We’re quickly approaching the first tax filing season impacted by the 2017 Tax Cuts and Job Act (TCJA). While we CPAs have been preparing for months, taxpayers will undoubtedly be in for a few surprises. To help avoid some of the uncertainty for business owners, I wanted to discuss three implications of the TCJA, and how they may impact your business.
1. Accountable plans
2. Corporate structure
3. Section 199A deductions
Accountable Plans – reimbursing employees for business expenses
Thanks to the TCJA, most employees will no longer be able to deduct unreimbursed business expenses. If your employees used to deduct mileage, cell phone usage, client lunches, and other expenses on their personal tax returns, they may soon turn to you for some additional financial assistance. The best way to reimburse employees for at least some expenses is by creating an “accountable plan.”
An accountable plan is a IRS compliant method for reimbursing employees for business expenses so that they are not counted as income, and therefore not subject to employee withholding or W-2 reporting. The IRS essentially requires that accountable plans include:
- A business connection between expenses and the business.
- Adequate documentation of the expenses and business purpose.
- Timely reimbursement for excess advances that exceed actual expenses.
If you’re interested in proactively creating an accountable plan for your business, please contact me to set up a meeting and discuss your business needs
Is it time to change your corporate structure?
Two major business benefits of the TCJA are:
- 21% corporate federal income tax rate for C corporations.
- 20% qualified business income (QBI) deduction for pass-through entities like partnerships, S corps and Schedule C businesses. Read more about this below.
Before the TCJA, many businesses were structured as pass-through entities to avoid problems often associated with C corporation profits being taxed at the corporate level and then again as dividends to shareholders – double taxation. Now that the corporate tax rate has gone from (up to) 35% to a flat 21%, you may want to consider whether changing corporate structure can minimize your tax liability.
Short- and long-term factors such as profitability, dividends, assets, and even exit strategy need to be analyzed prior to making a change, but in some cases, a corporate structure change could save a substantial amount of tax dollars. Let’s meet to discuss your company’s current and projected future financial situation, and determine the right corporate structure.
The 20% qualified business income deduction – do you qualify?
Also known as the Section 199A deduction, this new section of the IRS tax code offers taxpayers two primary deductions:
- A deduction of up to 20% of qualified business income (QBI) from a pass-through entity, such as a partnership, S corporation, trust, or Schedule C business.
- A deduction of up to 20% of combined real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income.
The 20% pass-through deduction is of course what most people are interested in understanding, so QBI as well as the type of business are important factors when calculating the actual deduction. If taxable income is less than $315,000 for married filing jointly ($157,500 for all others), odds are pretty good may that you’ll get the full deduction. If taxable income is greater than those amounts, both income and type of business may limit or even exempt you from the deduction. If you’re a rich CPA (ha, ha), forget it.
If you have questions about these or any other tax topics, please contact me to set up a call or meeting.
Ellen Gelfand, CPA