When the Tax Cuts and Job Act (TCJA) became law in 2017, the United States tax code significantly changed. Those changes, from deductions and accounting methods, to succession planning opportunities, have important implications for many taxpayers.
Additionally, TCJA expanded many states’ tax bases and initiated discussions on tax conformity. At the end of 2018, only five states conformed to an older version of the federal tax code, according to a senior policy analyst with the Center for Tax Policy at the Tax Foundation. Many states have yet to resolve issues raised by their tax conformity regimes, the analyst noted.
As we move through 2019 under the reformed tax code, tax advisors are recommending certain business owners look at their pass-through deductions. The TCJA allows some qualified businesses to circumvent paying taxes on up to 20 percent of allowable business income. There are many factors to be considered, so it’s advisable to speak with a tax professional to fully understand the complexities of this matter.
The TCJA also offered an opening to new accounting methods for businesses with average annual gross receipts up to $25 million, which can now switch from the accrual method to reporting on a cash basis. Eligible organizations may also be able to avoid certain accounting rules for inventories, according to Jonathan M. Clark, CPA and partner in The Tax Service Group of RKL-LLP. Making any such changes in accounting methods should be discussed with a tax advisor.
Clark points out that tax reform means accelerated deductions, which can create more immediate savings from larger business deductions and expenses. For the first time, qualified used property bought between Sept. 27, 2017 and Dec. 31, 2022 is now eligible for a 100 percent deduction through bonus depreciation. Tax advisors also suggest that smaller businesses consider taking advantage of the Sec. 179 limits to expense the cost of property, including software, equipment, furniture, fixtures and more.
TCJA also limited the amount of interest expense that may be deductible for certain businesses. In addition, the revised tax code defines interest expense as taxable interest paid or accrued on indebtedness allocable to a trade or business, so investments in tax-free municipal bonds do not increase a taxpayer’s interest expense deduction capacity. Clark notes that applicability and rules for partnerships or S Corporations require professional guidance to maximize benefits.
Although TCJA maintained the federal estate tax rate of 40 percent, the exemption amount for married couples increased to $22.4 million. Excluding changes to the law, this joint exemption will return to the previous rate ($11.2 million), after 2025. Advisors suggest that business owners take this opportunity to discuss whether an increase in giving or making more irrevocable generation-skipping transfer gifts is wise.
The reduction of the corporate tax rate to 21 percent captured the headlines and made some pass-through business owners consider switching to a corporate structure. But, as some professionals suggest, that critical decision depends on individual circumstances.
All major tax-related decisions should be reviewed by a tax professional. Contact your tax advisor at Diamond & Associates, PC with any questions or concerns you may have about how TCJA applies to you and/or your business.