A Refresher on Major Tax Law Changes for Small-Business Owners

The dawning of 2019 means the 2018 income tax filing season will soon be upon us. After year end, it’s generally too late to take action to reduce 2018 taxes. Business owners may, therefore, want to shift their focus to assessing whether they’ll likely owe taxes or get a refund when they file their returns this spring, so they can plan accordingly.

With the biggest tax law changes in decades — under the Tax Cuts and Jobs Act (TCJA) — generally going into effect beginning in 2018, most businesses and their owners will be significantly impacted. So, refreshing yourself on the major changes is a good idea.

Taxation of pass-through entities

These changes generally affect owners of S corporations, partnerships and limited liability companies (LLCs) treated as partnerships, as well as sole proprietors:

  • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35%, and 37%
  • A new 20% qualified business income deduction for eligible owners (the Section 199A deduction)
  • Changes to many other tax breaks for individuals that will impact owners’ overall tax liability

Taxation of corporations

These changes generally affect C corporations, personal service corporations (PSCs) and LLCs treated as C corporations:

  • Replacement of graduated corporate rates ranging from 15% to 35% with a flat corporate rate of 21%
  • Replacement of the flat PSC rate of 35% with a flat rate of 21%
  • Repeal of the 20% corporate alternative minimum tax (AMT)

Tax break positives

These changes generally apply to both pass-through entities and corporations:

  • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets
  • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
  • A new tax credit for employer-paid family and medical leave

Tax break negatives

These changes generally also apply to both pass-through entities and corporations:

  • A new disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
  • New limits on net operating loss (NOL) deductions
  • Elimination of the Section 199 deduction (not to be confused with the new Sec.199A deduction), which was for qualified domestic production activities and commonly referred to as the “manufacturers’ deduction”
  • A new rule limiting like-kind exchanges to real property that is not held primarily for sale (generally no more like-kind exchanges for personal property)
  • New limitations on deductions for certain employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

Preparing for 2018 filing

Keep in mind that additional rules and limits apply to the rates and breaks covered here. Also, these are only some of the most significant and widely applicable TCJA changes; you and your business could be affected by other changes as well. Contact us to learn precisely how you might be affected and for help preparing for your 2018 tax return filing — and beginning to plan for 2019, too.

Do You Still Need to Worry About the AMT?

There was talk of repealing the individual alternative minimum tax (AMT) as part of last year’s tax reform legislation. A repeal wasn’t included in the final version of the Tax Cuts and Jobs Act (TCJA), but the TCJA will reduce the number of taxpayers subject to the AMT.

Now is a good time to familiarize yourself with the changes, assess your AMT risk and see if there are any steps you can take during the last several months of the year to avoid the AMT, or at least minimize any negative impact.

AMT vs. regular tax

The top AMT rate is 28%, compared to the top regular ordinary-income tax rate of 37%. But the AMT rate typically applies to a higher taxable income base and will result in a larger tax bill if you’re subject to it.

The TCJA reduced the number of taxpayers who’ll likely be subject to the AMT in part by increasing the AMT exemption and the income phaseout ranges for the exemption:

  • For 2018, the exemption is $70,300 for singles and heads of households (up from $54,300 for 2017), and $109,400 for married couples filing jointly (up from $84,500 for 2017).
  • The 2018 phaseout ranges are $500,000–$781,200 for singles and heads of households (up from $120,700–$337,900 for 2017) and $1,000,000–$1,437,600 for joint filers (up from $160,900–$498,900 for 2017).

You’ll be subject to the AMT if your AMT liability is greater than your regular tax liability.

AMT triggers

In the past, common triggers of the AMT were differences between deductions allowed for regular tax purposes and AMT purposes. Some popular deductions aren’t allowed under the AMT.

New limits on some of these deductions for regular tax purposes, such as on state and local income and property tax deductions, mean they’re less likely to trigger the AMT. And certain deductions not allowed for AMT purposes are now not allowed for regular tax purposes either, such as miscellaneous itemized deductions subject to the 2% of adjusted gross income floor.

But deductions aren’t the only things that can trigger the AMT. Some income items might do so, too, such as:

  • Long-term capital gains and dividend income, even though they’re taxed at the same rate for both regular tax and AMT purposes,
  • Accelerated depreciation adjustments and related gain or loss differences when assets are sold,
  • Tax-exempt interest on certain private-activity municipal bonds, and
  • The exercise of incentive stock options.

AMT planning tips

If it looks like you could be subject to the AMT in 2018, consider accelerating income into this year. Doing so may allow you to benefit from the lower maximum AMT rate. And deferring expenses you can’t deduct for AMT purposes may allow you to preserve those deductions. If you also defer expenses you can deduct for AMT purposes, the deductions may become more valuable because of the higher maximum regular tax rate.

Please contact us if you have questions about whether you could be subject to the AMT this year or about minimizing negative consequences from the AMT.