By Ron Kustek, Business Instructor Cabrillo College
You may be curious about the 2017 tax law changes to benefit corporations, or likely one of our many important small business owners that are the heart of our local economy. Either way it’s likely you haven’t had much time to find out how last year’s tax law changes will impact each business. Whether you’re an LLC filing as a C-corp or S-corp, or a typical Corporation, there are some essential ‘need to knows’ to consider during your 2018 operating year.
Before we begin, it is recommended to consult with your tax accountant who specializes in business tax laws so that you are able to take full advantage of the bevy of changes afforded businesses by the recent tax law changes.
Overall, in contrast to the very few and minor tax breaks for individuals which expire on December 31, 2025, the business breaks and provisions generally will not expire, unless there are further changes to the tax laws.
Corporations
First, the corporate Alternative Minimum Tax (AMT) was repealed. The AMT was designed so that no matter how many breaks and deductions a corporation was legally allowed to take, their corporate AMT would have been at least 20%. Consequently, the largest corporations were allowed to keep foreign (non-US profits) ‘off-their-tax-books’ by the US, and effectively paid a rate much lower than 20%, as there was a graduated scale down to 15% – and many corporations paid no taxes at all. From 2018 forward, without an alternative minimum tax, instead of an AMT, a 21% flat corporate tax rate was instituted.
But don’t think corporate taxes increased — the ‘flat corporate tax rate’ of 21% is before deductions.
Depreciation of Purchasing Used Equipment
Prior to the tax change, used equipment was considered differently than new equipment for depreciation. Simply put, the depreciation rate began at only 50% of the acquired cost. Now, both new and used equipment can be depreciated at the same rate — meaning, 100% of the acquisition cost of the equipment you bought, whether new or used. Please note, in keeping with our ‘It’s Complicated’ theme, the depreciation percentage changes in 2023 depending on the industry …
No Entertainment Expenses
Before panic sets in, the only ‘entertainment’ expenses allowed under the new corporate tax law, apply to the 50% limitation for expenses on food and beverages that an employer pays for providing employees an eating facility that meets the minimum requirements for consideration as fringe benefits for the convenience of the employer.
So, if you subsidize and provide a free cafeteria for the benefit of your employees, you are able to still deduct the same 50% of the expenses for that employee cafeteria. However, this is one of the few corporate tax changes that ‘expire’ on December 31, 2025.
The most important part to know is that entertainment expenses associated with or “directly related to the active trade or business” are no longer allowed as deductions. This includes concert or theater tickets, tickets to sporting events, golf outings, club expenses or dues for important clients, etc. These are all no longer deductible.
Limitation on Business Interest
The new tax law limits the net interest expense deduction to 30% of a business’ adjusted taxable income. However, the definition of a “Small Business” is defined as a business with average gross receipts of $25 million or less. So, if you’re making more than $25 million in 2018 and beyond, it is very likely that you already have a trusted accountant who knows the details of the deductible amount of the interest expense from your loans, lines of credit or other financing.
So, there you have it. As we said at the outset, “It’s Complicated” as any relationship — whether taxing or not — can often be. Again, for the full benefits explained and/or to be in full compliance with the new tax laws, it is recommended that you work with a well-educated accountant to process your taxes, so that you legally pay the amount that is owed.
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Ron Kustek is a Business Instructor at Cabrillo College who teaches • Marketing • Starting & Operating A New Small Business • Introduction To Business. If you have any comments or questions for Ron email: [email protected] Subject “Ron Kustek”