During the week leading up to Christmas, Congress passed a major tax bill. This tax legislation may be the biggest overhaul of the US tax system since 1986. It goes into effect on January 1 leaving very little time to do much tax planning for year-end 2017. It must be done next week during the holidays!
Here is a Plan of Action for businesses to consider by New Year’s Eve under what is officially called the Tax Cuts and Jobs Act (TCJA):
Simply put, Accelerate Deductions to 2017 from 2018!
Tax rates will generally drop under TCJA in 2018. That means expenditures that results in tax deductions are worth more in 2017 than in 2018. This is true whether the business entity is a C Corporation, S corporation, sole proprietorship, or a partnership.
As an example of the impact of lower tax rates, let’s look at buying a $5,000 piece of equipment whether as a C corporation, or any pass-through entity such as a S corporation, sole proprietorship, or partnership.
C Corporation rates drop from 34-35% to 21%.
In 2017, the $5,000 piece of equipment is worth a tax deduction of about $1,750.
In 2018, with the lower tax rates, that same $5,000 piece of equipment is worth a tax deduction of only about $1,050!
Most pass-through entities will receive a new 20 percent tax deduction from business income.
For example, a taxpayer with $100,000 of pass-thru income might receive a deduction equal to 20 percent of $100,000, or $20,000.
This Pass-through Income Deduction is good news but it reduces the value of a tax deduction.
In 2018, the value of the $5,000 piece of equipment as a tax deduction is reduced (after taking the Pass-through Income Deduction into consideration) to $4,000!
In 2017, the $5,000 piece of equipment is still worth a tax deduction of $5,000!
Most owners of pass-through entities will have a lower personal income tax rate.
This is more good news but the lower income tax rates reduce the value of a tax deduction in the year 2018 as opposed to the year 2017.
Look at a married business owner with $100,000 in taxable income, for example.
The income tax liability will decrease from $16,478 in 2017 to $13,879 in 2018, a decrease of 2.85%!
But that also means the tax deduction value of a $5,000 piece of equipment is worth more in 2017 than in 2018 by that same 2.85 percent!
Using the example of the $5,000 piece of equipment, one can see that major consideration should be given to purchasing the equipment post-haste in 2017 rather than waiting to 2018. The logic of this analysis, of course, can be applied to any expenditure that results in a tax deduction!
Don’t lose sight, however, of the fact that any expenditure should be a sound business decision and not be made just for tax purposes.
By: John J Kasperek. Enrolled Agent, who wanted to provide business people a brief summary of the new tax law so that business people have the tools to make some fast decisions before the year 2017 ends.