Tax changes for businesses

How the tax reform affects your business taxes

Tax reform of 2017 will have a significant affect on almost every business and individual starting in 2018 tax season. Before you file your tax return, consider the following information: 

  1. Bicycle Commuting - The $20/month commuting reimbursement by bicycle is now eliminated through 2025 and any reimbursement or payments made toward bicycle commute are taxable income to the employee, subject to payroll taxes. 
  2. Corporate Tax Rates - The tax reform has permanently cut the top C Corporate tax rate from $35% to 21%.
  3. Pass-Through Businesses - Owners of businesses setup as Partnerships, S corps, LLC's and Sole Proprietors can deduct up to 20% of their qualified business income. Single individuals earning up to $157,500 and married couples earning  up to $315,000 are eligible for the biggest deduction and tax savings. This is also known as the Section 199A deduction. Not without exception, this deduction has limits based on income and type of business. For more information refer to the IRS publication.
  4. Bonus Depreciation Deduction - Although the rules for depreciation can be complex, the new 100% bonus depreciation is now available for property placed in service after Sept. 27th, 2017 and before Jan. 1, 2023. 
  5. Entertainment Expenses - The new law eliminates the deduction for expenses incurred for entertainment, amusement or recreation. This law does not affect the meal deduction if the business owner or employee is present at the meal and the expense is not lavish or extravagant. 
  6. Business Interest Limit - Businesses whose average annual sales are less than $25 million can only deduct up to 30% of the company's EBITDA (earnings before interest, taxes, depreciation and amortization). 
  7. Like Kind Exchanges - Only exchange of real property property used for business or held as an investment qualifies for the non recognition of gain. Like kind exchanges of improved or unimproved property qualify for like kind exchanges. But real property in the US exchanged for real property outside of US does not qualify for the like-kind exchange. 
  8. Settlements For Sexual Abuse or Harassment - Payments made and legal fees arising from settlement due to sexual abuse or harassment are now non deductible if the claim is attached to a a NDA (non disclosure agreement).  
  9. Net Operating Losses - The tax reform has eliminated the requirement of carrying back losses 2 years and 20  years forward. Instead there is no limitation on how long the net operating losses can be carried and used but the deduction is limited to 80% of taxable income (without regard to the deduction) with the balance carried forward indefinitely. 
  10. Excess Business Losses - For non corporate taxpayers (refers to S Corps, Sole Proprietors, Partnerships) losses in excess of $250,000 for single individuals and $500,000 for married jointly must be carried forward indefinitely until they are completely used up. 
  11.  New Deduction For Certain Assets - Under the new tax reform a business may deduct the entire cost of certain (Section 179) property, which is used in the active conduct of one's trade or business, that is not a building or land. The maximum deduction increased from $500,000 to $1 million with the new higher phaseout from $2 million to $2.5 million. Included in the definition of the property subject to this deduction are interior improvements, which also include a new roof, HVAC, fire protection systems, alarms, etc. Property expansion, elevators and improvements to internal structures of buildings are not eligible for the deduction. Improvements to restaurants and retail establishments are now subject to longer depreciation period of 39  years, rather than the old 15 year recovery. It's also not subject to bonus depreciation.   

Additional Changes

  • Luxury Auto Depreciation - The deduction for luxury vehicles increased to $10,000 for the first year and up to $18,000 if claimed with the bonus depreciation
  • Moving expenses - Reimbursements for moving paid by an employer is now subject to income and employment taxes to the employee and the employer.
  • Credit For Family / Medical Leave - Wages paid to an employee while on medical or family leave up to 12 weeks per taxable year qualify for a credit based on a percentage of wages between 12.% up to 25%.
  • Accounting Method - Starting in 2018 businesses with an average annual sales under $25 million can now use the cash basis method of accounting. This also applies to businesses with inventories and long term contracts. Prior to Dec. 31, 2017 only businesses with an average annual sales of $5 million or less could use the cash method. 
  • Credit for Property Rehab -  The 20% credit for qualified rehabilitation of historic property is now deductible over five years, rather then 1 year. 
  • Investment in Opportunity Zone - Expenses for investing in economically distressed communities that qualify for the preferred tax treatment can defer capital gain if the gain is reinvested into a qualified opportunity fund. 



How the tax reform affects your personal taxes

  1. Employee Expenses -  The temporary suspension of the un-reimbursed employee expenses. Although not as common for many self employed individuals, the elimination of these expenses will have a greater impact on employees working independently such as those in sales, fashion, production, etc.  
  2. 529 Education Plan - Starting in 2018, the education plan now allows families to use payments towards private K to 12th schooling. These plans can be used towards public, private or religious schools. Up to $10,000 can be withdrawn from the plan per student. 
  3. Standard Deduction - Every filing status will enjoy a higher standard deduction which will reduce your taxable income. For many this change will reduce their taxes.  
  4. Alimony Payments - The tax reform eliminated the deduction of alimony payments made to an ex-spouse. The recipient does not claim these payments as income. The new rule affects divorces or separation agreements starting on Jan 1, 2019.
  5. Alternative Min. Tax -  Maximum AMT rate dropped from 39.6% to 28%.  The new AMT threshold kicks in when the AMT income riser above $191,500 for married couples filing jointly and $$95,750 for others. 
  6. Child Tax Credit - Effective Jan 1, 2018 the child tax credit doubled to $2000 per qualifying child. The credit phaseout has been increased allowing more couples with children an opportunity to reduce their taxes while earning more money. 
  7. Personal Exemption - The $4050 deduction for each member of your household is no longer available. However, the increase in the standard deduction will buffer some of the negative effects on some people. Unfortunately, this will have some negative impact on some taxpayers, especially those with kids or other qualified dependents.
  8. Limit On the SALT Deduction (State and Local Taxes). Although you will still be able to write off your state and local taxes, it is now limited up to $10,000. For taxpayers who paid income taxes and property taxes, only up to the threshold amount will be deductible. 
  9. Primary Home Residence Sale - The gain exclusion on primary residence is not taxable provided the individuals lived there for 5 of the 8 years prior to the sale.  Prior to 2018 the exclusion applied provided the individuals lived there at least 2 of the last 8 years prior to the sale. 
  10. Medical Expenses - The threshold deduction for medical expenses was reduced from 10% to 7.5% for all taxpayers. 
  11. Tax Preparation Fees - Tax preparation fees are not deductible from Jan 1, 2018 to Dec.31st 2025.
  12. Investment Fees - Costs for financial advisers and investment brokers deductible prior to 2018 are now entirely eliminated through Dec. 31, 2025. 

Additional Changes

  •  Mortgage Interest - Interest on home mortgages taken after Jan 1, 2018 are deductible on loan amount up to $750,000. Interest on home loans prior Dec. 31, 2017 follows the old rule of $1,000,000 threshold limit. Interest on home equity line of credit is deductible as long as the proceeds were used to buy, build, or substantially renovate the home.  This rule wills stay in affect until 2025.
  • Moving Expenses - These are suspended for all taxpayers, except the members of the military until 2025. 
  • Personal Casualty / Theft Losses - The only personal casualty deduction allowed are those occurring during a federally declared disaster through 2025. 
  • Student Loan Debt Discharge - Student debt discharge due to death or disability will not have to be reported as taxable income through 2025. 
  • New Tax Brackets - The tax rates for tax payers dropped, including the top earners whose rates fell from 39.6% to 37% . These brackets are due to expire in 2027.