The Tax Cuts and Jobs Act presents both a challenge and an opportunity for tax professionals, according to Intuit’s senior tax analyst.
“It’s a challenge just because of its sheer breadth,” said Mike D’Avolio, CPA, JD. “But it’s also an opportunity to better serve clients by providing tax planning and advisory services.”
“It can run the gamut,” he said. “It can be as simple as redoing the W-4 in light of the changes to available deductions, the elimination of the personal exemption and the major increase in the standard deduction. Or the advisor could do more sophisticated planning such as a choice of entity analysis – should a business be conducted as a C corporation, or a flow-through entity such as an S corporation or partnership.”
Small-business owners, in particular, have a lot to think about, so it’s understandable that taxes may not always be front and center, D’Avolio advised. “However, with most major provisions of the Tax Cuts and Jobs Act being implemented in 2018, now is the time to start planning,” he suggested.
“It’s the middle of summer, so there’s plenty of runway,” he said. “It’s an excellent time to take a step back and educate yourself, your staff and your clients.”
D’Avolio suggested five areas for planning to get a head start on 2018 taxes.
1. New 20 percent deduction for qualified business income. “One of the key tax reform measures provides a 20 percent deduction beginning in tax year 2018 for income earned from sole proprietorships, limited liability companies, partnerships and S corporations,” he observed. “The deduction begins to phase out at an income level of $315,000 for joint returns and can reduce the effective marginal rate to a 29.6 percent maximum. But wage income is not eligible for the lower rates on business income.”
“This allows small-business owners to keep more earnings tax-free, and helps curb high rates because income flows through to individual returns. Individual rates are coming down, but small-business owners are getting hit with both sides of the self-employment tax. And the rate for C corporations – at 21 percent – is way down, so this helps pass-throughs be on a more level playing field with C corporations. It can get very complicated, and a lot of different limitations apply,” he said.
2. Entity planning. Now that the corporate tax rate has been lowered to 21 percent, it might be time to examine your clients’ choice of entity, “especially if they are a high-earning professional service provider such as a doctor, lawyer, or investment manager,” D’Avolio suggested.
“Entity analysis is becoming more important. There could be tax savings in going from a flow-through to a C corporation because a C corporation now has the flat 21 percent tax rate,” he said. “This opens the door to advanced entity planning.”
3. Depreciation benefits. If a client has been thinking about new upgrades, this is an area they need to know about,” he said. Business owners are now allowed to fully write-off the entire cost of new purchases with 100 percent bonus depreciation, such as computers, furniture, equipment and vehicles, in lieu of depreciating the cost of the asset over a number of years. In prior years, you could deduct only 50 percent of the cost in year one. Under a companion measure, the Section 179 tax break has been doubled from $500,000 to $1,000,000, which represents the amount of assets you can deduct in the first year. “Business property qualifying for this deduction has been expanded to now include fire protection, alarm systems and security systems. The depreciation limits that apply to vehicle purchases have also increased under the new law.”
4. Entertainment expenses. Business-related entertainment, amusement or recreation expenses are no longer deductible under the Tax Cuts and Jobs Act, D’Avolio noted. While there is some ambiguity in this area, D’Avolio, and most commentators, believe that business meals are still 50 percent deductible.
The confusion results from the language of the act, which appears to pull all business meals under the entertainment umbrella. However, the Committee Report indicates that this is not what Congress had in mind.
“We expect the IRS to address this area and clear up any confusion,” D’Avolio said.
5. Credit for family and medical leave. As part of the TCJA, employers are now able able to claim a credit based on wages paid to qualifying employees while they are on family and medical leave, D’Avolio observed. “To claim the credit you must have a written policy that provides at least two weeks of paid leave annually to all qualifying employees who work full time,” he said.
“Additionally, the paid leave must be no less than 50 percent of the wages normally paid to the employee. Be sure your small-business client sets up this policy early in the year so they can claim the credit come tax time,” he said.
Editor’s note: This article was originally published in Accounting Today.