The new tax law is great news for favorable for small business. Owners of pass-through entities deduct up to 20 percent of their business income on their personal tax return, subject to certain limits. Increased deductions for capital expenditures will shield income for property owners who make capital investments and improvements in properties.
The new pass-through deduction will benefit business owners holding title through partnerships, LLCs, and S-Corps generating qualified business income. Rental properties with net income after amortization and depreciation will receive a 20 percent deduction on net income or a 2.5 percent deduction on your property’s unadjusted basis. The pass-through provision is quite complex, but there are some planning opportunities for small businesses willing to navigate the new rules. There are special limitations for “personal service firms”, and all businesses are subject to limitations. There is a two-part formula limitation, which is based on the greater of either 50 percent of wages or 25 percent of wages plus 2.5 percent of the basis of the business’ “qualified property.”
The new tax law will allow many businesses to fully expense qualified new and used property, with a recovery period of 20 years or less, acquired after Sept. 27, 2017, and before Jan. 1, 2023. This is a major tax benefit for them and may favorably impact returns to business investors.
Under the previous tax rules, the bonus depreciation deduction was limited to 50 percent of the eligible new property. The new tax law allows bonus depreciation and immediate deduction of 100 percent of eligible property placed-in-service after September 27, 2017, and before January 1, 2023. These amounts are indexed for inflation for taxable years beginning after 2018.
The new tax law expands the definition of section 179 property to include certain depreciable tangible personal property improvements made to nonresidential real property as long as the improvements are placed in service after the date the building was first placed in service. Also, the deductible amount that can be expensed has doubled, from $500 thousand to $1 million. This is great news for small businesses. Owners of non-residential properties can take advantage of Section 179 for fire systems, security systems, roofs, and HVACs. When the 100 percent first-year bonus depreciation isn’t available, the Sec. 179 tax deduction provides similar benefits.
For C Corporations, the income tax rate permanently drops to 21 percent, starting in 2018. However, the interest expense deduction is reduced to 30 percent of earnings before interest, taxes, depreciation, and amortization for four years, and 30 percent of earnings before interest and taxes after that. Net operating loss (NOL) carrybacks are eliminated, and NOL carryforwards are up to 80 percent of taxable income. For businesses operating abroad, there is a newly deemed repatriation of currently deferred foreign profits, at a rate of 15.5 percent for cash and cash-equivalent profits and 8 percent for reinvested foreign earnings.
Steve Moskowitz and his dedicated team of tax attorneys, CPAs, enrolled agents and professional staff are here to help business and individual clients across the country and overseas to resolve a wide variety of tax matters. The Moskowitz LLP tax law firm (www.moskowitzllp.com) is a powerful ally in their clients’ quest to resolve tax issues, providing ongoing tax support and tax return preparation, and empowering clients to feel confident and prepared for the future of their dreams.