The New Tax Law's Impact on Small Business
Here are the changes that I expect will make the biggest impact on our business clients in 2018:
1. Entertainment expenses are pretty much gone. This means that tickets to shows or sporting events given to clients are out. Also out is membership dues to the Chamber or anybody else. The one exception to the removal of entertainment expenses is company holiday parties which remain deductible.
2. Meals remain deductible but are reduced by 50%. To qualify, the meal must take place during a business meeting or be directly following or leading such a meeting. Travel meals when on an out-of-town business trip are also still deductible with the same 50% reduction.
Examples of what this means for many of you include:
· BNI membership fees and meeting fees are non-deductible.
· Meals during a 1 to 1 with a potential or actual referral partner are 50% deductible.
· Chamber membership fees and the like are non-deductible.
· Auto expenses to a chamber or other business event remain deductible.
3. The new interest expense limitation will not apply to most of us unless your gross receipts exceed $25 million.
4. Net operating losses will no longer be available to carryback for an immediate refund. They will however be available for carryforward until used up.
5. Equipment purchases, be it new equipment or used, is deductible in the year placed in service rather than being spread over several years.
The big impact for most businesses is the rate reductions. C Corporations are now taxed at a flat 21% rate and the corporate alternative minimum tax has been removed. What’s more the Personal Services Corporate rates that apply to professional firms such as doctors, lawyers, engineers, and stock brokers has been eliminated which means that they also get the same flat 21% rate.
Most of us however are taxed as S Corporations or Sole Proprietors and the rules here are less than great. These pass-throughs get a deduction off the top of their income – sort of. Tax law becomes even more murky than usual when it comes to professionals that are in the fields of health, law, consulting, athletes, financial services, brokerage services and the like, but not engineers and architects (makes you wonder who they knew). Everybody is eligible for the business income reduction until their taxable income exceeds $157,500 for single and $315,000 for joint filers. Professionals then start to lose the reduction which completely phases out over the next $100 thousand of income.
Things really get flunky when it comes to figuring the amount of the business deduction. It’s the lessor of:
· 20% of “Qualified Business Income” (which does not include the W-2 compensation of an S Corp shareholder); or
· The greater of 50% of W-2 wages from that trade or business or the sum of 25% of the W-2 wages from that trade or business plus 2.5% of the unadjusted basis of qualified property.
Yep, that’s going to be easy to calculate. Clearly, simplification was not a priority in the new tax law. Another explanation is that this is what happens when you get too many MBA’s in one room.
Given the complexity and limits of the new 20% business deduction, it might be better for some to consider revoking their S Corp status and electing to be a regular C Corp with its flat rate of 21%.