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With 2018 bringing the most sweeping changes to the U.S. Tax Code in a

generation, there’s still a lot of uncertainty and confusion heading into year-

end and the beginning of tax season. The ink may well be dry on the Tax Cuts

& Jobs Act of 2017, but that doesn’t mean that the law’s implications are all

crystal clear: even the IRS is still officially interpreting portions of the TCJA so

they can prepare updated forms for 2018 taxes.

In other words, if you’re uncertain how the law will affect you and your busi-

ness, rest assured that you’re not alone!

So while we’re all going to be in wait-and-see mode on some details of the

TCJA while the IRS continues to do their work, there’s still a lot that we do

know – including some big changes for small and mid-sized businesses and

business owners.

With the standard caveat that nothing here should be viewed as tax advice

and that you should always consult your tax advisor for guidance on your own

individual taxes, here’s a rundown of the six biggest things we’re keeping an

eye on as we help our clients make the shift to tax planning and preparation

under the TCJA.

Navigating the Tax Cuts & Job Act

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6 Tax Tips for Small & Mid-Sized Businesses

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Bonus Depreciation & Section 179 Expensing

The TCJA sets the bonus depreciation rate at 100% (temporarily) and allows it to be used for the purchase of used equipment as well as new equipment. So on that count, it’s a good time to make improvement purchases and to replace old machinery, equipment, or vehicles.

However, before you jump in and take all that bonus depreciation, there are a couple factors to consider. The first is that, if you expect to show only a small amount of taxable income or a loss in future years, you may want to elect only a 50% bonus depreciation deduction or to opt out entire-ly. This avoids creating a large Net Operating Loss (NOL) carryforward that you won’t be able to utilize in the foreseeable future.

Second, Section 179 expensing may be a better route than bonus depreciation. The TCJA increases the Section 179 limits (to $1M with a dollar-for-dol-lar reduction for asset purchases above $2.5M), and as a general rule, you’ll be better served (or at least no worse off) using that full allowance before turning to bonus depreciation. Why? Many states – our home state of Massachusetts among them – don’t recognize bonus depreciation but do accept Section 179 expenses.

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The Corporate Tax Rate

One of the biggest headlines of the TCJA, of course, is the sig-nificant lowering of the corporate tax rate to 21%. (The dividends received rates were also reduced, and the corporate Alternative Minimum Tax was repealed.) Because corporations are now taxed at a lower rate, S-Corps, partnerships, and single-member LLCs may want to consider re-forming as C-Corps in order to be taxed at the new lower rate. Of course, there are other legal, logistical, and financial considerations to weigh as well, but from a rate standpoint, a corporation has clear advantages.

Section 199a Passthrough Deduction

The Section 199a Passthrough Deduction was intended to level the playing field a bit (and only temporarily) for owners of S-Corps, partnerships, and single-member LLCs, who pay taxes at the high-er individual income rate and not at the headline-grabbing reduced corporate rate.

If your business qualifies, Section 199a provides a deduction of up to 20% of your qualified taxable income. The deduction cannot exceed your taxable income – that is, it cannot put you into a loss.

Because the corporate tax rate is lower than the rate for income from pass-through entities, you may want to consider re-organizing as a C-Corp.

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Sounds great, right? The catch is that only certain trades or businesses qualify and most service businesses with income greater than a bit over $200,000 do NOT qualify. So law, medicine, accounting, consulting, and financial services firms with income over $200k do not qualify, while archi-tects and engineers DO qualify, even above the $200k threshold. Note that the amount of the deduction phases out at higher income levels.

The other catch is that there are a lot of different variables that help determine the final amount of the deduction you can take, and so it won’t always be clear what the best path will be. We’ve seen situations, for instance, where switching your personal filing status from Married Filing Jointly to Married Filing Separately has a significant impact on the amount of deduction you can take. You’ll definitely want to set aside some time to meet with your tax advisor to look at your options for this one!

If you’re filing as a sole proprietor, you may be missing out on significant passthrough deductions. Re-forming as an S-Corp and paying yourself a salary may be advantageous.

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Meals, Entertainment & Travel Expenses

If you’re like most small and mid-sized business owners, you’re probably pretty accustomed to keeping track of your business expenses (or at least throwing receipts into a shoebox) so you can take a deduction come tax time. The TCJA significantly changes what’s deductible and to what extent.

The long and short of it is that you need to be tracking your meal, entertainment, and travel expenses with more granularity than before and should not assume that you can continue to deduct expenses you’ve previously deducted. Why? Some of these historically deductible expenses remain fully deductible (or at least as deductible as they ever were), while some are now deductible at a reduced rate or not at all. If, for example, your team is working late to meet a deadline and you bring in dinner, that used to be fully deductible. Now, it’s only 50% deductible. But if you decide to take your team out to dinner after they hit that big deadline and win that big account, that meal is fully deductible (it’s a “Celebratory Meal,” which is fully deductible).

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Or say you want to take a client out as a thank-you. You’re probably used to making sure you talk some shop and then taking a deduction. That still works great (for a 50% deduction) if you go out for a meal. But if you take that client to a Red Sox game, you can talk shop for 9 innings and still not be able to take a deduction, because that’s an Entertainment expense.

Especially if you have a high number of expenses during the course of the year, it can be prohibitively difficult to accurately determine what kind of meal expense that lunch at Ruth’s Chris was. Integrating your bookkeeping with your tax preparation is a good way to make sure your expenses are correctly categorized so that you take the full deduction the law allows.

It’s more important than ever to keep good track of your expenses, and not just what you spent and for what. Keep track of who you were with, what you discussed, why you traveled.

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Net Operating Losses (NOLs)

Net Operating Losses can now offset only up to 80% of taxable income, for losses originating since the beginning of 2018 (losses originating prior to that date can offset 100% of taxable income). Additionally, carryback of NOLs is mostly a thing of the past, while carryforward has no time limit (but is capped at 80% of taxable income). Be sure to keep track of when your NOLs originate to determine whether they are capped or not.

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And Don’t Forget Your Personal Income Taxes Too

Of course, the TCJA makes a host of changes to the per-sonal income tax code as well. Rates, especially in the up-per brackets, were reduced, but that’s not the whole story. Other big changes include an increase in the standard deduction, capping of the deduction for state and local taxes, a decreased limit on the mortgage interest deduc-tion, an increase in the child tax credit, and changes to the phaseout of the Alternative Minimum Tax that significantly reduce the number of people who will pay the AMT. There’s definitely plenty to talk about with your tax preparer!

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The bottom line is that a lot has changed. Most of the headlines about the

TCJA have been about the reduced rates, and while it’s true that many busi-

nesses and business owners will see an overall reduction in their tax liability,

the reality is, not surprisingly, much more complicated. Given the amount of

change, the most fundamental piece of advice we’re giving our clients is to

meet with us so we can review the ways the TCJA may affect them and adjust

their tax management strategies accordingly. It’s never too late (or too early!)

to start your tax planning, so if you haven’t talked with your advisor about TCJA

yet, make the call. And if you go to lunch for that meeting, make sure you save

your receipt and categorize the expense correctly so you can get that 50%

deduction!

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