On December 22, 2017, the Trump Tax Act was signed. The “Act” has several provisions that will be of direct effect towards small to medium businesses and owners. The impact of the Act on small businesses is likely to be mixed. How any particular business or taxpayer will fare depends on a number of marital and family status, amount and type of deductions and in which state they live. Some changes that may benefit your business, and others, like the elimination of select meal and entertainment deductions, may hurt your business.
The Act is in effect which leaves no time to make adjustments to 2018 plans and budgets. Although, these changes are immediate, not all last forever and some expire as early as 2019, while others expire in later years.
If you haven’t already, we suggest you review your plans with the guidance of your accountant to ensure you understand the full impact of these tax changes on your business and personal tax situations. If you need recommendations, we work with many accounting firms, feel free to contact us at firstname.lastname@example.org.
Following are select changes that took effect as of 31 December 2017 as a result of the Act;
Corporate Tax Changes. As entrepreneurs, we know how important tax policy is and how much it influences our decisions and can affect our success. As business owners, we do what we can to take advantage of these tax cuts and not only grow our businesses but also to improve the economy.
- Repealed the corporate Alternative Minimum Tax (AMT). Corporations that were previously subject to AMT are eligible for a refundable credit (subject to limitations)
- Reduced the Federal corporate tax rate from 35% to a flat rate of 21%. This will impact how you should organize your business (e.g. Corp v "pass-through" or LLC v S-Corp)
- Set the net interest expense deduction at 30% of adjusted taxable income (ATI) (i.e. EBITDA proxy) for businesses with sales of $25+ million
- Limited net operating loss (NOLs) deductions to 80% of income
- Repealed NOL carryback where companies will no longer be allowed “carry back” losses in the future to offset the tax liability from taxable transactions
- Reduced the dividends received deduction to 50% (for <20%-owned subsidiaries) and to 65% (for <80%-owned subsidiaries)
- Reduced the Asset Depreciation schedule to one year versus several years
Individual Tax Changes. Business owners may also benefit from the reduction in individual tax rates. Business owners living in high-tax states (such as California, New York and New Jersey) who itemize deductions may benefit less due to the new caps on state and local taxes and mortgage interest. However, for those in low-tax states (such as Florida, Nevada and Wyoming), the combination of reduced business income and lower individual tax rates is likely to result in a lower tax bill.
- Lowered the maximum rate from 39.6% to 37% for income in excess of $500,000 (single taxpayers) or $600,000 (married with joint filing)
- Limited the itemized deduction to $10,000 ($5,000 for a married taxpayer filing a separate return) for state and local taxes (SALT) which includes; personal state and local property taxes, and (ii) state and local income taxes (or sales taxes)
- Preserved the individual Alternative Minimum Tax (AMT) and increases the "exemption amount". Those with a high “SALT” and mortgage interest deductions pay more
- Eliminated the capital asset treatment of "self-created" patents, inventions or trade secrets
- Limited the mortgage interest deduction to $750,000 of principal (down from $1 million)
- Eliminated miscellaneous deductions subject to a floor equal to 2% of adjusted gross income. This impacts any private investor who deducts management fees
- Doubled the estate tax exclusion to $10 million and retains the 40% tax rate
- Set the "pass-through" income deduction to 20% of qualified business income earned through a pass-through vehicle
Although K Squared is a private equity firm, we are not accountants and won’t be able to calculate the “dollars and cents” impact. We do hope this post clarified some of the changes and some of the implications to your business and your individual returns.
DISCLAIMER (because we're not accountants). This post is for informational purposes only and is not intended as a recommendation, offer, or solicitation with respect to the sale or purchase of a security by K Squared Fund, LLC. The information disclosed as historical fact from sources deemed reliable and accurate. K Squared Fund, LLC. shall not be liable for damages resulting from the use of or reliance upon the information presented.