A federal tax overhaul passed by Congress late last year will benefit business owners, but it also will come with pain, an area accountant said Tuesday.
About a dozen business owners gathered at the Jefferson City Area Chamber of Commerce on Tuesday afternoon to hear how the Tax Cuts and Jobs Act will affect their businesses. Jeremy Morris, a CPA with Williams-Keepers Certified Public Accountants & Consultants, told the group that overall, business will benefit because of changes made under the bill, although some generous deductions under the previous tax code will vanish.
President Donald Trump signed a bill Dec. 22 that overhauled the nation's tax code. Under the new tax bill, the corporate tax rate drops from 35 percent to 21 percent. Republicans who pushed the bill through Congress aimed to decrease taxes and simplify the tax code. Morris said taxes decreased but remained complex.
"Your taxes may go down, your taxes may go up. It just depends on the situation, but generally marginal tax rates have gone down," he said.
Because Trump signed the bill before the beginning of the calendar year, the changes took effect Jan. 1. Americans won't see any changes to their taxes until 2019, when they file their 2018 tax returns. The bill eliminated the alternative minimum tax. Morris said this was a big win for businesses.
Before the bill's implementation, businesses that recorded operating losses could recover all taxes paid up to two years prior to the loss, he said. Now, businesses recording operating losses can recoup up to 80 percent of taxes paid but can recoup that money only beginning in the year the loss is recorded.
Businesses also may notice Congress repealed the Domestic Production Activities Deduction. Manufacturers primarily used this 9 percent tax deduction that applied to businesses that produce goods in the United States rather than overseas. Morris said Congress replaced this deduction with another 20 percent deduction.
"Again, the after-tax benefit may not be exactly what you think it is," Morris said.
Some of the biggest changes for businesses come in relation to entertainment and meals purchased for clients and employees. Previous tax laws allowed businesses to deduct 50 percent of expenses from business-related entertainment and meals. Morris said businesses often used this deduction when taking clients out to lunch or sporting events.
Meals provided by businesses for the convenience of staff members also used to be 100 percent deductible. Those meals now are deductible only up to 50 percent through 2025. After 2025, they become entirely non-deductible.
"It's not going to change anyone's behavior, but it increases the after-tax cost of providing that benefit," Morris said.
The bill also restructures the seven personal income tax brackets and generally decreases them by about 3-4 percent. Individuals will see the standard deduction increase to $12,000, while married couples who file jointly will see the standard deduction increase to $24,000.
For budgetary reasons, the individual income tax changes expire Dec. 31, 2025. The corporate tax cuts will be permanent.
Because of the doubling of the standard deduction, Morris said, more people likely will now take the standard deduction and fewer people will itemize deductions. Most individuals will see lower tax bills because of the doubling of the standard deduction. Several $4,000 personal exemptions for families were eliminated under the new law, though.
Through 2025, the threshold at which filers pay the estate tax was doubled to $11 million for individuals and $22 million for married couples. Overall, Morris said, the effects of the new tax law will be very individualized.
"You could have a situation where your taxable income will actually increase," he said. "If your taxable income increased but your tax rate has gone down, maybe you'll pay more taxes. Maybe you'll pay less taxes.
"It really is just situational specific."