Annapolis Business Expo May 23, 2018 Business Tax Update By - - PDF document

Annapolis Business Expo

May 23, 2018

Business Tax Update By Michael K. Shelby, CPA, MST

Michael K. Shelby, CPA, LLC

Accounting ◊ Consulting ◊ Tax Services

1410 Forest Drive, Suite 32 Annapolis, MD 21401 410-777-5359 mkshelbycpa.com

Note: The rules discussed in this presentation apply to 2018 and later tax years, unless otherwise noted. This presentation is meant to provide only a general overview of various and complex federal tax laws for discussion purposes only. It should not be construed as tax advice suitable for the reader’s specific tax situation. A qualified tax advisor should be consulted for guidance and proper application of any tax rules discussed in this presentation regarding the reader’s specific situation.

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I. Corporate Taxes

• A. Corporate tax rate is now flat 21%
• B. Personal Service Corporation special tax rate of 35% - eliminated
• C. Corporate Alternative Minimum Tax – eliminated

II. Depreciation

• A. Enhanced Section 179 Expensing
• a. Up to $1,000,000 of qualifying property purchases may be

expensed on purchases of up to $2,500,000.

• b. Qualified property is tangible personal property, qualified

improvement property that is not residential property (generally: improvement to an interior portion of a building made after the building was first placed into service) ot residential, roofs, HVAC, fire protection, alarm and security systems.

• c. This deduction is applied BEFORE bonus depreciation.
• d. Many states require a deduction over $25,000 to be added

back in lieu of a modified depreciation deduction.

• B. Enhanced Bonus Depreciation Deduction
• a. 100% for property placed in service after 9/27/2017 and

before 1/1/2023

• b. Does not apply to luxury passenger autos – only $8,000 for

that.

• c. Applies to new and used property
• d. Applies to property with a recovery period of 20 years or less –

including heavy SUVs.

• e. Not subject to taxable income limitation or AMT adjustment.

Therefore, this deduction CAN create a net business loss.

• f. Note: Many states add this deduction back in lieu of a modified

depreciation deduction.

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III. Business Interest Expense Limitation

• A. Limited to business interest income plus 30% of adjusted taxable

income.

• B. Small business exception: Does not apply if last 3 years average gross

receipts are no more than $25 million. IV. Domestic Activities Production Deduction

• A. 9% deduction provided to many manufacturing and construction

companies.

• B. Repealed, effective 2018.
• C. Note: This rule is found in IRC Sec. 199. The provision for the

Qualified Business Income Deduction (discussed below) is Sec. 199A. Much of the structural concepts from Sec. 199 have been merged into Sec. 199A. V. Deduction for Entertainment

• A. Was limited to 50%. Now, completely eliminated for any

entertainment, amusement or recreation related to the taxpayer’s trade or business.

• B. Exception: Does not apply to recreational, social, or similar activities

primarily for the benefit of employees (other than highly compensated employees).

• C. Note: Business meals are still 50% deductible.

VI. Gross receipts limit raised to $25 million for various accounting method rules:

• A. C corporations allowed to use cash method (was $5 million)
• B. Not required to account for inventory (was $1 million for most small

businesses and $10 million for certain industries). But can only deduct items actually used or sold.

• C. Sec. 263A UNICAP rules for producers and resellers (was $10 million)

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• D. Small construction contract exception to having to use percentage of

completion method for construction contracts. VII. Qualified Business Income Deduction

• A. Generally: 20% of qualified business income (QBI) from partnership, S

corporation or sole proprietorship.

• i. Does not apply to C corporations.
• ii. Does not apply to “specified service” trades or business, i.e.,

law, accounting, consulting, financial services and several other fields.

• 1. There is an exception for certain “small” taxpayers

whose taxable income does not exceed a threshold amount of $157,500 for single, MFS and $315,000 for MFJ.

• B. Deduction limited to lesser of:
• i. 20% of qualified business income, or
• ii. The greater of:
• 1. 50% of W-2 wages of the business, or
• 2. The sum of 25% of the W-2 wages, plus 2.5% of the

unadjusted basis of qualified property.

• iii. Exception: Same as exception for “specified service” trades or

businesses discussed above re: taxable income thresholds. Under this exception, the deduction is simply 20%.

• C. This new law, referenced as IRC Sec. 199A, is seen by many tax

practitioners as very complex and fraught with new terms that leave a lot of ambiguity. The law is 10 pages long. Currently, there are no regulations or other known guidance from IRS.

• i. One of the great unknowns is whether this deduction will

apply to rental properties. There is no clear guidance on this but one reputable tax author has opined that rental income should qualify. See The Tax Advisor, Tony Nitti, CPA, April 1,

• 2018. This is a 26 page in-depth review of this new law.

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• VIII. Unreimbursed Employee Business Expenses Eliminated
• A. Can no longer take deduction on Schedule A.
• B. Will likely result in many employees asking their employer to

reimburse them for out-of-pocket business expenses.

• C. Will likely cause tension between employee and employer.