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Federal tax law spells major changes for businesses.

Byline: Rochester Business Journal Staff

Federal tax reforms passed in late 2017 drastically overhauled the national income tax system, and businesses and accountants are preparing to file taxes under the revamped scheme for the first time.

The Tax Cuts and Job Act of 2017, approved by congress in December, marked the most significant restructuring of the federal tax code in three decades. Most businesses owners and individuals are familiar with the lower tax rates, but experts say there's a bevy of other changes that could impact businesses as taxes are filed in the coming months.

Among the biggest changes is the lowering of the business tax rate, which was as high as 35 percent and is now 21 percent, said Jonathan Traub, managing principal of Deloitte Tax Policy Group. Traub, who came to Deloitte more than six years ago after working on Capitol Hill for nearly two decades focusing on the interaction of tax and politics, said the 21 percent tax rate applies to corporations and unincorporated businesses such as partnerships and S-corporations.

"That's something that's extremely beneficial," said Joe Middleton, who is a tax partner in business tax services with KPMG. The company has a global network of professional services firms that provide audit, tax and advisory services. "That's the biggest benefit."

Aside from the lower tax rate, Traub said there are "dozens and dozens of smaller changes" that businesses and individuals should know about, and every company should start thinking about how the changes could impact their business and consult with tax professionals to avoid surprises.

"Every year it's advisable to think about your tax position and business structures and to work with tax professionals to make sure that you are not going to deal with surprises when the tax bill comes due," Traub said. "And that's especially true this year given the major changes congress made to the tax code at the end of 2017."

Many deductions businesses have become accustomed to over the years are absent from the tax code or more limited in scope, including meaningful changes to deductions for interest and net operating losses (NOLs), and the elimination of the entertainment deduction.

Michael Catallo, a partner in the tax department at Rochester-based Insero & Co, said there's no longer any business deduction for entertainment expenses, so the cost of tickets and other entertainment can no longer be written off. He said meals, however, can still be deducted at the former rate of 50 percent. Similarly, transportation and parking benefits can no longer be deducted by employers, Catallo said, noting that would leave many companies working to find an acceptable solution on how to provide that type of benefit without negatively impacting their employees.

"That's one of the things that could hurt a lot of people, because employers could take this deduction and now they can't," Catallo said. "There's no real work-around for it, although some companies are consideringincluding it in the employees' pay. But unless the employer is going to provide some type of tax "gross-up", which can be quite expensive, employees are not going to be happy as it will cost them more money out of pocket."

Middleton, who covers the Upstate New York area, said changes to net operating loss (NOL) deductions could have a major impact on businesses. In the past NOLs could offset up to 100 percent of income and be used to reduce the tax burden in the prior two tax years or on future taxable income for 20 subsequent years.

"For NOLs generated from 2018 or after, those NOLs have an indefinite life to carry forwardso they never expire," Middleton said, noting NOLs can no longer be applied to previous years. "And 2018 NOLs and after can only reduce taxable income up to 80 percent."

Tax experts say the new tax code places limits on the deduction of interest expenses, which will force companies to consider the impact when borrowing money in the future. Middleton said companies would be allowed deductions for some portions of debt but only under certain conditions.

"Under previous law any business interest was deductible from your income so you could use as much debt as you wanted to reduce your taxable liability," Traub said. "There's now a cap on how much interest you can deduct that's tied to your net income that's going to require companies to think about their structures."

Another significant change is a qualified business income deduction for "flow-through entities," such as S-corporations, partnerships as well as sole proprietorships whose profits are passed on to the business owners. According to tax experts, they can generally expect to see a deduction of up to 20 percent against their business income.

"What that's meant to doat the individual levelis to try to level the playing field with the large cuts for corporations," Catallo said. "In theory you can get a 20 percent deduction against your qualified business income to reduce your overall tax burden."

However, the qualified business income deduction starts to phase-out for individuals in "specified service businesses" with taxable income above $157,500 or couples with income exceeding $315,000, Catallo said, pointing out there are a number of other restrictions on which businesses are eligible and a number of calculations that come into play with the deduction.

Tax experts said a special 9 percent deduction for businesses with manufacturing income has also been eliminated.

Companies with large, multinational operations should expect to deal with new complexities, which could make tax planning and compliance more difficult. Experts say the changes were largely driven by large companies sheltering money overseas to avoid taxes.

"For most companies with multinational operations, they're going to find tax compliance has become more complex," Traub said.

Certain new provisions allow the U.S. to tax income that companies may have been able to defer prior to tax reform. Catallo said companies would have to pay tax on income of foreign subsidiaries even if the money was not brought back into the country.

Middleton said another significant change is allowing for expensing of property, plants and equipment. Prior to tax reform, the law allowed for 50 percent bonus depreciation, also called immediate expensing, for certain new assets put into service, but companies can now take a first-year deduction equal to 100 percent of any costs associated with eligible assets acquired after Sept. 27, 2017.

"You can get a 100 percent bonus depreciation deduction for federal purposes on those assets opposed to the 50 percent that was in place," Catallo said.

A significant change that could impact some small businesses is an expansion of the companies eligible to use the cash method of accounting opposed to accrual, Catallo said. Under previous tax law, companies needed to have $5 million or less of average gross receipts over the past three years, but that limit is now raised to $25 million, which experts said could help some companies.

With major changes to the tax code, Traub said there are still some universal recommendations, including the need to have complete and accurate records.

"Whatever you do, you need to be able to document carefully what you spent your money on," he said. "And be able to provide evidence that you're taking the proper deductions and you're claiming the appropriate amount of incomethat certainly hasn't changed. That probably will never change."

As tax professionals grapple with the myriad of changes, Catallo said the federal government is still issuing guidance and clarification on some of the regulations. In addition to all the changes to federal rules, experts say businesses are still required to comply with state tax laws, which are variable.

Traub said the importance of good tax advice "cannot be overstated," and companiesparticularly those that operate internationallyneed tax advice now more than ever. With all the unknowns, Middleton said it's more important than ever to meet with a tax advisor.

Matthew Reitz is a Rochester-area freelance writer.

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Publication:Rochester Business Journal
Geographic Code:1USA
Date:Nov 7, 2018
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