The new-for-2018 tax bill, a.k.a. the Tax Cuts and Jobs Act (TCJA), will have a wide-ranging impact on businesses of every size. And while it's too soon to fully process all the implications of such a massive piece of legislation, we can certainly take a high-level look at some of the changes.
Focusing primarily on small businesses, we've broken the changes down into government "giveaways" and "takeaways."
- 100% depreciation: A big potential giveaway for small businesses involves depreciation. Businesses can now claim a 100% deduction for any equipment, new or used, placed in service not just in 2018, but retroactive to Sept. 27, 2017. This will provide a major benefit to businesses that are equipment-intensive, such as construction. For retail and service businesses that might need to replace only a couple of computers over the course of a normal year, the benefit will be far less significant. (The 100% depreciation will begin to phase down in 2023.)
- No more graduated tax rate: The change from a graduated tax rate to a flat tax rate will benefit most (but not all) C corporations. Here, the math is pretty simple: Under the TCJA, C corps are taxed at a flat rate of 21% instead of the graduated scale (which ran from 15% to 39%). That change is very advantageous for the larger companies that generate profits at the higher end of the scale — and it just as obviously hurts businesses that were in the 15% bracket before. LLCs and S corporations might thus want to reevaluate their legal form of entity, as some could potentially benefit from changing to C corps (depending on their previous tax rate).
- A higher cash accounting threshold: With few exceptions, S corps and pass-through entities can now use the cash-basis method of accounting for up to $25 million in revenue, a major hike over the previous limit of $10 million. That means many fewer small businesses will now be required to use the accrual method of accounting. This will eliminate much of the guesswork and complexity inherent when there is a lag between the time transactions occur and when invoices are issued.
- No more entertainment expenses: This is a big one, especially for businesses where the sales process typically involves a social component. Under the TCJA, deductions for entertainment or recreation activities, facilities or membership dues are no longer allowed. So, you can no longer write off that membership to the golf club where you entertain clients. It will certainly impact marketing activities for many companies. (Watch for additional carve-outs down the road on this one.)
- DPAD is dead: A provision of the American Jobs Creation Act of 2004, the domestic production activity deduction (DPAD), allowed a 9% reduction of income related to production activity based in the United States. (This was primarily for the benefit of contractors and manufacturers.) That deduction has been repealed, which will have a significant impact on small and large businesses alike.
- No going back: Before, a C corp that suffered a loss in a given year, but which had been profitable the previous two years, could claim some back taxes from those two profitable years for cash flow. That provision has been repealed. Now a struggling business must carry that loss forward indefinitely — a big takeaway.
Don't Jump to Conclusions
Because there are so many variables with the TCJA — and exceptions to almost every new rule — it's more important than ever for small-business owners to sit down with their accountants and run through all applicable What if? scenarios. (For example, there's a new 20% deduction of income for pass-through entities, but it's subject to so many possible limitations, phase-outs and so forth that it's impossible gauge actual impact without a pro forma of your personal tax return.)
The bottom line: Be sure to call on a professional to help you maximize the TCJA's giveaways and minimize the takeaways.David Jean is a CPA at Albin, Randall & Bennett, a certified public accountant and business consulting firm in Portland, Maine. He specializes in construction, real estate management and manufacturing.