Last week we addressed the biggest tax changes for 2018 as a result of the Tax Jobs and Cuts Act of 2017. If you missed it, check it out here. As promised, we want to inform you of more tax changes that may or may not affect you. Today we want to cover changes that impact businesses and retirement plans.
Corporations and Small Business
- The corporate tax rate is lower and now 21percent. This new rate is a flat rate and the same for all C corporations.
- There is no longer a corporate alternative minimum tax AMT).
- Some pass-through businesses get a deduction
What is a pass-through business?
These entities are defined as S corporations, partnerships and sole proprietorships whose profits pass through to the business owner and they pay income tax on their personal tax returns using a schedule C.
- These entities may be able to deduct up to 20 percent of their business income. This deduction is only available if certain qualifications are met.
- Married filing jointly and taxable income less than $315,000 will likely qualify for the deduction
- Single filler with income less than $157,500 may also qualify for the deduction
- If you have taxable income between $315,000 and $415,000 (married filing jointly) or between $157,500 and $207,500 (single) you may get some portion of the 20 percent deduction
- Income $415,500 or $207,500, your ability to take the any part of the deduction depends on if your business is considered a service or a non-service business
This Is Where Things Get Sticky…
- The Type of Business Owned- Service vs Non-Service
- Service Business
A service business is a business in which you and your employees work primarily providing services.
- Service businesses will phase out of the pass-through deduction once the upper income limit is surpassed.
- Non-Service Business
A non-service business is one in which your business primarily sells products.
- If you own a non-service business, once you reach the income limit, you may still qualify for the deduction but only by the following two calculations:
- 20 percent of your qualified income, or
1. The greater of 50 percent of you W-2 wages or
2. 25 percent of your W-2 wages plus 2.5 percent of your property cost (property or equipment you own)
These definitions of what qualifies as a service or non-service business are not etched in stone. In some cases, it may be in your best interest to change the type of business entity you have. Therefore, it is important to consult with a tax adviser before moving forward with plans.
- There are some business deductions that are no longer available or more difficult to take
Finally, starting in 2018, there are some deductions that many businesses depend on that are no longer available or have stricter requirements.
- Entertainment Expenses
The entertainment of clients is no longer a deductible expense.
- Business Interest
A business can only write off interest expenses that are equal to 30 percent of its adjusted taxable income
- Net Operating Loss Deduction (NOL)
This deduction can only be carried forward and is limited to 80 percent in any year
Employer Retirement Plans
- Maximum elective deferral to retirement plans, e.g., 401(k), 403(b) $18,500
- Catch-up contribution limit for 401(k), 403(b), and 457 plans $6,000
- Maximum elective deferral to SIMPLE IRA plans $12,500
- Catch-up contribution limit for SIMPLE plans $3,000
- Maximum elective deferral to 457 plans of gov’t and tax-exempt employers $18,500
- Limit on annual additions to defined contribution plans $55,000
- Annual compensation threshold requiring SEP contribution $600
- Limit on annual additions to SEP plans $55,000
- Maximum annual compensation taken into account for contributions $275,000
- Annual benefit limit under defined benefit plans $220,000
- Limitation used in definition of highly compensated employee $120,000
- Health flexible spending account maximum salary reduction contribution $2,650
Loss of Deduction for Investment Management Fees
In the past, these fees could be deducted as a miscellaneous itemized deduction
401 (k) Borrowers
401(k) plan borrowers will now have more time to repay the loan if there is a job loss. Borrowers will have until the due date of their tax return for the year they left the job to repay.
We here at Timothy Roberts & Associates, LLC really do hope that this information has been helpful to you. We again direct you to our Tax & Accounting page on our website, www.timothyrobertsllc.com for more information regarding taxes. Follow us on FaceBook and LinkedIn. Finally, stay tuned for next week’s issue of Global Money Solutions. Remember, Your Interest is our Only Interest!