How TCJA Reform Affects Year End Tax Planning for C Corporations
How the TCJA affects C Corporation Taxes and year-end planning
One of the most prominent and controversial alterations embedded in the Tax Cuts and Jobs Act (TCJA) was the absolutely permanent installation of a flat 21 percent federal income tax rate for C corporations for tax years beginning 2018. As opposed to the prior law, where personal service corporations (PSCs) were taxed far more heavily than other C corporations, a new 21 percent rate applies equally to C corporations now.
C Corporate Tax Planning Guideline
Although the Tax Cuts and Jobs Act (TCJA) alterations introduced myriad tax law provisions, nothing has changed with regards to the run-of-the-mill tax planning priorities for C corporations. Five specific rules of thumb very much stand out among most:
1)Businesses with continuous tax losses are not good C corporation candidates.
In the event a company is arranged as a C corporation, losses are not permitted to be passed through, be it to owners, who are the shareholders. Rather, business tax losses form net operating losses (NOLs) which are allowed to be carried over into future tax years and subsequently used to shelter any future corporate taxable income. The TCJA, however, somewhat altered this caveat in that it made it so NOLs arising in tax years 2018 and forward have a threshold cap of sheltering no more than 80% of taxable income in the NOL carryover year.
2)Businesses with appreciating assets are not good C corporation candidates.
It’s not recommended that a business with significant assets which will probably appreciate (think: real estate and specific intangibles) be organized as a C corporation. This is because should the assets eventually be sold off, profits will be subject to double taxation. If a business is set up as a pass-through, profits are only taxed at the owner level.
To make matters more complicated, C corporation assets don’t even definitely have to appreciate to be double taxed. Depreciation lowers the tax basis property, creating a taxable gain if a real estate sale price is greater than its depreciated basis. In essence, appreciation is rendered by depreciation when depreciable assets retain their value.
3)Double taxation is still applicable to C corporations.
Despite double taxation still being possible under the TCJA, the new TCJA’s 21 percent corporate rate still avails. As a definition, taxing double is when corporate income is taxed first at the corporate level and secondly with the shareholder, at the dividend level.
4)Double taxation does not occur should earnings be used for capital investments and to finance growth.
In such a case, all earnings remain “inside” the C corporation. Therefore, no dividends are issued and double taxation is avoided.
5)Double taxation does not occur should a corporation’s taxable income be low.
A low taxable income is normally garnered by paying compensation and benefits, otherwise known as salaries, benefits and fringe benefits, in a timely fashion. Fringe benefits are favorable from a tax standpoint as they can be deducted by the C corporation, in addition to being tax-free to the employee recipients. Historically, such a methodology has been considered a reasonable corporate tax strategy.
Related Content Learn More
MIDTERM ELECTION RESULTS MOST LIKELY LIMIT PROSPECTS FOR ‘TAX 2.0’ LEGISLATION
Now that we have reviewed some well-known and reputable guidelines, let’s take a look at some strategies your business may profit from as a C corporation:
Deferring Company Income
Now that the TCJA has implemented a permanent reduced federal income tax rate for C corporations, you know the rate is 21 percent; before, the nation was in limbo. Hence, the best strategy for businesses is to defer income into the following year and speed up deductible expenditures into the 2018 tax year. This, in turn, will postpone company federal income tax bills.
Per the TCJA, and of particular note, a majority of small and medium companies can now utilize cash-method accounting for tax purposes. This change allows for more flexibility to manage taxable income by deferring some corporate federal income tax into 2019. Let’s go over some popular ways to do this:
If your business uses cash-basis accounting, it is permitted to deduct prepaid expenses in the current tax year assuming the economic benefit from the prepayment doesn’t pass beyond the earlier of: 1) one year following the first date the benefit is realized or 2) the closure of your business’ 2019 tax year
Pre-charging Recurring Costs.
A business can prepay recurring business expenses that it would pay early the next year on credit cards. This is only applicable if a business uses the cash-basis of accounting. Yes, taxpayers can claim 2018 tax year deductions despite the fact that the credit card invoice won’t be paid until 2019. Please note that favorable tax treatment described does not apply to store revolving charge accounts. For instance, your Home Depot account does not qualify for this tax benefit.
Using Checks for Paying Expenses.
A little-known caveat in the tax law says that taxpayers can deduct the expenses in the year checks are physically mailed, if cash accounting is used. This is despite the remitted checks not being cashed or deposited by recipients until early the next year.
Cash-basis accounting for taxpayers dictates that a business need not report income until the year payment is received. To put this rule into good use, consider remitting payment for specific invoices that you don’t want to be charged for until next year.
Using the TCJA Bonus Depreciation Clause to its Full Extent
If acquired and put into use between September 28, 2017 and December 31, 2022 (certain circumstances allow for an extension until December 31, 2023), the TCJA permits qualified property to raise the first-year bonus depreciation percentage to 100 percent for new and used property. This is significantly higher than the 50 percent that 2017 witnessed. Please note that this depreciation clause trumps the section 179 tax law explained next.
Using the TCJA Liberalized Section 179 Law to its Full Extent
If a business qualified property is placed into service on or after January 1, 2018, the TCJA has permanently raised the cap for the Section 179 deduction to $1 million. Prior law dictated that this dollar figure was $510,000. In addition to this fact, the Section 179 deduction phase-out threshold has risen to $2.5 million. Prior law dictated that this dollar figure was $2.03 million. Moreover, both dollar amounts will be adjusted for inflation as time passes.
Simultaneously, the TCJA expands the meaning of eligible property to contain specific depreciable tangible personal property predominantly utilized for lodging furnishings (think: appliances, beds…etc.) in the living portion of a lodging facility. The TCJA has also expanded the definition of qualified real property eligible for Section 179 deduction to contain qualified costs for HVAC equipment, fire protection and alarm systems, security systems for a nonresidential real property, as well as roofs.
Nothing has changed with the prior law’s Section 179 allowance for deductions to be taken for qualifying real property expenditures, with a cap of $1 million starting in 2018. Section 179 deductions claimed for real property reduce the maximum annual allowance dollar for dollar due to the fact that there is no distinct and separate cap for real property expenditures.
Purchasing a “Heavy” Vehicle
The TCJA’s first-year depreciation law actually considers heavy vehicles (think: vans, pickups, large SUVs…etc) qualified assets. Therefore, they qualify for the benefits of bonus depreciation which results in an enormous tax advantage. To be considered a “heavy vehicle”, manufacturer’s gross vehicle weight rating (GVWR) must be more than 6,000 pounds.
Thomas Huckabee, CPA of San Diego, California recognizes that many options exist when it comes to writing off property and equipment, especially in light of the TCJA’s ratification. As we hope this article highlights, there are a plethora of changes for C corporations to look forward to. Operating a full-service accounting firm, Tom guides clients through the complicated process of knowing which path to take so a business’ write-offs are optimized and the best creative planning moves are made for your company.