Northeast Ohio has a history of great manufacturing, distribution and innovation-based businesses. These businesses can often benefit from specific tax incentives on the federal and state level. Many of these tax incentives have changed over the last few years. With the Tax Cuts and Jobs Act (aka “Tax Reform”) passed into law in late December 2017, now is a great time to assess the key considerations for 2018 and going forward to ensure that your business is generating the highest possible after-tax returns. Below are some key considerations:
- Tax Rate Reductions
- C-Corp is reduced to a flat 21%.
- Individual top rate is reduced to 37%. Qualified Business Income is eligible for a 20% deduction, which equates to a 29.6% top rate for flow-thru business income.
- Consider the optimal entity structure.
- Accelerated Depreciation (Sec. 179 & Sec. 168k)
- Immediate depreciation deduction (up to 100% of the cost) under “Bonus Deprecation” for personal property acquisitions (i.e. machinery and equipment) with useful lives under 20 years.
- Bonus depreciation is phased out after 2022 (over a 5 year period).
- Allows enhanced benefit of a Cost Segregation study for tax depreciation deductions for real property (i.e. buildings).
- Research & Development (R&D) Credit
- Valuable source of support to businesses that conduct qualified research and development.
- The current Federal credit was previously made permanent, and beginning in 2016 it can offset Alternative Minimum Tax (AMT) or payroll taxes for certain taxpayers.
- The current Ohio credit can be used against the Commercial Activity Tax (CAT).
- Work Opportunity Tax Credit (WOTC)
- Valuable source of support to businesses that hire employees from defined targeted group.
- Remains unchanged and available until December 31, 2019.
- Interest Expense Limitation
- In the past, interest paid on any business loan was considered 100% deductible. Starting in 2018, a limitation was put in place for taxpayers whose average gross receipts exceed $25 million.
- The allowable deduction limit is calculated based on 30% of your adjusted taxable income (similar to EBITDA for years up to 2021, then similar to EBIT after).
- Domestic Activities Production Deduction (DPAD or Sec. 199 Deduction)
- Additional tax deduction for qualifying manufacturing & production activities that take place in the United States until December 31, 2017.
- This was eliminated as part of Tax Reform.
- Tax free exchange (Sec. 1031)
- Opportunity to defer the taxable gain on the sale of appreciated real property, through the use of a qualified exchange.
- Allowed only for real property starting on January 1, 2018.
- Entertainment deduction
- Starting on January 1, 2018 entertainment expenses are no longer deductible. Previously, they were 50% deductible.
- Recommend review of accounting for these expenses and separating from other expense line items.
As an accounting and business advisory firm that works with Ohio-based privately held businesses, we are reviewing these changes and incentives with our clients firsthand, to ensure they are incorporated into the overall business plan. Some of these considerations are sizable and can give your company a competitive advantage. To learn more, please contact your own tax advisor or Jeff Brooks at Apple Growth Partners for further guidance and information: jbrooks@applegrowth.com or 330-867-7350.