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Let's talk about tax: How the new law may impact your business

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In December 2017, Congress and President Trump passed the most significant overhaul of America’s tax system in decades. And while many are familiar with the major provisions included in the Tax Cuts and Jobs Act (TCJA), once you dive a bit deeper, you’ll notice there are many more nuances to consider for your business. Let’s review a few of those items:

Excess business loss limitation

In the past, aggerate losses generated from business activities not subject to passive or basis limitations were generally available to offset all other types of income on a taxpayer’s individual return. A new provision included in the bill limits these losses per year to $250,000 for a single taxpayer and $500,000 for couples filing a joint return.
While this provision will only affect taxpayers with multiple sources of income, the impact can be quite severe. Individuals who incur large business losses but generate other types of income could end with a distorted tax liability. It is important to remember that business losses can still be used to offset other types of business income and that any excess losses are carried forward to future years.

Pass-through deduction

Taxpayers who own sole proprietorships and other pass-through entities may be allowed a deduction of up to 20 percent of the business’ income. The deduction sizes will vary depending on eligibility, limitations, phase-outs and thresholds.
While the deduction is targeted at pass-through entities, not all businesses operating in these forms will qualify. The provision limits the ability of “specified service businesses,” such as consulting firms, medical practices and law firms, from utilizing the deduction. The taxable income limitation is based on the taxpayer’s, not the pass-through business’, overall taxable income. Entities not considered a specified service business are still not guaranteed the full deduction. Another set of limitations needs to be considered involving W-2 wages and tangible assets within the business.

Corporate tax rates

The corporate tax rate structure has been altered significantly under the TCJA. Tax brackets with a top rate of 35 percent have been eliminated and replaced with a flat 21 percent tax rate. While the reduced corporate rate may cause many pass-through businesses to contemplate converting to C-corporations, there are many factors that need to be considered. Although the 21 percent flat corporate rate is significantly lower than the 37 percent top individual rate that pass-through businesses are generally subject to, C-corporations are also subject to a second layer of taxation when dividends are paid out of the company’s profits. C-corporations are also not eligible for the 20 percent pass-through deduction which can reduce a business’ overall effective tax rate to as low as 29.6 percent.

Deemed repatriation

Deemed repatriation of deferred foreign income is one part of the U.S. transition to a modified territorial tax system. Under the new provision, U.S. shareholders owning at least 10 percent of a controlled foreign corporation must include in income all accumulated deferred foreign income. Deferred income held in cash would effectively be taxed at 15.5 percent and any remaining amounts at 8 percent. Going forward, U.S. corporations will be eligible for a 100 percent dividends received deduction, allowing them to generally bring back cash to the U.S. tax-free.
While deemed repatriation or the “transition tax” is applicable to all qualified U.S. shareholders, the dividends received deduction is only available to C-corporations going forward. Also, the transition tax applies to the 2017 tax year. This means that significant analysis and calculations will need to be performed with the 2017 return and the tax paid that year. However, an election to pay the liability over eight years is available and
S-corporation shareholders have additional tax deferral options.

 

ABOUT THE AUTHORS

Chelsie Avery is a senior tax associate. She serves individuals and small to medium-sized business clients in a variety of industries. Contact her today at chelsie.avery@rehmann.com.

Anthony Licavoli is a tax manager focusing on federal and state business taxation for both medium and large clients. He is a member of the Tax Reform subcommittee monitoring tax legislation and its impact on businesses and individuals. Contact him today at anthony.licavoli@rehmann.com.

Michael Patterson is Rehmann’s director of international tax. He has more than 25 years of international taxation experience and a successful track record of providing value-driven consulting, planning and structuring for clients in a wide range of industries.Contact him today at michael.patterson@rehmann.com.

 

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