Team Insight

By Mark Battersby A re you ready for tax "reform?" I certainly hope so, because it is here and it will have a very real impact on you and your business. Thanks to the Tax Cuts and Jobs Act (TCJA), the tax rate for incorporated team sport deal- ers and retailers will be reduced from its current 35 percent to 21 percent -– for the 2018 tax year and thereafter. And although the business tax cuts are, for the most part, permanent, the tax cuts for individuals are only temporary, expiring in 2026. Unfortunately, while regular C corpora- tions will be taxed at a flat 21 percent tax rate, the majority of small businesses that operate pass-through businesses will face new personal tax rates higher than the corporate tax rate. Here's the breakdown, in as simple lan- guage as possible. Pass-through Businesses: Pass-through businesses operating as partnerships, limited liability companies (LLCs), S corporations and sole proprietorships, pass their income to their owners who pay tax at their individ- ual tax rate. The TCJA created a 20 percent deduction that applies to the first $315,000 of income (half that for single taxpayers operating as S corporations, partnerships, LLCs and sole proprietorships — in other words, most independent team dealers. All businesses under the income thresh- olds, regardless of whether they're service professionals or not, can take advantage of the 20 percent deduction. For pass-through income above this level, the new law pro- vides the 20 percent deduction, but only for "business profits." In effect, this reduces the owners effective marginal tax rate to no more than 29.6 percent. The TCJA places limits on who can qualify for the pass-through deduction, with strong safeguards to ensure that so-called "wage income" does not receive the lower marginal tax rates for business income. Thus, that 20 percent deduction applies only to busi- ness income that has been reduced by the amount of "reasonable compensation" paid the owner. What is meant by "reasonable" compensation has yet to be defined. Cost Recovery: Unlike in past years when a business was required to claim depreciation, spreading the recovery of their equipment, fixtures and other property costs over several years, many will be able to fully and immediately deduct many of those expenditures. What's more, this provision has been made retroactive to September 27, 2017. Of course, the faster write-off for equip- ment costs is only temporary. It is only at the 100 percent level for expenditures between September 27, 2017 and January 1, 2023. After 2023 and before 2025, the amount deductible drops to 60 percent. In 2027 the equipment cost write-off disappears. Interest Expenses: In the past, with a few exceptions, interest was usually tax deduct- ible, with the tax laws protecting the ability of small businesses to write off the interest on loans. In an attempt to "level the playing field" between businesses that capitalize through equity and those that borrow, the TCJA caps the interest deduction to 30 percent of the adjusted taxable income of a team sports business. Every dealer and retailer is subject to the deduction "disallowance" of net inter- est expense in excess of 30 percent of the operation's adjusted taxable income. A special rule applies to pass-through entities that require the 30 percent determination to be made at the entity level rather than at the tax filer level. In other words, at the partnership level instead of the partner level. Other exceptions exist for small busi- nesses, generally those with gross receipts that have not exceeded a $25 million thresh- old for a three-year period, protecting their ability to write off the interest on loans that help them start or expand a business, hire workers and increase paychecks. Simplified Accounting: Simplifying the rules governing the method of accounting that must be used for tax purposes is a welcome option. Businesses with average annual gross income of less than $25 mil- lion may now use the simple cash-basis accounting method. Under this provision, the current $5 mil- lion threshold for corporations and those partnerships with a corporate partner is increased to $25 million and the requirement that such businesses satisfy the $25 million limits for all prior years has been repealed. Also, under the new law, the average gross receipts test will now be indexed to inflation. Fringe Benefit Limits: Of particular inter- est to small dealers, the new law "disallows" deductions for entertainment expenses, eliminating the necessity of proving that such expenses are sufficiently business-related. The 50 percent limit on the deductibility of business meals has been expanded to include meals provided through an in-house cafeteria or otherwise on the premises of the team sport business. Auto Expenses: New limits for writing off the cost of so-called "luxury" automobiles and personal use property were included in the TCJA. For passenger automobiles and light trucks placed in service after December 31, 2017, where the additional first-year depreciation deduction is not claimed, the maximum amount of allowable depreciation is increased to $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9600 for the third year and $5760 for the fourth and later years in the recovery period. Losing With NOLs: A major benefit of the Net Operating Loss (NOL) was the fact that they could be carried back to more prosperous years to create a refund of taxes paid in those earlier years, providing an immediate infusion of cash. Today, the NOL deduction has been severely limited. The write-off is now limited to 80 percent of taxable income and only in special cases will a NOL carryback be permitted. Of course, there is no limit on how far forward NOLs may be carried. Oh, So Much More Obviously, there are many more changes contained in the massive, Tax Cuts and Jobs Act. The newly passed law provides immediate relief from the so-called "Death Tax" by doubling the estate tax exemption. The higher thresholds would sunset in 2026. The corporate Alternative Minimum Tax has been repealed; deductions for local lob- bying expenses eliminated; S corporations attempting to convert to C corporations will face new rules; and partnerships will no longer automatically terminate upon the death or exit of a partner. Dealers need to keep in mind, however, that the potential savings won't be seen until the tax bill for 2018 comes due. Q 8 Team Insight / January 2018 teaminsightmag.com All businesses under the income thresholds, regardless of whether they're service professionals or not, can take advantage of the 20 percent deduction for pass-through businesses. TEAM / TRENDS Tax Reform and You What it all means for independent team dealers in 2018.

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