Tax year 2018 has been all about tax saving plans and new tax strategies due to tax reforms that kept moving back and forth from proposal to final stage. Now that most of the tax regulations have been finalized, here are some tax reforms that business owners should be aware of, and prepared for, so that they can prepare for the 2019 tax season accordingly.
2019 Tax Season Tax Tips for Business Owners
Limitation on Carried Interest
Carried interests allow an individual to have ownership interests in a partnership and receive a share of the net profits. These interests are often issued to investment managers as a form of payment for their services. The advantage of having carried interest is that the income is considered capital gains, which is taxed at a lower rate than ordinary income.
Under the Tax Cuts and Jobs Act (TCJA), the holding period for certain carried interests has been extended to 3 years, and is effective for tax years beginning after December 31, 2017.
Deduction for Pass-through Entities
With the reduction in the corporate tax rates, investors in pass-through entities were disadvantaged as these entities did not receive benefit of a reduced tax rate. To compensate, the government recently finalized a 20% deduction known as the “Qualified Business Income Deduction” or ‘Section 199A’ deduction under the TCJA. Taxpayers that earn business income through sole proprietorship, partnerships, trusts, and S-corporations may qualify for this deduction. Qualifying taxpayers can claim it for the tax year of the entity beginning after December 31, 2017. This means most taxpayers will make a claim beginning with the 2018 tax year (i.e. while filing their 2018 tax return in 2019).
In order to qualify the business income must be income from a U.S. trade or business within the United States. Incomes, such as wages, capital gain, interest and dividend income do not qualify for this deduction. Also, special rules apply if the taxpayer’s income is greater than $315,000 if filing as ‘Married filing Joint’ and ‘$157,500’ if filing as ‘Single’ or ‘Married Filing Separately’.
Previously, 50% of an entertainment expense was allowed as a deduction from business income. The new laws, have disallowed deductions for entertainment, amusement or recreation expenses. Any commuting expense incurred to carry out these activities are also disqualified from being deducted.
The 50% deduction for meals is still available, therefore, if the expense includes a meal and attendance at an event, only the meal portion would be deductible, The food and beverages must be purchased separately from the entertainment, or the cost of the food or beverages must be stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
Section 179 Expensing
A taxpayer is allowed to expense certain property purchased and deduct the cost in the year the property is placed in service under Section 179.
The TCJA increased the maximum deduction limit for Section 179 Expensing from $500,000 to $1 million. The phase-out threshold limit has also been increased from $2 million to $2.5 million. These amounts are subject to inflation adjustments on an annual basis.
Additionally, under the new law, the definition of eligible property was expanded to include the following improvements made to non-residential real property after the date when the property was first placed in service:
- Qualified improvement property, which means any improvement to a building’s interior. However, improvements do not qualify if they are attributable to:
- the enlargement of the building,
- any elevator or escalator or
- the internal structural framework of the building.
- Roofs, HVAC, fire protection systems, alarm systems and security systems.
Note that these changes apply to property placed in service in taxable years beginning after December 31, 2017.
Furthermore, the limit for bonus depreciation, that allows businesses to write off most depreciable business assets, has temporarily been increased from 50% to 100% for qualifying property, which were bought and placed in service after September 27, 2017 and before January 1, 2023. Qualifying assets placed in service before September 28, 2017 still qualify for the 50% deduction not 100% as under the new rule.
The new law also expanded the definition of property eligible for bonus depreciation to include used property. Prior to this change, bonus depreciation was only available for new property purchased.
Business Interest Expense Limitation
Earlier, under Section 163(j), a deduction for non-qualifying interest paid or accrued by a corporation in a taxable year were disallowed even if they met the threshold tests of having a debt-to-equity ratio of 1.0 to 1.5 (safe harbor ratio), and a net interest expense of more than 50% of adjusted taxable income.
The updated Section 163(j) limitation, under TCJA, now limits the annual business interest expense deduction limit to any business interest income plus 30% of the adjusted taxable income. Disallowed interest may be carried forward indefinitely.
Employer Credit for Paid & Family Medical Leave
Employers, who provide paid leaves to their full-time employees for medical or other qualifying family reasons, may qualify to claim a general business credit for providing paid medical and family leaves to employees. The tax credit can range from 12.5% -25% of wages paid to an employee while on family and medical leave for up to 12-weeks per taxable year. Employers are required to have a written policy on this paid leave for medical and family reasons.
The credit applies to wages paid in taxable years beginning after December 31, 2017, and before January 1, 2020.
Rehabilitation Tax Credit
The new legislation kept the Rehabilitation Tax Credit, however, it now requires taxpayers take the 20-percent credit on a pro-rata basis over five years instead of in the year they placed the building into service and eliminates the 10 percent rehabilitation credit for the pre-1936 buildings. This provision is effective for amounts that taxpayers pay or incur for qualified expenditures after December 31, 2017.
Proper and early tax planning can help save on taxes; consult a tax specialist to help strategize a tax plan tailored for your business.
Check out our article on tax compliance for a US Person with ownership in Foreign Corporations here.
AG TAX LLP CAN HELP
If you have any other tax-related queries, and/or need assistance with tax planning/filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
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We can assist with:
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