March 17, 2018

THE NEW TAX LAW: Nuances Require an Expert’s Knowledge

When The Tax Cut and Job Act was passed in December, it was touted as an overhaul and simplification of the tax code. For the average American, that may well be true.

But if you have a business, even a relatively simple, small, home-based operation, there are many nuances in the new tax law that the services of a certified public account are almost universally well worth the effort and the expense. And it’s probably best to make that appointment soon as there are many strategies moving forward that the business owner can employ to substantially reduce a company’s tax bite. Proponents made no secret of the fact that the bill would lower the tax rates on businesses. It does that and then some. There are several provisions that are very advantageous to even the smallest operation or farm.

At least that was the takeaway after a conversation with a couple of tax experts in the Yuma, AZ, office of Frost PLLC, a certified public accounting firm. Last year, Terkelson, Smith and Tyree merged their 50-year old firm with Frost, another independent CPA specializing in agriculture, with offices strategically located around the country. Partners Carol Smith and Tim Terkelson talked to Western Grower & Shipper in February and noted that the merger was designed to help the firm better serve its clients. “Our clients are growing and we didn’t want to be outgrown,” said Terkelson. “We now have unparalleled resources to meet their needs.”

Smith said it was a seamless transition for the firm’s clients as the two firms merged in June of 2017. “As far as our clients are concerned, nothing changed in our day to day operation.”

What has changed for every CPA, however, is the federal tax law. There is some truth that for many individuals, the law will mean filing a standard return for 2018 utilizing the standard deduction rather than filing the “long form” which involves itemizing one’s deductions. Matt Lewis, vice president of financial services for Western Growers Financial Services, noted that the new law does have a $24,000 standard deduction for a married couple filing jointly. The law still allows for unlimited charitable contributions, but with caps on deductions for property taxes, mortgage interests and state income tax, he said many couples will not reach the $24,000 threshold.

However, there are legitimate strategies that can be employed to run one’s income and expenses through a business, thus taking advantage of the tax breaks this law gives business owners. There is also a loophole in the law that treats sales to a co-operative more advantageously than sales to a company. Terkelson expects a legislative fix to this provision…or a stampede by businesses to operate as co-ops where possible. Co-ops have long been utilized in agriculture and, with no change, this law would give them a huge boost.

Smith said that for most of the firm’s ag business clients the most advantageous provisions in the new law are the lowering of the top corporate tax rate from 35 percent to 21 percent, and the change to depreciation schedules. In fact, the depreciation change went into effect on Sept. 22, 2017, so some firms were able to take advantage on their 2017 returns. Without getting too deep in the woods, the new law allows for faster depreciation, expands the amount that can be depreciated and also applies the rules equally to both new and used equipment. In the past, they were treated differently with new equipment having an advantage when it came to write-offs.

Terkelson said another big change is the way net operating losses are treated. Under the old law, losses had a carry back provision of five years and a carry forward limitation of 20 years. The new law limits carry back losses to two years but carry forward is unlimited.

And still another advantageous provision for many people is a provision that establishes a 20 percent deduction of qualified business income from certain pass-through businesses. Joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries. This provision would expire December 31, 2025. This is another provision that should make small business owners at least consider how they are structured. Terkelson said this deduction requires some complicated calculations but it’s very much worth looking at.

The advantageous co-op provision, which the Frost duo believes is an unintended consequence of the law, points to a fact that is almost always true with major legislation, and that is that “fixes” are needed once the law is analyzed by experts. These types of laws are the result of lots of negotiations and unintended consequences are inevitable. Terkelson said the co-op provisions appears to give sellers of products to co-ops a 20 percent deduction on the revenue. So if a grower sells his product to a packing house that without a co-op status, he or she would have to report 100 percent of the income. If the packing house was a co-op, only 80 percent of the income would be reported. “This is a competitive advantage,” he said. “Co-ops are going to come out of the woodwork if this isn’t changed.”

Smith said Congress is aware of this needed fix as well as some other necessary changes and many are anticipating that corrective legislation will be written and passed.

The new law also changes the deductibility of business entertainment. Under the old law, 50 percent of the cost of business meals could be deducted. Under the new law, business entertainment is no longer deductible. Employee expenses when on business trips or at conventions are still deductible but that expensive client dinner is not.

As Smith and Terkelson looked at other nuances in the law, the bottom line remained the same: go see an accountant as you plan your business strategies for 2018 and beyond. It might be an opportune time to change your business structure or buy that piece of equipment you have been putting off.