nfortunately, while regular C-corporations will be taxed at a flat 21% tax rate, the
majority of dealers and retailers operating as pass-through businesses will face new
personal tax rates higher than the corporate tax rate.
Pass-through businesses operating as partnerships, limited liability companies
All businesses under the income thresholds, regardless of whether they’re service professionals
or not, can take advantage of the 20% deduction. For pass-through income above this level, the
TCJA places limits on who can qualify for the deduction, with strong safeguards to ensure that so-called “wage income” does not receive the lower marginal tax rates for business income.
Above the threshold, the new law provides a deduction for up to 20%, but only for “business
profits,” reducing the owner’s effective marginal tax rate to no more than 29.6%. That 20% deduction applies only to business income that has been reduced by the amount of “reasonable compensation” paid the owner. Although lawmakers know what is “excessive,” “reasonable” compensation
has not been defined as yet.
Lawmakers long-ago created a unique 20% tax rate as part of a parallel tax system that limited
tax benefits to prevent large-scale tax avoidance. Under this system, incorporated businesses were
required to calculate both their ordinary tax bill and the Alternative Minimum Tax (AMT), paying
whichever tax was higher. Fortunately, the corporate AMT has been eliminated, lowering taxes and
eliminating the confusion and uncertainty that surrounded it in the past.
Unlike in past years when a business was required to claim
depreciation, spreading the recovery of their equipment costs
over a number of years, many will be able to fully and immediately deduct the cost of certain equipment. What’s more,
this provision has been made retroactive to Sept. 27, 2017.
Of course, the faster write-off of equipment costs is only
temporary. It is at the 100% level for expenditures between
Sept. 27, 2017 and Jan. 1, 2023. After 2023 and before 2025,
the amount deductible drops to 60% with a further decrease
to 40% after 2025 and to 20% after 2026. On Jan. 1, 2027,
the equipment cost write-off disappears.
Despite the narrowing of differences between bonus
depreciation and the tax law’s Section 179 first-year expensing, the Section 179 write-off is an improved option. The
immediate write-off, or expensing of capital assets, is appealing because, unlike so-called bonus depreciation, the use of
equipment doesn’t have to begin with the business.
Lots of changes mostly
Are you ready for tax “reform?”
Thanks to the Tax Cuts and Jobs
Act (TCJA), the tax rate for incorporated marine electronic businesses will be reduced from its current 35% to 21% for the 2018 tax
year and thereafter. Although the
business tax cuts are, for the most
part, permanent, the tax cuts for
individuals are temporary, expiring
BY MARK E. BATTERSBY
Tax cuts and