January 10, 2018
by Dean Zerbe, former Senior Counsel to the U.S. Senate Finance Committee and alliantgroup National Managing Director
The balloons have dropped, the signing ceremony is over and the dust is beginning to settle on the tax reform bill signed into law. For small and medium business owners there is good news, some not great news — and certainly important tax planning opportunities that they should consider to keep more dollars in their pocket to grow their business and create jobs.
The New Law And Small and Medium Businesses
For business owners organized as passthroughs (LLC, partnership, (most) S Corps) there is certainly good news with Congress providing (generally) a 20% deduction of qualified business income (potentially capped depending on the type of business). In addition, passthrough businesses will benefit from a number of other provisions, including the reduction in the rates and AMT relief.
However, Congress also cut back significantly on certain deductions — limiting deductions for state and local taxes (up to $10,000); interest on mortgage debt (capped at debt in excess of $750K going forward); and other miscellaneous expenses. In addition, a big revenue raiser has been overlooked — disallowing active passthrough losses in excess of $500,000 for joint filers (raises $150 billion over ten years).
The expansion of 179(d) expensing was increased from $500k to $1 million with a phaseout at $2.5 million up from $2 million). On the other hand, businesses see the elimination of Section 199 — the domestic production deduction (especially beneficial for manufacturers). Both permanent law.
Important to bear in mind that most of these provisions for individuals and passthroughs expire after 12/31/25 (with a few exceptions, such as a new measure for inflation – permanent law). The doubling of the estate credit also expires in 12/31/25. By contrast, most of the corporate provisions are permanent law. The hope for Republicans is that they will come back and make these provisions for individual/passthroughs permanent. We will see.
Planning To Maximize Tax Savings
At the end of the day, with the tax cuts and the tax increases — its four yards forward and two yards back — certainly there are benefits for business owners, but owners are also losing previous deductions. To ensure that business owners maximize their tax savings from the new law — it is important to sharpen the pencil. The tax bill did eliminate a number of credits and incentives but it also kept in place some important ones as well. In addition to 179(d) mentioned above and bonus depreciation — other key tax provisions for business owners to look at include:
Research and Development (R&D) Tax Credit
The R&D tax credit enjoys significant bipartisan support in Congress and also the administration. The new law preserves the recently enacted AMT turnoff for the R&D tax credit — allowing companies to take the R&D tax credit against AMT. At alliantgroup, we have found this change in law has been a massive game changer with hundreds, if not thousands of companies across the country now being able to utilize the R&D credit for the first time. In addition, the expansion of individual AMT relief included in the legislation will provide some help for business (and the elimination of the corporate AMT will be a significant help for many smaller C Corps to utilize both current R&D tax credits and pre 2016 R&D carryforwards — because those carryforwards will no longer be limited by AMT — recall you can amend open years).
The key though, as always, with the R&D tax credit is for business owners to understand that Congress intended this tax benefit (the largest federal tax credit for businesses) to be available for a broad range of industries. While there are hoops and ladders to qualifying (it is tax afterall) a broad range of industries can potentially qualify for the R&D tax credit — such as manufacturing, agriculture, software, architecture, engineering, construction, system integrators, etc — engaged in both applied R&D as well as basic R&D. In addition, many states have an R&D tax credit as well — so a chance to possibly lower your state taxes as well.
One note, the provision in tax reform requiring amortization of the R&D expenditures starting in 2022 was a last-minute plug-in to help make the books balance for tax reform and is essentially an orphan with no supporters in Congress and is expected — similar to the Cadillac tax in health reform — to never actually see the light of day (either eliminated or continually delayed).
Incentive For Exporters (IC-Disc)
I have written in the past about this key export incentive that primarily benefits small and medium businesses. The IC-Disc was in the cross- hairs to be eliminated in tax reform (it was on the chopping block in the Senate tax reform bill) — but miracles — the Congress called the calling off off. If your company exports (or the widget it makes is included in something bigger that is exported — think of the engine on a plane sold overseas); does architectural / engineering work for buildings located outside the U.S.; sells software outside the U.S. — the IC-Disc is a potential big tax savings.
Incentives For Hiring
Another last-minute provision that was saved from the ax in tax reform is the Work Opportunity Tax Credit (WOTC) — essentially a hiring incentive for companies (companies benefited last year with a billion dollars in federal tax credits from WOTC — and a number of states have similar hiring incentives). WOTC, in brief, gives a tax benefit to employers who hire specific populations — example, veterans, long-term unemployed; individuals receiving federal support; etc. There are also a number of state hiring incentives for which a business may qualify. The truth is big companies are particularly adept at taking advantage of these hiring incentives — small and medium business owners need to take a hard look.
Lastly, while perhaps not sizzling — it is important to note that Congress also made some very positive changes in accounting methods that will benefit many small and medium businesses —particularly allowing businesses greater access to the cash method of accounting (increasing the threshold to use cash accounting from $5 million to $25 million — three-year average annual gross receipts test) and other accounting changes (ex. accounting for inventories) that will provide meaningful relief to a number of businesses. Business owners will want to review closely with their accountants whether these new rules on accounting methods can provide tax savings.
The tax reform bill provides tax savings for small and medium business owners — but business owners need to make sure that they look hard to maximize their potential savings under the tax laws.
Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington, D.C. office. Prior to joining alliantgroup, Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman of the Finance Committee, Senator Charles Grassley, on tax legislation. During his tenure on the Finance Committee, Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law, including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform) and the Pension Protection Act. Zerbe is a frequent speaker and author on the outlook for short-term and long-term changes in tax policy, as well as ways accounting firms can help their clients lower their tax bill.