New Tax Laws and Your Business
On Dec. 22, 2017, Congress passed the Tax Cuts and Jobs Act, which provides significant tax benefits for individuals and corporations.
Of particular note are the tax benefits afforded corporations in the United States. The tax benefits are intended to help stimulate our economy and allow corporations to compete effectively against global competition.
The following are important provisions from the Tax Cuts and Jobs Act that corporations need to be aware of for the upcoming year. It is vital for a corporation to understand the changes made and how they may affect the business in the short and long terms.
Corporations derive enormous benefit from several provisions in the Tax Cuts and Jobs Act. For instance, the corporate tax rate was reduced from 40 percent to a flat rate of 21 percent, and it became effective Jan. 1.
Likewise, the new law abolished the special tax rate on professional or personal service corporations. Entities that are considered pass-through, such as S-corporations and limited liability companies, are taxed at the individual owner’s tax rate. Therefore, the tax rate for pass-through businesses can be different, depending on the level of income.
The new tax law allows pass-through entities to deduct up to 20 percent of their income. This change will assist pass-through entities in reducing their overall tax burden and increase equity in the business.
Beginning in 2018, the new law reduced the withholding rate from 25 to 22 percent on supplemental wages that are less than or equal to $1 million. Simply stated, employers should withhold a flat 22 percent on any bonuses, commissions, or any other supplemental-wage payment that is less than or equal to $1 million.
In like manner, if the supplemental amount exceeds $1 million, the withholding rate of 37 percent should be used instead of 39.6 percent.
The new law temporarily eliminated the personal income tax exemption from 2018 through 2025. Additionally, the individual rate for standard deductions nearly doubled. This is a significant change, as it drives more taxpayers to use the standard deduction instead of itemizing. To illustrate this change, a single taxpayer will see a new standard-deduction rate of $12,000 instead of $6,350.
Beginning in 2019, the penalty for an individual who does not purchase health insurance under the Affordable Care Act is reduced to 0 percent. Most certainly, some individuals will opt out of purchasing health insurance.
As a result of fewer individuals purchasing health insurance, insurance companies will probably look to raise premiums on individuals and employers and transfer costs to those individuals who don’t have health insurance. In the end, with fewer people in the health insurance pool, the costs to offer employees health insurance may go up.
One very significant change under the new law pertains to treatment of employees who use the Family Medical Leave Act. Under the new law, employers can receive a tax credit for paying employees while they are using FMLA.
However, the employer must have in place a written policy that allows full-time employees no less than two weeks of annual paid FMLA leave. Also, the employee has to be paid at least 50 percent of the employee’s regular wages. Under the new law, an employer will receive a tax credit equivalent to 12.5 percent and up to 25 percent of the amount paid to the qualifying employee.
There are several other changes under the new tax law that will impact benefits to employees. For instance, food and beverage provided by the employer for the benefit of the employee will no longer be fully tax deductible. Starting in 2018 and going through to 2025, businesses will only be permitted to deduct up to 50 percent of those costs, and after 2025 they will not be permitted to take a deduction for food and beverage.
The new tax law makes significant changes to employee commuter benefits. As a result of the new law, employers are able to take a maximum monthly amount of $260 for transit passes and qualified van pools. The amount provided for employee parking exclusion was increased to $260.
Similarly, the bicycle-commuting tax-free reimbursement of up to $20 was eliminated starting in 2018 and is effective through 2026.
Also effective for calendar year 2018 are changes in tax reporting of business expenses for both employees and employers.
According to Dana S. Nonnenmocher, principal and shareholder of Brown Schultz Sheridan & Fritz, CPAs and Business Advisors, “Reimbursements of employee business expenses under an ‘accountable plan’ are not taxable. An accountable plan requires employees to submit their business expenses eligible for reimbursement with appropriate supporting documentation.
“Payments rendered under a ‘non-accountable plan’ (where an employer pays a flat allowance to the employee and does not require any accounting for the use of the funds) are to be included in the employee’s W-2, subject to all taxes.”
Prior to 2018, employees paid under non-accountable plans were able to deduct qualified business expenses on their personal income tax returns against the income included in their W-2 using Form 2106, Nonnenmocher said. Form 2106 then flowed to Schedule A, miscellaneous itemized deductions, limited to the 2 percent of adjusted gross income floor.
“However, beginning in 2018, these miscellaneous itemized deductions are suspended through 2025 and, therefore, unavailable until at least 2026,” he added.
“Also beginning in 2018, businesses can no longer deduct any payments or reimbursements of entertainment costs, such as admission to sporting or other events. Prior to 2018, these items were 50 percent deductible. Conversely, business-travel expenses continue to be 100 percent deductible by employers.”
Another provision that has been modified pertains to the treatment of moving expenses. Under the new tax law, from 2018 through 2026, employees will not be allowed to deduct qualified moving expenses. The only exception provided for pertains to active-duty members of the armed services.
Along the same lines, employees will no longer be permitted to exclude employer-provided qualified moving-expense reimbursement from income. These changes will be a significant impact to relocation policies and moving-expense reimbursement.
Under the new law, the first-year bonus depreciation percentage increased to 100 percent for qualified property placed into service between Sept. 28, 2017, and Dec. 31, 2022. The new law expanded the category to allow for both new and used qualified property.
Furthermore, the new law allows 100 percent bonus depreciation for qualified film, television, and live theatrical productions that are placed into service on or after Sept. 28, 2017.
In some cases, the 100 percent first-year bonus depreciation is not available. If that is the case, a business can use the Section 179 tax break, which allows the business to deduct the entire cost of qualifying new and used depreciable property in year one.
Of course, this benefit is subject to certain limitations. Under the new law, Section 179 deduction for qualified property placed in service starting in 2018 is raised from $510,000 to $1 million, and the phase-out is increased from $2.03 million to $2.5 million. In later tax years, the amounts will be indexed for inflation.
The new tax law expanded the definition of eligible property and included certain depreciable, tangible personal property used to furnish lodgings. The definition for qualified real property under section 179 was expanded and includes items relating to improvements to nonresidential property. Some of the items included under this expanded definition include roofs, security systems, alarm system, and HVAC equipment.
Given the enormous amount of changes under the new tax laws, it is highly advisable to consult with a tax professional to determine how these changes specifically impact your business. At a minimum, some changes to your employee handbook will be in order.
Lastly, the IRS has a lot of work ahead of it to set up guidelines to implement these changes. You should plan on working with your tax consultant to make sure that your business is in compliance with the new laws. BW