Taking Advantage of the New Tax Law.

• Author: Wheelwright, Tom
• Position: BUSINESS & FINANCE - Tax Cuts and Jobs Act of 2017

THE 1,000 PAGES in the new tax law has led to a like number of pages of regulations from the Internal Revenue Service interpreting that law. The Tax Cuts and Jobs Act of 2017 (TCJA), also known as the Trump tax bill, was enacted in December 2017. The law itself was written hastily and relied on the IRS to write new regulations to explain what Congress intended. The IRS has issued several sets of regulations explaining how the agency believes taxpayers should behave under the new law.

The law--and even the regulations--is confusing enough to tax professionals, so how do average taxpayers even begin to understand what is going on and how to respond when they prepare their 2018 tax return? If you own a business, there are major changes to your taxes that impact your return. How you deal with these will have an enormous impact on the amount of tax you pay.

TCJA includes a new 20% tax deduction for owners of qualifying small businesses. Businesses in health, accounting, legal, consulting, brokerage, or other professional services do not qualify unless their taxable income is under $157,500 as a single individual or $315,000 as a married couple.

The IRS defines professional services narrowly, so a pharmacy owner is not in the health service business when he or she sells prescriptions--but is if he or she gives flu shots or charges for consulting with patients. Professional athletes, entertainers, or anyone who is paid an appearance fee or license fee for use of his or her name or image also do not qualify for the deduction.

All business owners whose income is above the thresholds are subject to additional limitations based on wages and physical assets, such as real estate and equipment.

The first step is to have your tax preparer calculate your deduction. If you get the full benefit, you probably want to continue operating the way you have in the past (i.e., as an S corporation, partnership, or sole proprietorship). If you do not qualify or lose a lot of the 20% deduction, you may want to consider changing to a C corporation.

TCJA reduced C corporation taxes to a flat 21 % rate. If you do not get much or any of the 20% deduction and you reinvest a lot of your income back into your business (i.e., you do not take it out to use personally), then a C corporation may be right for you. You must make the change to C corporation within the first 75 days of the new year--so by mid March.

If your business does not qualify for the 20% deduction because it...