The Tax Cuts and Job Act (TCJA) includes provisions that will impact some service industries. One question you might be asking yourself is, "what is a service provider". Service industries are ones where the principal driver of income is the know-how of one or more of the employees of the business. This includes medical practitioners, lawyers, architects, engineers, performers, athletes, financial service providers, brokers, accountants, etc. If you fall into one of these categories, you are a service provider.
1. QUALIFIED BUSINESS INCOME DEDUCTION
This provision allows for a deduction of 20% of qualified business income (QBI) subject to some limitations. For taxpayers in the highest tax bracket, this essentially results in reducing the 37% tax rate on this income to 29.6%. Unfortunately, the definition of QBI excludes income from service industries in most cases. In order to give relief to small businesses owners who fall into one of these industries, the TCJA does allow service providers to apply this deduction (subject to limitations and phaseouts) if their taxable income is less than $415,000 for married taxpayers, or $157,500 for single taxpayers. The definition of a service provider for this provision does not include architects and engineers.
If you're worried about this deduction being out of your grasp, there may still be some options. Maybe a piece of the services you offer are really related to retail. Spinning off a section of your business could open up the ability to utilize some of the deduction. Maybe your entity selection (partnership v. corporation) could be changed. These options depend on the nature of your business.
2. EXPANSION OF BONUS DEPRECIATION
For tangible personal property placed in service on or after September 27, 2017, taxpayers may be able to take a deduction for 100% of the cost as depreciation immediately. Tangible personal property can include equipment, furniture, and some improvements to the interior of buildings. This deduction can be taken on both new and used property. Keep in mind that your resident state may or may not allow you to take this deduction. New York, as an example, does not allow for bonus depreciation deductions. This would result in potentially large add-backs to state income. This is the same rule as before, but the numbers are more onerous now.
3. BUSINESS LOSS LIMITATION
Starting in 2018, taxpayers will see their business loss deductions limited. Individual taxpayers may deduct trade or business expenses, or losses of up to $500,000 if married (or $250,000 if single) more than their trade or business gross income and gains for the year. Any deduction or loss above that ceiling may be carried forward to future years. Such limitations could result in some high-net-worth taxpayers having net income in years where they experienced business losses.
4. NO DEDUCTION FOR ENTERTAINMENT EXPENSES
Look for DKB's webcast on this topic to be released on March 12th!
At the time of the posting of this article, no regulations have been issued for any of these provisions. When they are issued, look for updated articles from DKB's TCJA team. You can find more from our team at our Tax Cuts and Jobs Act Resource Center..
This article is informational only. It should not be used as tax advice. Please consult your tax adviser regarding how these provisions affect you given your own unique tax situation.