Tax Reform Considerations for Startups
The Tax Cuts and Jobs Act (TCJA) contains several provisions that will have broad implications for businesses across industries. Guidance is still being issued for many of the provisions in the tax law, and the impact will be different for businesses of all types and sizes. Below are some of the most important changes impacting startups:
- C Corporation Tax Rate. From a funding perspective, C Corporations can be the most beneficial entity choice for startups. Accordingly, many startups are structured in this fashion. The tax rate for C corporations is now a flat 21 percent compared to a top tax bracket of 35 percent under previous law.
- 20 Percent Qualified Business Income Deduction. For startups that are organized as S corporations or partnerships, 20 percent of the net income of the business may be eligible for a deduction. This deduction is subject to several limitations such as it may be limited depending on the type of business or service that the startup provides. Legal, accounting, financial, medical and health services are all among the list of services that are limited within this 20 percent deduction.
- Accelerated Depreciation. The new tax legislation expands the ability to push depreciation deductions into the year that fixed assets are placed into service. Specifically, taxpayers are now allowed to depreciate 100 percent of the cost of equipment in the year it is placed in service, and it doesn’t matter if it was purchased new or used. An important caveat is that the purchase of real property (i.e., an office building) does not apply. Improvements to real property may possibly be written off in year one, subject to certain conditions.
- Elimination of Entertainment Deductions. While client entertainment is certainly a valuable part of many businesses, the deduction for entertainment has been completely stricken, and the deduction for meals has changed. Generally, entertainment is now nondeductible. Meals, drinks and fringe benefits, such as coffee in the break room, are now 50 percent deductible, while meals or drinks for full company functions remain 100 percent deductible.
- Net Operating Losses (NOLs). Under new law, C corporation net operating losses (NOLs) generated in 2018 and beyond can only be used to offset 80 percent of corporate taxable income. This means that even in a year when NOLs are available in excess of current-year income, you would still pay tax on 20 percent of your income. Corporate NOLs can now be carried forward indefinitely compared to 20 years and cannot be carried back ( except for limited exceptions) as was allowed under the prior law. Individuals cannot deduct in one year their active business losses in excess of $500,000 (married filing jointly) or $250,000 (all other taxpayers).
For more information on how the new tax law might impact your startup or to discuss tax planning for your business, please contact Kurt Kuhl, Tax Supervisor, at firstname.lastname@example.org or 314.983.1396.
To learn more about our services for the startup industry, contact Cathy Goldsticker, Tax Partner and Startup Industry Group Leader at email@example.com or 314.983.1274 .