1. THE new Tax Cuts and Jobs Act cuts corporate taxes from eight graduated rates of 15 percent to 35 percent to a flat rate of 21 percent.
2. The Act provides a 20 percent deduction for owners, partners and shareholders of pass-through entities such as S-corporations, LLCs and partnerships. However, the 20 percent deduction is prohibited for service business (doctors, lawyers, accountants, engineers, consultants) unless their taxable income is less than $315,000 if married ($157,500 if single).
3. The Act also includes rules to prevent abuse of the pass-through tax break. Owners, members, and partners who work for their entity should be paid salaries which are taxed at ordinary rates. They may decide not to receive salaries to escape payroll taxes and self-employment taxes and also benefit from this new 20 percent deduction on their personal tax returns. It will be interesting to see how a depleted IRS catches them as well as passive owners who game the system to take advantage of this new break over active owners who actually run the business.
4. The Act changes how U.S. multinationals are taxed. Old law taxes U.S. companies on worldwide income – all profits from all sources, regardless of where the income is earned. However, they’re allowed to defer paying U.S. tax on their foreign profits until they bring the money home. This “worldwide” tax system puts American businesses at a disadvantage because foreign competitors use territorial tax systems, meaning they don’t owe tax to their own governments on income generated offshore. The Act switches the U.S. to a territorial system. It also includes anti-abuse provisions to prevent corporations with foreign profits from gaming the new system. U.S. multinationals are encouraged to repatriate earnings by offering a one-time, low tax rate on their existing overseas profits at low rates of 15.5 percent on cash assets and 8 percent on non-cash assets.
5. The Act repeals the dreaded corporate Alternative Minimum Tax (AMT). The Tax Cuts and Jobs Act repealed the corporate version (bien) but not the individual AMT (malo).
6. The Act expands the number of taxpayers who may use the cash method of accounting. It allows taxpayers with average annual gross receipts of $25 million or less to use the cash method even if inventories are required.
7. The Act removes computer or peripheral equipment from the definition of listed property. Computers can now be immediately expensed in the year of purchase rather than depreciated over a number of years.
8. The Act preserves the current tax treatment of nonqualified deferred compensation.
9. The Act retains the business interest expense deduction for small businesses.
10. The Act simplifies inventory rules for small businesses.
11. The Act increases Section 179 expensing to $1 million and threshold to $2.5 million.
12. The Act reduces the depreciation period of residential rental properties from 40 to 30 years.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.
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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies. He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at [email protected].