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New Tax Law 101 | Navigating the new Tax Cuts and Jobs Act

New Tax Law 101 | Navigating the new Tax Cuts and Jobs Act

Introduction To New Tax Law 101

In this six-part series, the partners at EJC will guide our clients and friends through the important provisions of the new tax law in effect for tax years beginning on or after January 1, 2018. This series is meant to serve as an overview of the “Tax Cuts and Jobs Act”to help you understand how it could affect your business as well your personal tax situation. If you would like to review specific questions and/or topics, please reach out directly to your EJC contact or email us at info@ejccpa.com.

Part 1 – How does the new Tax Law affect my Business?

On December 22, 2017, the President signed into law the “Tax Cuts and Jobs Act” which is the most sweeping tax reform in the US in over 30 years. The significant changes have brought simplification to some areas, but complications to many others. The following are key provisions that will affect our client base:

Corporate Tax Rate (C-Corporation)

  • Old Law – Graduated rates with a maximum of 35%
  • New Law – Flat rate of 21%

Business Income Deduction

  • In order to provide a benefit to owners of companies other than C-Corporations, the Business Income Deduction was enacted as part of the legislation. The deduction is generally equal to 20% of “qualified business income” from an S Corporation, Partnership or Sole Proprietorship.
  • The deduction is “below the line” in that it reduces taxable income, but not in arriving at adjusted gross income (AGI).
  • Contractors, architects, and engineers are eligible for the deduction. However, there are certain types of service businesses that the deduction phases out for such as health care, law firms, accounting firms, consultants, and financial services firms once the taxpayers income exceeds a certain taxable income level.
  • For individuals with taxable income above $157,500 ($315,000 for married filed jointly), there is a limitation phased in based on W-2 wages paid by the business and the basis of property used in the business.
  • EJC will cover this complex topic in more detail in the next part of this series.

Domestic Production Activities Deduction (DPAD)

  • This 9% deduction that many of our contractor and manufacturer clients qualified for has been eliminated.

Tax Depreciation Section 179:

  • Old Law – $500,000 deduction with phase-out starting at $2 million of asset purchases• New Law – $1 million deduction with phase-out starting at$2.5 million of asset purchases.

Bonus Depreciation:

  • Old Law – 50% first year deduction on new capital assets and equipment
  • New Law – 100% first year deduction on new or used capital assets and equipment. This is one of the few provisions of the new law that went into effect prior to1/1/18 (9/28/17). Beginning in the 2023 tax year, the first year deduction percentage decreases to 80% and continues to decrease each year until expiring after 2026.
  • Expanded definition of qualified leasehold improvements.

Methods of Tax Accounting

Percentage of Completion for Long Term Contracts:

  • Old Law – Required Percentage of Completion if the average of your annual revenue for the prior 3 tax years exceeded $10 million.
  • New Law – Threshold has been increased to $25 million average of prior 3 years.

Cash Method:

  • In connection with the change to the Percentage of Completion Rules,the cash method is now permitted for companies (S or C Corporation) with less than$25 million average revenue of prior 3 years.

Business Interest Deduction

  • This new provision applies to any business that has average revenue of $25 million or more for the prior 3 years.
  • Interest deduction is limited to 30% of adjusted taxable income, which is determined at the entity level for partnerships and S-Corporations.
  • Any disallowed amount is carried forward for use in future years indefinitely.

Entertainment Expenses

  • Old Law – 50% of qualified business-related entertainment expenses were allowed as deductions.
  • New Law – Entertainment expenses are no longer deductible. This includes tickets for sporting events.

For more information on your specific tax situation, please contact your EJC tax professional or call our main line at 978-729-4298. Not yet a client of EJC?

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