How the New Tax Law Affects C Corporations

The Tax Cuts and Jobs Act (TCJA) made significant changes to the federal tax law, including a significant decrease in the corporate tax rate.

Beginning in 2018, the tax rate for c-corporations is a flat rate of 21%. This is great for existing corporations, as they were previously taxed at rates up to 38%.

But what if your business is not currently classified as a c-corporation? Does it make sense to switch entity types to take advantage of the new, lower rate? The answer is it depends. Every business is different, and their tax situation should be analyzed carefully before making a decision on an entity change.

However, it is important to note some factors that should go into this decision. One is that c-corporations are still subject to double taxation. This means that the corporation pays income tax at the entity level. Then, if the owners take the profit out of the company, they are then taxed on that distribution as dividend income or compensation. Thus, the profit of the company has now been taxed twice.

In addition, one of the other changes in the TCJA is a new 20% deduction on pass-through business income. If your business is classified as a pass-through (including sole proprietorship, partnerships, and s-corporations), you may be eligible for this deduction which would lower the tax on your business income.

There are other tax and accounting changes that may be required to change to a c-corporation, so it is very important to consult your tax advisor regarding this decision.

If you have any additional questions, please contact Rebecca Bischoff, CPA at 314-576-1350 or rbischoff@bwtpcpa.com.

2018 Itemized Deduction Changes

Due to the recent tax law changes, many more taxpayers will be taking the standard deduction vs itemizing for 2018. The standard deduction  for 2018 is $24,000 for married filing jointly taxpayers (up from $12,700 in 2017). Significant changes to itemized deductions take effect this year. In order to itemize your deductions, the total of those must exceed the allowed $24,000.

  • Medical Expenses – remain deductible to the extent they exceed 7.5% of AGI (must exceed 10% of AGI beginning in 2019).
  • State & Local Taxes (includes state income tax, real estate tax and personal property tax) – limited to $10,000 for both single and married filing jointly taxpayers.
  • Mortgage Interest – interest on loans up to $750,000 of new acquisition debt.
  • Charitable Contributions – the 50% limitation has been increased to 60% for 2018.
  • Miscellaneous – expenses that exceeded 2% of AGI that were deductible have been eliminated. Employee business expenses, investment advisor and tax prep fees are no longer included as itemized deductions.
  • Phase Out – high income taxpayers were subject to phase out limits of itemized deductions previously but the phase out has been eliminated for 2018 – 2025.

 

For further information regarding tax law changes, please contact Jaclyn Ellis, CPA at jellis@bwtpcpa.com or 314-576-1350.

W-2 and 1099s Due Date Reminder

With the coming of a new year means W-2s and 1099s are due right around the corner. The due date for both is January 31, 2019. You will need the following information in order to accurately and timely report your 1099s:

  1. Social Secuirty Number or Federal Identification Number
  2. Individual of Business name
  3. Current address of person or business that will require a From 1099.

 

Additionally, you will want to verify the information on your employee’s W-2 forms. Ensure the following is accurate:

  1. Each employee’s Social Security Number
  2. Name is as it appears on their Social Security card
  3. Current address

 

If you need our help preparing and reporting your W-2s and 1099s for your business, please contact Mike Dempsey, CPA at mdempsey@bwtpcpa.com or 314-576-1350.

Is Your Business A Specified Service Business?

Tax deduction

The Tax Cuts and Jobs Act (TCJA) created a new deduction for qualified business income. However, business income that comes from a specified service business is not eligible once taxable income reaches a certain limit.

So, what is considered a specified service business? The IRS definition includes businesses that involve performance of services in the field of health, law, accounting, actuarial science, performance arts, consulting, athletics, financial services, or brokerage services. The term also includes businesses that participate in investing, trading, or dealing in securities. Architecture and engineering businesses are excluded from the definition of specified services.

To help further define these specified service business categories, the IRS issued guidance on what would or would not be included  in the definition. Below is a table which illustrates two of the categories:

Field

Includes

Excludes

Health Physicians, pharmacists, nurses, dentists, veterinarians, physical therapists,  psychologists, other similar professionals providing medical services to patients Health clubs or spas, payment processing, research, testing, and manufacture and/or sales of pharmaceuticals or medical devices
Consulting Providing professional advice and counsel to clients to assist the client in achieving goals and solving problems Sales, providing training and educational courses, consulting services ancillary to sale of goods in a business that isn’t a specified service business if no separate payment for the services

 

There are also additional rules that could make a non-specified service business be treated as one, if it provides services to a specified service business and they are both owned by related parties.

If you have any additional questions, please contact Rebecca Bischoff, CPA at 314.576.1350 or rbischoff@bwtpcpa.com.

Are You Eligible for the New Business Income Deduction?

The Tax Cuts and Jobs Act (TCJA) made significant changes to the tax law, most notably the addition of a new deduction for qualified business income.

Qualified business income includes the ordinary income from sole-proprietorships, single-member LLCs, partnerships, S-corporations, and some rental income. It does not include wages, guaranteed payments, or investment income.

If you do have qualified business income, your eligibility for the deduction depends on the type of business and your personal taxable income. If your taxable income is below $315,000 for married taxpayers filing jointly ($157,500 for other filing statuses), you are eligible for the deduction regardless of your type of business.

If your business is a specified service business, you are not eligible for the deduction if your taxable income is over $415,000 for married taxpayers filing jointly ($207,500 for other filing statuses). A specified service business is a business which involves the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services.

If your business does not fall under the definition of a specified service business, you are eligible for the deduction when your income is over $415,000 (or $207,500), subject to certain limitations. The same is true when your taxable income is in the phase-out range of $315,000 to $415,000 (or $157,500 to $207,500).

If you have any additional questions, please contact Rebecca Bischoff, CPA at 314.576.1350 or rbischoff@bwtpcpa.com.