By Vincent J. Nadder, CPA, Partner, Tax Practice Leader
By Vincent J. Nadder, CPA, Partner and Tax Practice Leader
Businesses should begin year-end tax planning now. The Tax Cuts and Jobs Act (TCJA), signed into law on December 22, 2017, includes numerous provisions which will have a significant impact on your Federal income tax bill.
Here are five issues that businesses should consider before the end of 2018:
1. Cash Method of Accounting
Businesses typically account for transactions under the accrual method or the cash method. Many businesses prefer the cash method since revenue is not taxed until collected and the deduction for expenses is deferred until paid. The TCJA eased the eligibility requirements for the use of the cash method of accounting.
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Prior Law: Corporations and partnerships with corporate partners could only use the cash method of accounting if their average gross receipts did not exceed $5 million for all prior years. Businesses required to account for inventory were required to use the accrual method of accounting unless they met a $1 million (or $10 million for certain industries) average gross receipts exception.
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TCJA: The average gross receipts test has been increased to $25 million, meaning more middle market companies are eligible to use the cash method of accounting. The new law also revoked the requirement that businesses need to satisfy the test for all prior years.
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If your business is like most, and has more accounts receivable than accounts payable, the cash method generally results in lower taxes than the accrual method. Taxpayers using the accrual method, but who meet the $25 million gross receipts threshold, should consider filing an accounting method change converting to the cash method.
2. Depreciation Deductions
Claiming a deduction for depreciation is a major component in helping companies minimize their tax liability. Depreciation allows a business to ratably deduct the cost of tangible personal property and real property over the “life” of the asset. The prospect of recovering the cost over what some might consider a long life can prevent business owners from making an investment in capital assets. Two aspects of depreciation that help alleviate this issue and can also be beneficial from an income tax standpoint, are the Section 179 expense election and bonus depreciation deduction.
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Prior Law: The maximum Section 179 deduction was $510,000 and the maximum amount eligible for bonus depreciation was 50%.
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TCJA: The maximum Section 179 deduction is $1,000,000 and the maximum amount eligible for bonus depreciation is 100%.
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Under Section 179 and the bonus depreciation provisions, taxpayers can immediately deduct certain capital expenditures. Taxpayers will benefit from the immediate “write off” of investments in heavy machinery, equipment, computers, vehicles, and more. It is easier for businesses to evaluate their capital expenditure plans and proceed with acquiring new equipment. Businesses should consider their needs for capital assets and, if appropriate, make investments prior to the end of the year to take advantage of these generous deductions.
3. Pass-Through Deductions
A new provision introduced under the TCJA is the concept of “qualified business income” (QBI). Under Section 199A of the Internal Revenue Code, QBI refers to profit that is generated by a pass-through entity such as an S corporation, sole proprietorship, LLC, or partnership. Pass-through entities do not pay income tax because the income is “passed through” to the business owners where the income tax is ultimately paid. Business owners who meet certain qualifications can claim a tax deduction on their personal income tax returns of up to 20% of QBI.
The actual deduction allowed may vary. One major hurdle is whether your company is excluded from this deduction under the “specified service trade or business” rules. Additionally, the calculation of the allowable deduction may be dependent on wages incurred and qualified property owned by the business. Proper planning is critical to maximize the benefit of this new deduction.
4. Qualified Opportunity Zones
Qualified Opportunity Zones (QOZ), areas considered economically distressed, are another new concept created under the TCJA. They are designed to spur economic development and job creation in low income communities. QOZs vary by state but will provide tax benefits to investors nationwide. There are 212 Opportunity Zones in Virginia, including 9 in Fairfax County, 16 in Norfolk, 11 in Richmond, and 8 in Virginia Beach.
There are three main benefits from investing in a QOZ. First, investors can defer capital gains tax on gains reinvested until the earlier of the date the investment is sold (or exchanged) or December 31, 2026. Second, if the investor maintains the investment for 7 years, they will receive basis in their investment amounting to 15% of the original gain deferred. This means only 85% of the original capital gain is subject to tax. Third, if the investor holds their investment in a QOZ for at least 10 years, they will receive an increase in their basis up to the fair market value of the investment. This provision eliminates the income tax on any gain attributable to the appreciation of a QOZ investment that has occurred during the investors holding period.
5. Meals and Entertainment Expenses
Meals and entertainment expenses can be a significant expenditure for your company. The TCJA may alter the ways in which some businesses spend money for entertainment purposes.
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Prior Law: A taxpayer could deduct 50% of the cost of meals and entertainment expenses that were directly associated with or related to the active conduct of business.
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TCJA: While the rules related to meals were largely unchanged, expenditures for entertainment are no longer deductible, regardless of purpose.
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Many businesses incur significant expenditures entertaining vendors, customers, and prospects. Business owners should consider the impact entertainment expenses have on their operations and determine whether the new rules related to their deductibility will effect these efforts.
As a result of the Tax Cuts and Jobs Act, all businesses need to understand the new rules, discuss their impact on operations, and update their year-end plan to maximize deductions and minimize taxes.
Questions on how the tax changes may impact your business? Contact your Keiter representative or Email | Call: 804.747.0000. We are here to help.
More business tax planning resources:
About the Author
Vincent J. Nadder, CPA, Partner, Tax Practice Leader
Vince has over 25 years of experience in public accounting providing tax, consulting and accounting services to privately held companies. He is the Tax Department Leader and the Partner in charge of the Firm’s Cost Segregation and Historic Rehabilitation Services. Read more of Vince’s articles on our blog.
More Insights from Vincent J. NadderThe information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.
