Understanding New Tax Law Changes for Business Owners

by Leo H. MacDonald, Ronald E. Rucker, Brad D. Zimmerman

Even long-tenured business owners are finding themselves with new questions at tax time this year. Millions are navigating for the first time the changes in tax law that took effect in 2018 under the Tax Cut and Jobs Act of 2017. For those with pass-through businesses – such as sole proprietorships, partnerships, LLCs and S-corps – the question of whether their taxes went up or down isn’t always entirely clear.

In a pass-through business, the income “passes through” to the owner or owners and are taxed on their individual income tax returns. Pass-through businesses represent the vast majority of businesses in the United States. Because they are affected by both corporate and individual tax systems, the net impact of the tax reform law can be confusing, to say the least.

Here are several key deduction changes business owners will want to be aware of:

• Section 199A, a.k.a “The Pass-Through Deduction”
o This section of the tax act allows for a deduction of a portion of qualified business income (QBI) from pass-through entities. It is viewed as one of the most valuable new tax breaks, and is something business owners will not want to miss.

o QBI is the business’s total bottom-line profit, adjusted for deductions related to the business such as self-employed health insurance, self-employment taxes, and self-employed retirement contributions. For total taxable income below $315,000 for joint filers and $157,500 for others, the deduction is 20% of QBI less net capital gain. For income over these thresholds, additional restrictions will apply that limit the deduction.

• Separation of businesses
o There are certain situations where business owners with multiple business or business lines may find it advantageous to aggregate their businesses or separate their businesses to capture the most benefit from the QBI deduction. This move can make sense for business owners with taxable income high enough to be subject to deduction limitations. But, certain criteria must be met for aggregation or separation.

• Business entertainment expenses
o Business owners that do a lot of entertaining will find that deductions for entertainment, amusement, recreation, and membership dues have been eliminated. Prior to 2018, up to 50 percent of these expenses were deductible. Meal expenses related to operating a business are still deductible up to 50 percent. Providing food and drink on-site to employees was previously fully deductible, and now in most cases will be subject to the 50 percent limitation.

• 100% Bonus Depreciation
o Many business owners take advantage of depreciation deductions which allow them to write off assets of the business as they become obsolete. Previous IRS laws placed more limits on how much depreciation could be deducted the first year the asset is placed in service. But now, the new tax law allows business owners to immediately deduct 100% of the cost of certain assets in the first year of service. This applies to depreciable business assets with a recovery period of 20 years or less such as computers, equipment, machinery, appliances and furniture.

•Estate Exclusion Deduction
o Though not directly related to the operation of a business, business owners who achieve a high net worth are often concerned with what they will pass along to their heirs. Under previous tax laws, an estate valued at more than $5.49 million per person and $10.98 million per couple was generally subject to a tax rate of 40 percent when it was passed onto their descendants. The new tax reform bill basically doubles the exclusion amount to $11.4 million for individuals or $22.36 million for married couples for 2019. Consequently, with proper planning, business owners with estates valued under those exclusion amounts pass their businesses and financial legacy estate tax free – at least for now.

o The estate tax exclusion amount will return to $5 million (adjusted for inflation) in 2026. The 199A provision, along with most of the other tax changes, will also expire without intervention by Congress.

All of the changes discussed in this article are subject to different variables, restrictions, and limitations that will be unique from business to business. Working closely with a team of tax attorneys and CPAs provides customized, strategic guidance to each business.

Leo H. MacDonald, Jr. is an attorney at Carmody MacDonald and concentrates his practice in taxation, estate planning and business law, typically serving closely held businesses, not-for-profits and wealthy individuals.
Ronald E. Rucker is an attorney at Carmody MacDonald and concentrates his practice in taxation, estate planning and business law. He also serves as a board member to several corporations and frequently lectures on business law and tax issues.
Brad D. Zimmerman is an attorney at Carmody MacDonald and focuses his practice in the areas of taxation, estate planning and business law.
This column is for informational purposes only. Nothing herein should be considered legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely upon advertisements.