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Export Regulations How Will Tax Reform Impact Your Business?

By Ken McEntee

Some provisions of the new federal tax law signed by President Donald Trump on December 22 provided an early Christmas present to many businesses. The impacts of other parts of the new law, however, may not be as simple as general media sound bites imply, cautions CPA Jim Gero, co-managing partner of Hobe & Lucas, a Cleveland-based accounting firm.

"Whether some of the new rules are going to help your business has to be judged on a case by case basis," Gero said. "A lot of it is still pretty complicated. In fact, we're in the middle of March (March 17 - two days after the filing deadline for federal business taxes) and there is still a lack of clarity about some of these rules."

What is certain, Gero agreed, is that revised depreciation laws are very beneficial for businesses that are looking to invest in new equipment - such as shredders and mobile shredding trucks.

Doug Knisely, owner of Knisely Shredding, an LLC based in Lock Haven, Pa., said he has already taken advantage of an increased deduction for bonus depreciation. The new rule covers equipment placed into service after September 27, 2017.

"One of the reasons I bought my new Ford truck in December was because of the depreciation benefit," Knisely said. "If I need to deduct the full expense in the first year for a tax benefit I can do it, but I don't have to."

Along with improved depreciation allowances, the tax reform lowers tax rates for some C corporations and offers a tax deduction of up to 20 percent to some owners of pass-through entities, such as LLCs and S corporations.

In the opinion of Bob Johnson, executive director of the National Association for Information Destruction (NAID), of Phoenix, every bit of tax savings is helpful for businesses.

"The 20 percent credit for pass-throughs is a nice thing," Johnson said. "For small businesses in a competitive marketplace, anything that can enhance the economic welfare of the owner is a Godsend. Our members have rolling stock, so things like bonus depreciation are going to be beneficial in helping them to invest in more equipment like mobile shredding vehicles."

Here's a look at the provisions of the 2017 tax act that are likely to impact businesses in the document shredding industry.

Reduced rate for C corps

The "reduction" in the corporate tax rate to a flat 21 percent has been well documented in the media. But it may not be a reduction for all companies, Gero said.

"It's good for big companies," he said. "The breakeven point is around $90,000. If your taxable income is less than that, you're going to pay more taxes under the new rules."

That's because under the old plan, the first $50,000 in taxable income was taxed at 15 percent. The next $25,000 was taxed at 25 percent, and the rate increased gradually from there. So with taxable income under $90,000, a corporation was probably paying taxes at below 21 percent.

However, Gero noted, "most businesses that are earning under $90,000 are probably S Corps and LLCs, rather than C corporations."

Cash vs. accrual accounting

Gero said a major win for businesses, which hasn't received much play in the mainstream media, is an increase in the income threshold under which a business can elect to use the cash basis of accounting. Previously, corporations with more than $5 million in revenue - averaged over the past three years - had to use the accrual method of accounting. That threshold has been lifted to $25 million.

Gero said the difference is significant in terms of cash flow.

For example, suppose a business makes a sale in one year, but doesn't get paid until the following year. Under the accrual method, taxes must be paid during the year in which the sale is made. Under the cash method taxes aren't due until the year the company actually receives the revenue.

"The benefit is you are paying the tax when you have the cash to pay it," Gero said. "It can make a huge difference in a company's cash flow and its ability to control income by offsetting income by purchasing supplies or something like that."

Bonus depreciation

The increased allowance for bonus depreciation, Gero said, is probably the biggest win for most businesses. An increased deduction for "Section 179" depreciation is also significant. The difference between the two can be confusing.

Briefly, when a business buys equipment, machinery or other property, the cost of that purchase, for tax purposes, is deducted, or depreciated over the expected life of the equipment. Bonus depreciation allows a portion of qualified equipment and machinery to be immediately deducted in the year it is placed into service, allowing a larger offset against taxable income. Until now, the rules allowed for a 50 percent bonus depreciation, with the other 50 percent of the asset's value being depreciated over time.

The new rules allow the full 100 percent of the cost to be deducted on equipment placed into service after September 27, 2017, and they now include used equipment purchases.

"I have a client who bought a $500,000 machine and placed it into service in October," Gero said. "He is eligible for a half million dollar deduction for 2017, and because he financed a large portion of it, he'll be paying for it in future years. Plus, his deduction was off the higher tax rates than he will have this year."

The 100 percent bonus depreciation will be available through 2022, after which it begins phasing out by 20 percent per year until it is completely phased out in 2027.

Section 179 depreciation also allows a business to fully deduct the cost of qualified equipment and machinery during the year it is placed into service. In the new tax plan, the maximum Section 179 deduction has been raised from $500,000 to $1 million. The new law is expanded to include certain improvements to non-residential real property, such as roofs, HVAC and other improvements.

Also, Gero said, the deduction limit for luxury automobiles has been raised from $3,160 to $10,000.

Alternative minimum tax

Much has been written about the elimination of the corporate alternative minimum tax (AMT). The bad news, Gero said, is that the new law limits the past-year losses that can be used to offset future taxable income to 80 percent after 2018.

"It's ironic that they eliminated the AMT for corporations, but are restricting the losses that a business can carry over," Gero said. "It kind of washes out. If you have taxable income in the following year, you're going to be paying taxes on something instead of potentially getting a 100 percent loss write-off."

Pass through entities

Like the elimination of the AMT, the 20 percent credit on taxable income that passes through to owners of LLCs, S corporations and other pass-through entities has been widely reported in the media. But not everybody will qualify for the credit, Gero cautioned.

"There are income limits on the 20 percent credit," he said. "If the owner of the business files as a single person, he or she can deduct the full 20 percent of qualified business income from a pass-through if their income is under $157,500. Above that, the 20 percent credit gradually lowers and completely phases out at $207,500. For married owners filing a joint return, the limit is $315,000 and completely phases out at $415,000."

Things can get complicated, Gero said, when a person owns multiple pass-through entities.

"What if you own more than one entity and you have a loss on one entity and income on the other?" he said. "There are no regulations in place at this time and that's a problem because it's already March and people want to know how to structure or restructure their businesses."

No more entertainment expenses

What happens in Vegas stays in Vegas, and that now includes the money you spend schmoozing your customers.

Under the new tax plan, entertainment expenses are no longer deductible, and the deductibility of meals is still being debated, Gero said.

"So far it seems that the business meals will still be 50 percent deductible," he said. "But the deduction for Cavs tickets or a round of golf are gone. There has always been a question as to whether entertainment is a necessary business expense, and now this has eliminated the judgement call."

Explore your options

The new "simpler" tax law may not be a lot simpler than before, but it does offer some major incentives to make capital investments to grow your business. Gero said because many of the new provisions will impact each business differently, it's important to consult with your accountant and tax attorney to be sure you derive the greatest possible tax benefits.

"The new rules are going to be beneficial to small businesses like our members," Johnson said. "But the other part of this is that the businesses that they serve also are going to benefit from reduced taxes. A prosperous economy that is bolstered by these tax benefits helps everybody prosper and hire more people, which also results in more opportunities for our members to grow. Every service provider owes it to themselves to make sure they are exploring all the angles by which they can capitalize."

Ken McEntee is the publisher and editor of The Paper Stock Report, providing market intelligence for the paper recycling industry. Visit paperstockreport.com.

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