On December 22, 2017, President Trump signed the “Tax Cuts and Job Act” reform into law. The changes will affect both individuals and businesses in the coming years, effective as of January 1, 2018.
The tax reform not only reduces corporate taxes, but will affect businesses everywhere in regards to their employees’ wages, benefits, and taxes.
Here are the top five business tax reforms you should know about for the upcoming tax year as well as in the future with these essentially permanent changes to business tax law.
1. Withholding Tables, W-4 Forms, and Supplemental Wages (and What It Means for Individuals)
The new tax reform means your employee’s income taxes are essentially lowered until 2026. For individuals, standard deductions are also doubled, from $6,350 to $12,000.
There are also new withholding tables for 2018, which employers should begin using as soon as possible. These tables are meant to work with the W-4 form that employees already have on file. Currently, the IRS is changing the withholding calculator on their website as well as revising W-4 forms to align with the act’s new requirements.
While it’s not currently clear when a new withholding calculator will be available, employers should begin using the new withholding tables no later than February 15, 2018.
Keep in mind that state W-4 forms may change in addition to federal forms to reflect the elimination of personal exemptions as defined by the act. If you’re an individual who receives supplemental wages, $1 million or less requires that 22% be withheld while greater than $1 million is 37%.
For individuals, these new changes—such as the elimination of personal exemptions—are only valid until the end of 2025, unless further measures are taken before that point by Congress. For corporate taxes, these changes are permanent.
2. Employee Achievement Awards
Employee achievement awards include any item of a tangible nature given to an employee as a gift, for a term of service, or an achievement. These items are deductible, but limited to a certain dollar amount. These deductions are excludable from the employee’s gross income.
With the new tax reform, a definition is added to properly define what counts as an employee achievement award. The act claims that these awards cannot include:
- Cash or its equivalents
- Gift Cards, Gift Certificates, or Coupons
- Tickets to Sports Events or Theater events
- Stocks, Bonds, or Other Securities
These changes are effective for amounts either paid or received after 2017.
3. Business Entertainment and Recreations Changes
Previous tax laws have allowed businesses to deduct certain expenses, including those for entertainment, amusement, and recreational activities. These also include any membership dues associated with any club specifically for business, pleasure, or other social purpose, as long as the expenses relate to your business. These deductions are limited to 50% of otherwise deductible expenses.
The act now eliminates any deduction for the above-mentioned purposes, but you may still deduct 50% of otherwise deductible food and beverage expenses. These include meals consumed by employees on work travel.
For any amounts paid after 2017 through December 31, 2025, you will still be able to deduct 50% of your expenses as long as they are associated with food and beverages for employees via an on-site eating facility that meets certain requirements. After 2025, these deductions will no longer be permitted.
4. Section 179 Expansions for Certain Business Assets
Section 179 has expanded certain depreciable business assets that are currently permitted.
Typically, Section 179 allows you to deduct the full purchase price of any business-related equipment from your gross income. The act increases the maximum amount a taxpayer may expense to $5 million for taxable years before January 1, 2023. The amount was previously only $500,000.
In addition, the phaseout threshold has also been increased by a substantial amount—from $2 million to $20 million. Businesses can also index amounts for inflation after this year.
Businesses can now also use property such as energy efficient heating and air condition that qualifies as “real property”, as long as it’s been in service after November 2, 2017.
5. Corporate Tax Cut
Under the Tax Cuts and Job Act, corporate tax rate will decrease from 35% to 21%. The new act also includes a 20% income deduction for pass-through entities, which include sole proprietors, LLCs, partnerships, and S-corporations.
The tax reform also allows businesses to deduct the cost of depreciable assets in one year rather than deducting a certain amount of several years (although this does not apply to structures). To qualify, equipment must be purchased after 9/27/17 and before 1/1/2023.
Alternative Minimum Tax (AMT) has been eliminated for corporations under the new act. Previously, 20% was the standard if a corporation’s tax credits meant their tax rate was lower than 20%.
Keep in mind that this new plan will be more beneficial for businesses than for individuals, especially as these business tax changes will be permanent.
Is your business aware of these new changes that have already been implemented for 2018? From the expansion of Section 179 to corporate tax cuts, your business needs to be aware of how it will be affected in the coming years. Do you have questions about how your taxes will be impacted? Feel free to get in touch with the professionals at 365 BOOKSPRO for all your tax needs!