The Tax Cuts and Jobs Act (TCJA) took effect on January 1, 2018, for most provisions, and for many businesses it provides benefits such as reduced corporate tax rates, the end of the corporate alternative minimum tax, and a new pass-through business income deduction.

As 2018 winds down, we would like to share some planning tips for you as you ponder your tax obligations for the year.

1. Section 179

Prior to 2018, taxpayers could elect to immediately expense up to $500,000 of business tangible personal property placed into service during the year. Under the TCJA, the maximum deduction increased from $500,000 to $1 million.  In addition, the law expanded the definition of eligible section 179 property to include certain improvements made to nonresidential real property. The improvements must be made after the business is in use and includes improvements to the building’s interior.

For business owners looking for a year-end tax deduction, this is a great benefit. There is, however, a clause that limits the allowable deduction to income from a taxpayer’s trade or business before the Section 179 deduction, therefore, you cannot take section 179 in year in which you have a loss. The expense must be carried over to the succeeding year.

2. Additional Depreciation

Under the TCJA, the additional first-year depreciation percentage is increased to 100% for qualified property acquired after September 27, 2017. This is known as bonus depreciation and both new and used property, with a depreciable class life of 15 years or less, now qualify under the new tax law.  The advantage of bonus depreciation is that it allows for an immediate tax deduction. Bonus depreciation is not limited to income from a taxpayer’s trade or business.

3. Section 199A

The TCJA also introduced a new 20% deduction based on Qualified Business Income (QBI). This deduction is available for U.S. trades or businesses operated directly or through a pass-through entity, including most S corporations, sole proprietorships and partnerships.  There are two components to Section 199A and when combined, they total a company’s QBI.

1. Eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. Capital gains and losses, certain dividends and interest income are not considered QBI. (irs.gov)
2. Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified, publicly traded partnership (PTP) income. (irs.gov)

Your Entity Structure

With any significant changes to tax laws, come many questions and concerns, including whether your current entity structure still makes sense. Take some time to speak with your tax advisor to determine how the TCJA will impact your business and your tax outlook.