The first full year under new tax laws is now in the books, with filing season beginning at the end of January – but that doesn’t mean businesses filers are free of uncertainty.
The longest partial federal government shutdown in history is threatening to delay tax refund checks. And the changes in tax law passed by Republicans in Congress and President Trump in 2017 still haven’t been fully implemented by the Department of Treasury, which is weeding through what most agree was messy legislation. But even with those issues in the fore, there’s a lot of new opportunity for businesses to save – with a lower corporate tax rate, bonus depreciation rates for business assets and a host of new deductions, local tax experts said.
“There’s still some uncertainty heading into filing season,” said Greg Railsback, a CPA and partner in Railsback Johnson. “Treasury hasn’t issued regulations on the entire tax package yet, just the most important things. And there are still areas of the law where we’re waiting for those regulations. We don’t really know what will happen yet.”
One area where Treasury has worked out a significant amount of detail is in deductions. That includes a 20 percent deduction, called the QBI deduction, for closely held businesses that stay under a certain threshold of around $315,000 a year. It replaced a domestic productivity deduction for manufacturers of up to 9 percent, Railsback said.
“The biggest thing you’ve got to do is make sure you get all the deductions, including the qualified business deduction,” Railsback said. “For some people – especially in manufacturing – that’s a tax increase. But for a lot of people it’s a deduction they’ve never been able to take. We have certain clients that are right at that threshold.”
Another positive area for business is that the law added bonus depreciation for certain assets over time. In the past, you could deduct about 50 percent of certain items – such as $2,500 of a $5,000 computer as an immediate deduction. But under the changes, business can take the whole amount as a deduction, and that covers most items that are under 20 years old, said Sheri Karpa, a manager and CPA with Opsahl Dawson.
“That covers machinery, computers, equipment, cars and all sorts of things,” Karpa said. “Businesses are looking pretty good at getting a lot of extra deductions this year.”
But there are also some less positive changes for business. In another area, deductions for taking clients out for food, drink and entertainment have been altered. Under the changes, businesses can still deduct food, but they can no longer deduct entertainment. And that means no more deductions for sporting events or other activities, Railsback said.
“That’s an area where businesses really need to pay attention,” Railsback said. “I’m expecting we’ll get some new clients next year because their CPA wasn’t paying attention to it and they lost money.”
Of course the biggest change is that taxes for C Corporations have been lowered from a maximum rate of 35 percent to a flat rate of 21 percent.
“That’s the only portion of the law that was made permanent,” Railsback noted. “Everything else in the law sunsets in 2025.”
With the new tax changes also increasing the national deficit, there’s also a lot of uncertainty about whether most of the changes will remain in coming years – especially if Democrats take over the Senate and win the Presidency in 2020. Democrats have indicated they hope to reverse the cuts.
“Don’t get used to it or count on these tax rates being permanent,” Railsback said. “You could see a significant increase in your tax liability in the future. Planning for that generally includes allocating savings from these low tax years to increase reserves, paying down debt and increasing retirement savings.”
Todd Pisarczyk, owner of Sustainable Wealth Management, a Vancouver investment firm, agrees that the changes won’t be permanent, and may not last more than a few years. That means being strategic with your savings and planning is more important than ever, he said.
“One of the things we’re advising clients on is a change in retirement planning,” Pisarczyk said. “The limit for 401K contributions have gone up to $19,000 if your under 50, or an extra $6,000 on top of that if you’re over 50.”
His advice for businesses to help employees is to make sure they allow funding of both normal 401K plans and Roth IRA plans. With taxes so low, now is a good time to put money in a Roth account, which is a type of retirement account that the owner pays taxes up-front, and then can remove funds in retirement without taxes. In normal 401K plans, funds are put in pre-tax, and taxes are paid upon withdrawal.
“With the new tax changes, because rates are so low, it makes sense to put money in the Roth component of their plans,” Pisarczyk said. “Business owners usually set up those plans, and all they have to do to add a Roth account is check a box, but sometimes they forget to do that and employees don’t get the option.”
The changes mark some the lowest tax rates in U.S. history, so taking advantage of them now is important. But those rates are very likely to go up in the future, Pisarczyk said.
“It looks like the impact the tax changes had in stimulating the economy was short lived,” Pisarczyk said. “We had a boost in 2017 and 2018, but the economy is starting to slow.”