one classification to the other? There are several factors to consider, most prominently the income of the business. Here are some of the key figures:
- The 20% deduction for pass-throughs phases out for service companies like medical practices and consulting firms above the $157,500 income level for individuals, and $315,000 for joint filers.
- The new tax law lowers the tax rate for C corporations from 35% to 21%.
- The new top personal income tax rate, affecting many S corporations, is 37%, although that doesn’t kick in until a single filer’s income reaches $500,000.
There’s a lot to consider beyond the major changes above, so if you’re thinking about flipping from a C to an S, or an S to a C, consult with an accountant or your financial professional.
You have to revoke a subchapter S classification by March 15 to have it apply to the whole year, so this is a decision you might want to make quickly for 2018. (If your tax year isn’t the calendar year, the deadline is the 15th of the third month of your tax year.) If you can’t hit that deadline and you follow the correct procedures, you can make the declaration at any time and have it be effective from that point till the end of the year.
Change accounting methods
The law allows more businesses with less than $25 million in annual sales to use the simpler cash method of accounting, in which a business generally recognizes revenues and expenses when the money changes hands, rather than the more complex accrual method. Previously, most corporations couldn't use cash accounting unless their average annual revenues were below $5 million.
Businesses required to keep inventory had also been required to adopt the accrual method of accounting. The new law exempts certain companies with less than $25 million in sales from that rule as well. Accounting on a cash basis is not only easier but may allow businesses more flexibility in managing their finances.
Hire the unemployed
The Work Opportunity Tax Credit allows businesses to take a tax credit of up to $9,600 when they hire someone who is considered "long-term" unemployed. That includes anyone who has been looking for work for more than 12 months. This provision has been around for a long time, but the new law sunsets it at the end of 2019, so now is the time to take advantage of it.
Things to Consider:
- Changes to deductions and depreciation make this a great time to invest in your business.
- Your projected income could be the deciding factor in choosing an S or C corporation.
- More businesses are now eligible to use cash accounting.
Neither Transamerica nor its agents or representatives may provide tax or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors regarding their particular situation and the concepts presented herein.