By Zachary Fitzgerald
zfitzgerald@daily-review.com
The recent federal tax code overhaul affects many taxpayers, but changes for businesses are particularly complex and will take planning to minimize tax payments under the new law, according to an area accountant.
Laura Hebert, a certified public accountant and financial advisor with Darnall, Sikes, Gardes & Frederick, spoke March 5 to the St. Mary Industrial Group at the Petroleum Club of Morgan City.
She discussed the Tax Cuts and Jobs Act and what the new law means for taxpayers. President Donald Trump signed the piece of legislation into law on Dec. 22, 2017. Many of the provisions into went into effect Jan. 1 and expire at the end of 2025.
The act is 500 pages and “considered the most significant revision to the U.S. federal law” since former President Ronald Reagan’s Tax Reform Act of 1986, Hebert said.
Most individuals should “see a savings when looking at this from strictly a rate standpoint,” she said. Joint filers will generally save more in taxes due to the new law compared to single filers, she said.
Corporate rates decreased more than individual rates. The corporate tax rate dropped from a graduated schedule with a maximum rate of 35 percent to a 21 percent flat rate.
Businesses known as C corporations pay their taxes on their own tax returns. In order to disperse profits to owners, they have to pay out taxable dividends thus incurring a second layer of tax, Hebert said.
Most businesses in the area are taxed as “pass-thru” corporations, which means the companies don’t pay their own taxes and includes partnerships, S corporations or sole proprietorships. Instead, the owners pay the tax on their personal returns, and that business income is taxed at individual tax rates, Hebert said.
“In this area of the law, instead of simplifying things, it got really complicated,” she said.
To boost companies that are classified as pass-thru businesses, the Tax Cuts and Jobs Act allows a deduction against taxable income if the business meets certain criteria, Hebert said.
“The deduction is generally 20 percent of a taxpayer’s qualified business income, and this is calculated at the individual taxpayer’s level, not on the business return,” she said. “Basically, this allows you to only pay tax on 80 percent of taxable business profit instead on 100 percent of it.”
Single filers whose personal taxable income doesn’t exceed $157,500 and joint filers whose income doesn’t exceed $315,000 get that 20 percent deduction.
“If your income is in excess of these amounts, there are hoops that you’re going to have to through to get the benefit,” Hebert said.
The law limits the deduction for specified service businesses that exceed the $157,500 and $315,000 amounts of taxable income. The deduction is eliminated when taxable income exceeds $207,500 for single filers and $415,000 for joint filers, Hebert said. Those types of businesses are described as companies in which the principal asset is the reputation or skill of the employees.
Business owners should carefully consider their options to try to maximize their tax savings.
“For a lot of businesses, it’s going to take some planning to figure out the optimal structure for your particular business,” she said.
There are multiple other key components of the law that affect taxpayers.
Starting in 2019, the law eliminates the Obamacare penalty for people who don’t have qualifying health insurance. However, that penalty will still be in place for 2018.
In an effort to simplify the federal tax code, the new law gets rid of the personal exemption per person on a tax return, Hebert said. The law doubled the child tax credit from $1,000 to $2,000 per child. And the law created a new $500 credit for dependents who don’t qualify for the child tax credit, Hebert said.
According to the new law, the standard deduction increased to $24,000 for married individuals filing a joint return, $18,000 for heads of household and to $12,000 for all other taxpayers.
The standard deduction for 2017 was $12,700 for married individuals filing a joint return, $9,350 for heads of household, and $6,350 for single individuals and married individuals filing separate returns.
“With the higher standard deduction, a lot less people will be benefitting from itemizing,” Hebert said.
But there were also significant changes to the itemized deduction process.
“Most of us here in Louisiana that itemize our deductions, we get the benefit of deducting our state income taxes plus…the property taxes that we pay to the parish and to the city,” Hebert said.
That combined personal property tax and state income tax deduction was previously unlimited, but now the amount will be capped at $10,000 per year, she said.
“This is not creating any limit or disallowance on the property taxes that you’re paying on your rental properties or your business property. That’s still going to be treated the same way,” Hebert said.
The new law suspended “the overall limitation on itemized deductions that high income taxpayers were subject to,” she said. That provision helped offset some of the lost itemized deductions.
Information from congress.gov contributed to this report.
