Tax Cuts and Jobs Act: Business Owners Summary by Rick Fields

I had indicated in an earlier blog post that the provisions of this new law for small business owners are anything but simple. There are numerous provisions, most of which will be beneficial, but only if they are applied to proper business structuring. There are no shortcuts with this one, folks. While keeping your current business structure “as is” could cause you to see some benefit under this bill, there will be many of you – in fact, I would suggest most of you – who would see a benefit to restructuring your business to take advantage of various provisions of these new laws.

In order to give you a sampling of the new rules, I have provided bullet points of the most significant provisions below.

1. C Corporation tax rates will be 21% flat rate. This is significantly less than the current 35% rate, and will be a significant benefit for most larger businesses. This will also be the right fit for some smaller businesses going forward.
2. S Corporations, Partnerships, Sole Proprietorships and some other types of businesses will receive a reduction of the amount of net income from the business that is taxed by 20%. This is a key provision and will need to be utilized to its greatest extent. The fine print is significant, though. Owners must be engaged in the business operation. This reduction will not apply to companies which are held as investments only. Owners’ wages which should be at a “reasonable amount” don’t qualify for the reduction. Overall wages of the business provide a limitation to the amount of this reduction if they are too small. Capital invested in the business is also a limitation that could reduce the effect of this reduction.
3. Certain businesses have been qualified as “specified service trade or business” and won’t qualify for the 20% reduction if the income is above certain threshold levels.
4. First year bonus depreciation has been increased to 100% from the prior level of 50%. This has also been expanded to new and used property.
5. Section 179 expensing elections have been increased from $500,000 to $1,000,000 per year. New types of property qualify as well which have not in the past. For example, some property expenditures now qualify. In general, real estate expenditures under the prior law did not.
6. Small businesses with gross receipts of $25M or less can use more favorable cash method of tax reporting when reporting. The old limit was $10M in gross receipts.
7. Small businesses with gross receipts of $25M or less do no longer have to account for inventories. This provision was not available in prior law.
8. Small businesses with gross receipts of $25M or less do not have to use the uniform capitalization rules.
9. Interest expense for a business will be limited under the new law. For businesses that exceed $25M in gross receipts, interest expense in excess of 30% of the adjusted taxable income of the business will not be deductible.

As you can see from these provisions, which are not all inclusive, there are a myriad of changes for small businesses under this bill. The most significant part of the process is to get the business owner to think differently about the structure of the business with an understanding that taxes will vary tremendously depending on the type of structure that is put in place. In order to do this properly, a thorough review of previous year’s circumstances and expected current and future year’s operation results and goals is necessary. From that review, a plan can be crafted to take advantage of the opportunities for tax savings that are available under the Tax Cuts and Jobs Act. We will reach out to you individually to discuss your circumstances and the structure of your business.