Tax Reform Business: January 2017

Tax Reform lowers the corporate tax rate to a flat 21% and repeals the corporate AMT. Most small to medium corporations are permitted to use the cash method of accounting.
Taxpayers with domestic income from pass-throughs, partnerships, S corporations, or sole proprietorships can deduct up to 20% of profits. Not eligible are certain service businesses like doctors, lawyers, accountants and brokers, with the exception of those with lower incomes.
Businesses can immediately write off the full cost of new equipment. Businesses can no longer deduct entertainment, amusement, or recreation directly related to the business Taxpayers can continue to deduct 50% of food and beverage expenses associated with operating their trade or business.

The corporate tax rate is reduced to a flat 21%. Repeals the corporate AMT for tax years beginning after Dec. 31, 2017. Taxpayers with average gross receipts of less than $25 million (indexed for inflation) for the prior three taxable years are permitted to use the cash method of accounting,


Under the new IRC §199A, Taxpayers with domestic income from pass-throughs — partnerships, S corporations, or sole proprietorships — can deduct up to 20% of profits. This 20% deduction equals the lesser of QBI or 20% of taxable income. QBI is defined as all domestic business income other than investment income. The 20% deduction reduces taxable income, not adjusted gross income, and eligible taxpayers may use the deduction whether or not they itemize.

Thresholds and limits. If your taxable income does not exceed a threshold of $315,000 (joint filers), or $157,500 (all other taxpayers), your deduction is not further limited. .

Further limits: When taxable income exceeds the above thresholds, two more limits start to phase in and these limits fully apply after the single taxpayer’s taxable income exceeds $227,500 or joint filer exceeds $415,000. Under the first limit, the 20% deduction is not available to specified services businesses. The second limit is the wage and basis limit below.

Wage and basis limit. Under this limit the deduction cannot exceed the greater of:
(a) 50% of the W-2 wages paid with respect to the qualified trade or business, or
(b) 25% of its W-2 wages plus 2.5% of the unadjusted basis of all qualified property when acquired. “Qualified Property” means tangible property used to produce QBI subject to depreciation under §167.

Specified Service Businesses. Taxpayers with pass-through income from specified service businesses in the fields of health, law, accounting, consulting, athletics, financial services, and brokerage services are not eligible for the deduction with the exception of architects and engineers.

If your net amount of QBI from all qualified trades or businesses during the tax year is a loss, it is carried forward as a loss from a qualified trade or business in the next tax year and reduces your deduction in a subsequent year (but not below zero) by 20% of any such carryover loss.

Calculation of the 20% deduction is quite complex. If you claim the deduction and you understate the amount the tax required to be shown on your return by 5% or more, you could be subject to the substantial understatement of tax penalty.

I would be happy to discuss these issues in more detail, as well as various planning ideas, at your convenience.

Entertainment expenses. The Act repeals the current rule that allows the deduction of entertainment, amusement, or recreation that are directly related to the active conduct of a trade or business. No deduction is allowed for (1) entertainment, amusement or recreation activities, (2) membership dues with respect to any club organized for business or social purposes, or (3) a facility used in connection with any of the above items. The Act allows taxpayers to continue to deduct 50% of food and beverage expenses associated with operating their trade or business.
Section 179 deduction. If you purchase depreciable equipment in 2017, you may elect to deduct it under “section 179,” including computer software and qualified real property. You may elect to expense up to $510,000 in 2017 (with a phase-out for purchases in excess of $2,030,000 in 2017;
Bonus Depreciation For property acquired and placed in service during 2017 you may deduct 50%.of its cost (less the §179 deduction as bonus depreciation.

My advice:
1. Talk with your tax adviser about what business entity will be best for you taxwise. This question is way beyond the scope of this article. There are already scholarly studies, one by more than ten law professors, on how to deal with these rules.
2. If you are an employee, you can qualify as a pass-through by quitting your job and become an independent contractor. LOL. The IRS will be gunning for this.
3. Maximize your itemized deductions, since taxable income is calculated after itemized deductions.
4. If you are a banned service provider like a lawyer, don’t make too much money. With income less than $315,000 you qualify.
5. Buy equipment in 2017. Choose the best alternative: bonus depreciation, section 1709 deductions, and MACRS depreciation:
6. Buy Vehicles Weighing Over 6,000 Pounds: If you buy and pace in service a vehicle with a gross vehicle rating over 6,000 pounds it qualifies for a §179 deduction of $25,000, plus bonus depreciation on the rest, plus regular depreciation on the rest.
7. Allocate appropriate amounts of State and local taxes remain as business expenses.
8. Reexamine entertainment expenditures that are no longer deductible.

About Wis Laughlin

I help clients with tax preparation and IRS representation, estate planning, and complex contracts, including LLC's. As a former IRS tax attorney in their National Office. picked Wis in 2017 and several prior years as one of the Top Tax and Estate Lawyers in Tennessee. I am your advocate, not your accountant. I don't tell you what you can't do. I show you how to do it.
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