Garry Bartecki 2019 Tax Planning-Not paying attention can cost you
Just sat through another well-done presentation about the TAX CUTS and JOBS ACT (TCJA), and as I made some notes for this article concluded that Congress drafted this bill to pick on equipment dealers.
As you know I have been after you to get a handle on the TCJA months ago to give you time to understand it and get maximum benefit from the changes. I HOPE YOU DID THAT BECAUSE THIS TAX BILL IS REALLY COMPLICATED AND REQUIRES YOUR FULL ATTENTION AS WELL AS A TAX EXPERT WHO NOT ONLY KNOWS THE BILL, BUT ALSO WAYS TO MINIMIZE YOUR TAX BILL IN 2018 AND 2019.
So, to get you started in the right direction I am going to point you to a podcast I listened to this morning because it really did a great job explaining the bill (using examples) and providing direction of how to deal with these complex provisions. After reviewing the podcast, you are still going be confused but at least you will know what issues to zero in on that need discussion and guidance.
Go to CONTRACTORMD.ORG where the program is listed under “webinars” in upper right corner. Contractor MD is a new venture I started to aid contractors using a group of industry experts I know that really know their business. I won’t get into the details because if you are interested you can review the website and see what I am talking about. Who knows, maybe we need one just like it for the material handling industry.
Pay attention to the discussion about the different tax calculations required for C-Corps and S-Corps. This is probably the most complex section in the bill because that 21% C-Corp rate looks real attractive compared to the 37% individual rate you would pay on income received from a pass-through entity.
Even though you appear to have a material difference in C vs flow-through entities tax rates there is a complex tax review process required to truly understand if that rate difference is really a factor. The webinar provides a couple of examples comparing the tax bill for each type of entity. Comparing the two is a complex exercise which has you estimating business income, w-2 income and other factors. In fact, you may find yourself changing up how much you get paid and how much you take as a distribution to get the results you are looking for. Wow won’t that be fun!
I have come across multiple articles stating that you are better off with your flow-through status because of the double tax exposure you get from a C-Corp. These articles also note that a taxpayer receiving a K1 from a flow-through entity and using the new standard deduction and filing a joint return would have to have an Adjusted Gross Income (AGI) of $402000 to pay tax at the 21% rate. If they were able to use the full 20% QBI deduction the AGI would have to be $808000 before being taxed at the 21% rate.
Also consider that C-corps are taxed on what is left in the Company. Compensation and rents give back all the marginal tax rate savings. In addition, a nondeductible payment such as dividend would be taxed at about 19% for a potential total tax rate of 39.8% compared to the 37% top rate for an owner of a pass-through entity.
But in my estimation is the biggest risk you face is a political about face that reverses the new tax rates to where we were before TCAJ was passed. I would give that scenario a 75% chance of happening if Democrats take control of both houses of congress.
Let’s spend a few minutes on Bonus Depreciation. It changed to allow a 100% deduction for both new and used equipment. You can no longer generate an operating loss carryback but can carryover any tax losses created, with the losses able to offset business income from other sources.
Many people now ask why we still have the Section 179 write off and why would they use it if Bonus is available. The fact of the matter is that 179 is still useful because it applies to certain assets that Bonus cannot be applied to. So, the rule of thumb would be to use Bonus first and then 179 if you must, keeping in mind that 179 cannot create a NOL.
But even if you use Bonus Depreciation and generate a loss carryover, be aware that a NOL can only offset 80% of taxable income with NO. Carryovers, however, are carried forward indefinitely.
One also must pay attention to Book/Tax differences generated by deprecating your fixed assets over 5-10 years when they have already been 100% deducted for tax purposes. It is easy to forget that the “tax deductions” on your Balance Sheet may not available to reduce taxable income.
And of course, Congress also must play with your interest expense deduction. Interest expense is subject to a disallowance of a deduction of net interest expense in excess of 30% of the business adjusted taxable income. So, it is limited to the sum of (1) business interest income (2) 30% of adjusted taxable income and (3) the floor plan financing interest for the taxable year. The good news is that adjusted taxable income is basically your EBITDA number, which is a materially larger amount than taxable income. If average gross revenues for the prior three years are less than $25 million you are exempt from this rule.
Entertainment expenses are not deductible as they were before TCJA. Neither are reimbursed expenses paid to employees. Better clean up your entertainment expense accounts to make sure what you have in there is deductible.
Cash Basis accounting is available to firms generating less than $25 million in gross sales. Doable —yes. Practical —maybe. Basically, only a one-year deferral.
And let us not forget the latest major tax headache…..WAYFAIR. If you are selling parts or equipment into states where you think you have no nexus….think again. Unless you get an exemption certificate from your customer you are most likely going to have to pay sales or use tax. And the states will try to rope you in to file an income tax return. THIS IS A BIG ISSUE ….DO NOT SCREW IT UP because it can get really expensive if you do so.
Not only do we have to consider the new tax laws (TCJA) but also the new accounting rules regarding Revenue Recognition Rules. You will probably have to fill out a survey or questionnaire to determine if you need to change the way you report income. If you do, guess what, you may also have to change the way you report taxable income. JUST WHAT YOU NEEDED!
So, do yourself a favor and watch and listen to the podcast found in the CONTRACTORMD.ORG WEBSITE. It will go over all these issues (in English). Decide what you need to follow up on and make sure you are working with a tax person that knows these new laws. If the person you are working with does not sound like the folks in the video, then you are working with the wrong person.
I am done. Any questions call me. If you need a referral for tax work, call me.
Here is to a profitable 2019!
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail [email protected] to contact Garry.
