Top 7 Questions on Tax Reform
From converting to a C corporation to the new meals and entertainment rules and beyond, the 2017 Tax Cuts and Jobs Act has touched business of all sizes. In this episode of “The Bottom Line,” EisnerAmper manager Tim Schuster talks about the seven questions he’s receiving the most from clients on tax reform.
Dave Plaskow: Hello and welcome to The Bottom Line. This podcast examines the everyday business and finance issues faced by closely held and private businesses. We hope to provide you with news you can use, in what we like to think of as a jargon free zone. I’m your host Dave Plaskow and with us is Tim Schuster, a manager in EisnerAmper’s Private Business Services Group. Today, we’ll discuss with Tim the most common questions he’s receiving from clients concerning tax reform. Tim, hello.
Tim Schuster: Dave, it’s good seeing you.
DP: So tax reform has certainly touched businesses of all sizes, across all industries, I mean, it’s really, it, its, its tentacles go long and wide.
TS: Oh, it’s beyond anything that we’ve seen in at least thirty plus years.
DP:Yeah, so you and I have come up with a top 7 list of business tax reform questions you’re receiving from clients. So let me start with the first one. If I’m an LLC or an S corp, should I convert to a C corp?
TS:So it’s astonishing actually how many questions I’ve received from clients in regards to this. Really, they shouldn’t either convert to a C or revert back to being a C. So, while yes, the new C corp rates are favorable, and really, this is what kind of stirs the conversation is, wait a second, it’s 21% now - why would I not convert? C corps are still subject to double taxation. So, the profits of the corporation are taxed and dividends distributed to the owners are taxed as income on the individual level. You know, another reason to also not be a C corp is if you decide to sell your business down the road, you would be subject to double taxation on the sale. So your assets are taxed in the entity when it’s sold and then it’s taxed when the corporation is liquidated.
DP:Ok. Now number two is one that I’m hearing a lot – that’s the new meals and entertainment rules. Tell us about that one.
TS:There are a lot of changes with this as well, but I also want to start by just saying that I do come bearing good news. So office holiday parties are still 100% deductible. Oh yeah.
TS:The meals purchased while entertaining clients are still 50% deductible. Unfortunately that’s where the good news ends. There is no longer a 50% deduction on entertainment expenses. Also, meals provided for the convenience of an employer are now subject to 50% deduction where it used to be 100%.
DP:Ok. Now, this third one I haven’t heard much about, so why don’t you enlighten me…
DP: … on the domestic production activities deduction.
TS:Absolutely. So, unfortunately – and if you’re in the manufacturing realm, this was a very, very popular deduction – this has been completely eliminated starting in tax year 2018. In the past, manufacturers used to receive a 9% deduction from income derived from U.S. production activities. Congress had to make up the deficit somewhere.
DP: Ok. Number four – the new depreciation rules.
TS: Sure. There’s a lot of changes with this as well, and actually very favorable for taxpayers. So the new rules went into effect retroactively to September 27, 2017. So you can benefit from these new rules so long as the assets were placed in service after that date, or on that date as well. So the new depreciation rules will be favorable until at least 2022. 100% bonus is back. After 2022 the bonus depreciation is scaled back by 20% each year. This break on bonus depreciation is applied to assets with a useful life of twenty years or less, and the assets can be used or new. This is huge by the way.
TS: Section 179 saw an increase as well – up to $1 million. This limitation phases out dollar for dollar once you hit $2.5 million of qualified purchases.
DP:Ok. Number five – I feel like Dave, Dave Letterman here. Net operating loss rules.
TS:So the old rules were you would carry back your NOLs – net operating losses – first, to the second prior tax period if you had taxable income, then carry forward up to twenty years. The new rules, effective for years beginning after December 31, 2017 are, that two year carry back, are completely repealed. NOLs generated after December 31, 2017 are eligible to be carried forward indefinitely. But there is a huge caveat with that – you are only allowed to deduct up to 80% of taxable income in future years, so you cannot directly write off all of your NOLs being carried forward.
DP: Now, if I was on the cash method of accounting can I maintain that?
TS:Of course. Actually, in fact the new law expanded on this and more taxpayers are able to benefit. You’re allowed to be on the cash method of accounting if your average gross receipts are $25 million or less in the preceding three tax years.
DP:And finally, how does the new interest deduction work?
TS:So this change is huge for taxpayers who have high interest expense from each year. I honestly would expect to see this a lot in the real estate industry. So, interest deduction is limited to 30% of earnings before interest, taxes and depreciation amortization, or EBITDA. Any amounts disallowed may be carried forward indefinitely. If you are a taxpayer where your average gross receipts are less than $25 million for the proceeding tax… for the proceeding three tax years, then you’re exempt from this limitation. Have you guys noticed recently a trend with the look back period being three proceeding years?
DP:Ok. Well Tim, thanks for bringing some clarity to that for us.
TS: It’s my pleasure.
DP: Now let’s lighten the mood a little, and give us one of your New Jersey Historical Society fun facts.
TS:This is actually one of my favorites. Did you happen to know that New Jersey used to be two separate states at one point?
TS:So, it used to be East and West Jersey from the years 1674 to 1702. In fact, if you’re in the Princeton area, and drive on Province Line Road, this road used to be the dividing line between the states.
DP:Interesting. Well thanks again Tim for all this valuable information.
TS: My pleasure.
DP:And thank you for listening to The Bottom Line, as part of the EisnerAmper podcast series. If you have any questions or there’s a topic you’d like us to cover, email us at email@example.com and visit EisnerAmper.com for more information on this, and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.
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