As part of a two-part series, we’re providing you with a few more tax law changes that reveal how the Tax Cuts and Jobs Act (TCJA) impacts your company. In our September blog, we discussed a few of those impacts: C-Corps, NOL, Corporate Alternative Tax, DPAD and Bonus Depreciation.
Read below to learn four new ways your company may benefit from TCJA.
Deduction for Passthrough Businesses
The 2017 tax act includes a 20% deduction for passthrough businesses (or Qualified Business Income deduction). This deduction is available for tax years beginning after December 31, 2017.
This means many owners of sole proprietorships, partnerships, trusts/estates, S Corporations, Schedule C, rental activities REITs and Cooperatives can deduct expenses up to 20% of their qualified business income (QBI).
To determine QBI, you’ll calculate the net amount from qualified items of income, gain, deduction and loss from any eligible trade or business. Items included must tie to a US trade or business. Items excluded include capital gains and losses, certain dividends and interest income.
Businesses are now able to write off most depreciable business assets in the year the company places them in service. The 100% depreciation deduction applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture qualify. A taxpayer may elect to expense the cost of any section 179 property. They can then deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million.
While the maximum deduction for depreciations generously increased, TCJA disallows employer deductions for fringe benefits. It eliminates the deduction for expenses related to entertainment, amusement or recreation. However, taxpayers can continue to deduct 50 percent of the cost of business meals. To do so, the taxpayer or an employee of the taxpayer must be present and meet other conditions.
The backup withholding rate is a federal tax withheld on certain types of income. This rate ensures that the IRS receives taxes due to them. The TCJA reduced the backup withholding rate to 24%.
In most cases, taxpayers are exempt from backup withholding but there are instances when it becomes mandatory. The IRS requires payments from backup withholding when the following conditions are met:
- The payee provided an incorrect Tax Identification Number (TIN) on Form W-9
- The IRS notifies the payer that the TIN is incorrect or does not match their records (B Notice)
- The IRS notifies the payer of the understatement of income by the payee on his income tax return (C Notice)
Often, payments subject to backup withholding include interest, dividends, rent, non-employee or independent contractor payments, royalties, payments from brokers on stock and bond transactions, and payments from fishing boat operators.
The payer reports amounts collected on Form 945, by January 31st. This must be the following year after payment. Each payee reports total amounts withheld on Form 1099. The payee will then report the amounts withheld as tax credits on their income tax return.