Reviewing how federal tax cuts affected NH firms
With proper planning, businesses can reap significant savings
The Tax Cuts and Jobs Act of 2017 had a significant impact on businesses throughout the region this past year. On its face, the act, known as TCJA, predominantly included a reduction of the corporate tax rate, limits on certain deductions against income, increased expensing and bonus depreciation, and the much talked about 20% deduction of qualified pass-through business income.
Here are some of the major takeaways that impacted New Hampshire businesses.
1. The federal corporate tax rate for businesses is lower. The new rate is a flat 21%. In the past, corporate rates were progressive, or divided into brackets based on the level of income, and capped out at 35%
2. Costs of entertaining clients are no longer deductible. Deductions for business meals with clients are still limited to 50%, holiday office parties are still deductible at 100%, but snacks and meals provided in the office are now limited to 50% as well.
3. Previously, bonus depreciation on new assets placed into service by a business was limited to 50% and used assets did not qualify. Now, for qualified property placed in service between Sept. 28, 2017, and Dec. 31, 2022, bonus depreciation is increased to 100% and includes used property. Assets not qualifying for bonus depreciation may be eligible for Section 179 depreciation. The new law increased the Section 179 deduction from $510,000 to $1 million with the phase-out threshold increased to $2.5 million.
4. Probably the most significant, and complex, change for many business clients is the new 199A 20% Qualified Business Income Deduction. Tax planning took on a whole new look as minimizing business income did not necessarily equate to minimizing taxes. Qualifying for a full or partial deduction was determined by personal taxable income, the type of business owned, and for those not in the service industry, a myriad of other qualifying factors.
Taxpayers who are married, filed jointly and had a taxable income of less than $315,000 (or single with taxable income of less than $157,500) more than likely qualify to take the full 20% deduction of business income either passed through on a K-1 (1065 or 1120S) or reported on Schedule C (and, in some cases, Schedule E). Taxable income between $315,000 and $415,000 (married filing jointly) or between $157,500 and $207,500 (single), would mean a portion of the 199A deduction would be allowed depending on whether or not the company was considered a specified service business. Taxable income of more than $415,000 (married filing jointly), or $207,000 (single), could not take any of the 199A deduction if the income was derived from a specified service business, including lawyers, accountants and doctors.
Taxpayers who are not considered to be in the service business, but have income in excess of the thresholds outline, could still qualify for all or part of the 199A deduction, but are limited to the lessor of:
• 20% of the qualified business income, or
• The greater of either:
a. 50% of total wages paid by the business
b. 25% of total wages paid by the business plus 2.5% of the unadjusted basis of all the business’ qualified property immediately after its acquisition
Taxpayers with rental activity have another separate set of rules in order to qualify for the deduction. Factors such as the structure of the lease, who they were renting to, and the type of business they were renting to had to be considered, as well as IRS safe harbor elections.
Going forward, this all means there are significant tax saving opportunities for businesses that plan, especially in New Hampshire, where S corporations and partnerships are treated more like C corporations for state income tax purposes. But, with early and proper planning, businesses could reap significant tax savings in the long run.
Joseph T. O’Connor, CPA, a principal of the Commercial Services team at Melanson Heath, can be reached at 603-882-1111 or firstname.lastname@example.org.