Enacted on 12/22/17, the Tax Cuts and Jobs Act (TCJA) established a flat 21% federal income tax rate for C corporations, including Qualified Small Business Corporations (QSBCs). A QSBC is generally a domestic C corporation whose assets don’t exceed $50 million. In addition, 80% or more of the corporation’s assets must be used in the active conduct of a qualified business. There are other requirements as well, but we can fill in the details if you decide a QSBC is right for you.

By far the biggest benefit of owning QSBC stock is the ability to shelter 100% of the gain from a stock sale. The IRS generally requires three things to get this break: (1) you must have acquired the stock upon original issuance or through gift or inheritance; (2) you must have acquired the stock in exchange for money, other property (not including stock), or services; and (3) the corporation must have been a QSBC on the date the stock was issued and during substantially all the period you held the stock.

Another major benefit of owning QSBC stock is the ability to roll over (defer) the gain on a stock sale to the extent you acquire replacement QSBC stock within 60 days of the original sale. You must have held the QSBC stock for more than six months to take advantage of this break. Once the gain is rolled over, you must reduce the tax basis of the replacement stock by the amount of gain deferred. However, if the replacement stock is QSBC stock when it’s sold, the applicable gain exclusion break is available if the more-than-five-year holding period requirement is met.

The 100% gain exclusion and rollover breaks combined with the flat 21% corporate tax rate can make operating a newly formed business as a QSBC more tax-efficient than operating it as a pass-through entity (sole proprietorship, partnership, LLC, or S corporation). That is big news because pass-through entities have traditionally been the first choice for most small and medium-sized businesses. However, not all startup businesses will qualify for QSBC status.

Please contact us if you have questions or want more information about setting up a new business as a QSBC or if you have any other questions about business tax issues—especially if you are considering investing in a new business venture.

Before the Tax Cuts and Jobs Act (TCJA), you could deduct interest on up to $1 million ($500,000 if married filing separately) of home acquisition debt (debt used to buy or substantially improve a first or second residence). Also, you could generally deduct another $100,000 ($50,000 if married filing separately) of home equity debt, regardless of how the proceeds were used. So, deductible interest under prior law was really limited to $1.1 million of mortgage debt, or $550,000 for those who used married filing separate status. The TCJA cuts those numbers back significantly.

New Law Alters the Playing Field for 2018–2025

For 2018–2025, the TCJA reduces the limit on home acquisition debt to $750,000. For those who use married filing separate status, the debt limit is halved to $375,000. Also, the TCJA generally disallows home equity debt interest. However, the IRS recently advised homeowners that interest paid on home equity loans and lines of credit may be deductible if the funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. In other words, such loans will be treated as home acquisition debt subject to the new $750,000/$375,000 limits. By making this clarification, the IRS has confirmed that the actual use and substance of the loan, and not its label, is what matters.

Grandfather Rules for up to $1 Million of Home Acquisition Debt

Under one grandfather rule, the TCJA does not affect deductions for home acquisition debt of up to $1 million/$500,000 that was taken out: (1) on or before 12/15/17 or (2) under a binding contract that was in effect before 12/15/17 to close on the purchase of a principal residence before 1/1/18, as long as the residence is actually purchased before 4/1/18. Under a second grandfather rule, the prior-law $1 million/$500,000 debt limits continue to apply to home acquisition debt that was taken out on or before 12/15/17 and then refinanced later. However, this is limited to the extent the amount of the new loan does not exceed the principal balance of the old loan at the time of the refinancing. This is good news for existing homeowners.

Conclusion

The unfavorable TCJA changes to the home mortgage interest deduction rules will not affect all homeowners, but those with large mortgages and/or home equity loans are more likely to be affected. New homeowners who take out large mortgages to buy homes in high-cost areas also are more likely to be affected.

Please contact us if you have questions or want more information about the new rules.

• 2% miscellaneous itemized deductions are eliminated. This includes investment and accounting fees, safe deposit box fees, and unreimbursed employee business expenses.
• Personal exemptions are eliminated.
• The standard deduction has increased.

Before the Tax Cuts and Jobs Act (TCJA), taxpayers could generally deduct 50% of business-related meal and entertainment expenses, and exceptions allowed bigger deductions in certain circumstances. The TCJA shifts the playing field for expenses paid or incurred after 12/31/17.

Unfavorable Change Disallows Deductions for Most Entertainment Expenses

Effective for amounts paid or incurred after 12/31/17, the TCJA disallows deductions for the most common business-related entertainment expenses, including the cost of facilities used for most business-related entertainment activities. Specifically, nondeductible treatment now applies to the cost of tickets to sporting events; license fees for stadium or arena seating rights; private boxes at sporting events; theater tickets; golf club dues; company golf outings for customers; hunting, fishing, and sailing outings; and so forth. Some business entertainment expenses are still deductible, but only in very limited circumstances. Contact us for details.

Deductions Still Allowed for Eligible Food and Beverage Expenses

After the TCJA, the most common business-related meals are still 50% deductible, and the time-honored rules for proving that meals are business-related still apply. In addition, food and beverages that fall under certain exceptions are still 100% deductible after the TCJA. Although uncertain at this point, it appears businesses also can still deduct 50% of food and beverage expenses incurred at entertainment events, but only if business was conducted during the event or immediately before or after. These rules can get tricky, and future IRS guidance may change things, so contact us for details.

Conclusion

Consider assessing your current expense allowance policies to determine if the unfavorable TCJA provisions warrant changes—especially for entertainment expenses incurred by employees, which are now nondeductible (unless reported as taxable compensation). Accounting system changes may be necessary to separately track employee entertainment expenses and business-related meal expenses, which are still 50% deductible.

Please contact us if you have questions or want more information. The current tax rules for business-related meal and entertainment expenses are complicated, but we can help you plan ahead to get the best treatment for your business’s expenses.

Help us walk into a great new year! The months after the holidays are typically periods of financial concern for our community with the greatest needs. We invite you to consider supporting our community this year by donating shoes for children.

Our firm has organized this shoe drive to support the Kent School District. We are asking for your help! For every tax return, we prepare for you between now and April 17th, we are asking you to bring in a new pair of shoes or cash donation. Shannon & Associates will match your donation!

We believe this is a small yet important step for those in need in our community. Please help us have a successful Shoe Drive.

Sizes Needed: Toddler Size 13, Children’s sizes 1-6, Men’s & Women’s sizes 7-10.

Enacted on 12/22/17, the Tax Cuts and Jobs Act (TCJA) includes very beneficial provisions that can allow much bigger depreciation deductions for vehicles used over 50% for business purposes. Favorable changes apply to passenger vehicles (autos and light trucks and vans) and “heavy” SUVs, pickups, and vans with gross vehicle weight ratings above 6,000 pounds. Many popular SUVs and pickups fit into the “heavy” vehicle category.

For example, if you buy a new or used passenger vehicle this year, you can claim $10,000 in auto deductions. This is increased to $18,000 if bonus depreciation is claimed. For 2019, 2020, and 2021, you can claim $16,000, $9,600, and $5,760, respectively. (These amounts are more than three times higher than the ones under pre-TCJA law.) These allowances assume 100% business use. Also, the IRS will adjust these amounts for inflation in future years.

If you would rather buy a heavy vehicle, such as a pickup or van, you can deduct 100% of the business portion of the cost in Year 1. This assumes you use the vehicle over 50% of the time for business reasons. This is a significant departure from 2017 law, which allowed you to immediately deduct 50% of the vehicle’s cost. Also, under prior law, heavy vehicles had to be new to qualify for the most favorable depreciation treatment. The TCJA changes this—you now have the option to purchase and expense a new or used heavy vehicle.

Please contact us if you have questions or want more information about the TCJA’s favorable depreciation changes for business vehicles.

A New Way to Work with us – NetClient CS

In a world where business is done anytime and anywhere, we are pleased to announce a new way to work with us from any highspeed internet connection, 24 hours a day, seven days a week. Using NetClient CS is as easy as online banking and it’s completely secure.

Once you’re up and running on NetClient CS, you’ll have your own secure, password protected online portal that you can access from our website. Just log-in from your web browser for instant access.

A Client Portal allows you to:

• View and print tax documents – including finished tax returns, electronic filing authorizations and more. Final tax documents and other items can be saved for up to 7 years on the portal; you can also copy the files to your own location for safe keeping.
• Eliminate the bulky paper copies of your tax return, store and access them securely anytime/anyplace.
• Exchange files with us – any file, any time.

State-of-the-Art Security:

• Our NetClient CS portals are hosted at some of the largest most secure data centers in the world. It uses the industry’s most advanced security and reliability measures to keep your data safe, including:
• Built-in redundancy: Multiple data locations, internet connections and power sources keep your portal up and running all the time.
• Secure Password Protection – This protects your data as it travels between the data center and your computer.

Get set up today!

Simply send us an email ShannonTax@Shannon-CPAs.com or contact our office at 253-852-8500 to indicate your interest in getting set up.

is proud to be an independent member of Nexia International, a worldwide network of independent auditors, business advisors and consultants. Nexia International is the 10th largest network of accounting firms in the world, with member firms in over 100 countries. This global representation with Nexia enables us to offer our expertise in international taxes and accounting around the world and provide top quality service to our clients with foreign and domestic financial needs.