Business Tax Reform
The new tax law has a number of changes that affect individual and business taxpayers, but in the end, the tax treatment of investments was hardly touched.
Taxes & Business
Federal tax reform was most dramatic in the business arena, where the biggest change is a sharp drop in the top corporate income tax rate to a flat rate of 21% and a repeal of the corporate Alternative Minimum Tax (AMT).
As a sweetener for multinational companies to bring their cash back into the U.S., the new tax law will drop the repatriation tax rate from 35% to 15.5% on untaxed (by the U.S.) cash-equivalent profits and 8% on illiquid assets. Additionally, most U.S. companies no longer will pay taxes on the amount of income taxed by other countries.
Deductions Pared Back
In return, corporations will see interest deductions capped at 30% of adjusted gross income, although excess deductions may be carried forward. Business entertainment deductions will disappear, as well as those for providing employees with transportation benefits.
Pass-Through Income Tax
One of the highlights of the Tax Cuts and Jobs Act of 2017 is the new treatment of pass-through income.
What is it?
Pass-through income is business income that is “passed through” and taxed at a taxpayer’s individual income tax rate. This contrasts with the treatment of a business structured as a C corporation, whose income is taxed at a corporate tax rate.
New federal law now allows taxpayers to deduct a portion of pass-through business income on their tax returns. Joint filers with income up to $315,000 (and single filers up to $157,500) can deduct 20% of this type of taxable income starting in 2018. The deduction is more complicated for tax filers above that threshold, because it’s limited to the greater of 50% of the business’s W-2 wages or another calculation that includes the cost of acquired property — or 20% of their business income, if that’s less. The deduction phases out between $315,000 and $415,000.
Who Get's it?
Any sole entrepreneurship or business structured as a limited liability company (LLC), partnership or S corporation.
By the Way...
The tax savings this pass-through provision offers taxpayers won’t necessarily apply to state taxes, which may continue to use different formulas to determine your state tax liability. Talk to your tax professional to learn more.