How the Tax Cuts and Jobs Act will affect your business at tax time.

December 22, 2017 ushered in a new era of taxation for American businesses of all sizes. Two highlights of the new Tax Cuts and Jobs Act are a significantly lower corporate tax rate, and a shift to a territorial tax system.

In general, business owners’ responses to the bill have been favorable. However, it didn’t necessarily make compliance any simpler.

5 changes to corporate tax law

The first step in helping your accounting team bring your business under compliance is understanding the broader implications and requirements of the law. Knowing the following five changes to the law will help make tax time 2019 fall gently into place.

  1. A more competitive corporate tax rate. Perhaps the most well received provision of the new bill has been a cut to the corporate tax rate. The bill brings the tax responsibility down on income over $10 million to a flat 21%. This drastic relief effort grants US companies a 4% lower tax rate than the global average.
  2. Foreign income. Currently, earnings from doing business outside US borders faced a double tax. The Tax Cuts and Jobs Act (TCJA) converts corporate taxes into a territorial system, thereby eliminating the double taxation situation created by our current worldwide structure.
  3. Accounting method changes. The TCJA expanded accessibility to cash method accounting. This method is based on actual cash exchanges rather than when income items are earned or expenses are incurred. Corporations and partnerships with average annual gross receipts of $25 million or less will qualify for cash method accounting.
    In addition, those who qualify for cash method accounting will be allowed to consider their inventories as non-incidental materials and supplies and will no longer face the Sec. 263A UNICAP requirement.
  4. Business credits. Several changes were made to business credits in the TCJA.
  • The Sec. 45C orphan drug credit was reduced from 50% to 25%.
  • Changes to the employer credit for paid family or medical leaves enable employers to claim 12.5% of the wages paid during such leaves—as long as the company already pays at least 50% of the employee’s normal wages.
  • Modifications to Sec. 47 allow for the repeal of the 10% rehabilitation credit for buildings built before 1936, while maintaining the 20% credit for restoring historical structures—if they’re claimed over a five-year period.
  1. The new inflation. This is interesting—the TCJA reforms the way inflation is calculated. Prior to the TCJA, inflation was gauged by the consumer price index for urban consumers (CPI-U). As of 2018, inflation will be computed via the Chained CPI. The Chained CPI increases at a slower rate than the CPI-U, therefore preserving tax bracket thresholds, deduction and eligibility limits, as well as other areas of taxation affected by inflation.
  1. Covered employees. Revisions to Sec. 162(m) expanded the definition of covered employees to include the principal executive officer and the principal financial officer. In contrast to this expansion, the remaining employees covered are now limited to the three highest paid officers of the tax year.

Things are still settling

With such sweeping changes, the IRS has a full workload. Incorporating them into the tax code by their effective date is unlikely. That leaves business owners in uncertain territory. Fortunately, the financial advisors at No Boundaries are prepared.

Our advisors understand how each of the new provisions will affect business of all sizes. For more information on complying to the 2018 tax requirements, we encourage you to connect with us at your earliest convenience.

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