Confused by Tax Reform? It Could Help Simplify Your Company Taxes
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Let’s keep this simple: Taxes can be complicated. And more than 500 pages of tax reform won’t make understanding U.S. taxes any easier.
But here’s the good news: Various provisions of the latest tax reform may actually simplify your company taxes.
It’s been well-documented that the new tax code provides a hefty tax cut to corporations overall, adjusting the tax rate to 21 percent from the previous level of 35 percent. Tax rates also decreased for individuals, and a new deduction was introduced allowing less tax to be paid on income from flow-through businesses such as LLCs and S-corporations. That’s a change praised by Jay Timmons, president and CEO of the National Association of Manufacturers.
“We had the highest corporate tax rate in the industrialized world,” Timmons said. “By providing relief to small businesses especially, Congress has strengthened the heart of the modern manufacturing economy.”
Yet beyond that tax rate reduction are other changes that may provide additional boosts to your company’s bottom line. Whether you’re considering adding a new product line or financing a new building, elements of tax reform will impact your decision and could simplify your company taxes. Here’s what you need to know.
The decision to take on debt is even more important now.
Average your gross receipts for the past three years. If the number is more than $25 million, new limitations may affect your ability to deduct interest paid. Before the 2017 tax reform legislation became law, 100 percent of interest paid on debt was deductible. In many cases, that’s no longer true.
For these companies, the amount you can deduct for business interest is now limited to 30 percent of your adjusted taxable income, a calculation similar to EBITDA. That’s a big change — from 100 percent to 30 percent — and that will impact your decisions on when and why to take on new debt.
While this is affects only companies over $25 million, it’s smart for smaller companies to pay attention, too. If accumulating debt is part of your growth strategy, you’ll need to understand the impact that will have on your tax situation.
No More Capitalization of Overhead Costs
Accounting for inventory just got easier.
Here’s a helpful change for smaller businesses: If your gross receipts are less than $25 million, you’re now exempt from a provision that required you to capitalize certain costs related to inventory. In the past, these overhead costs, including storage, handling and others, could not be expensed until the inventory was sold.
Take rent, for example. Let’s say you are renting a warehouse to store your inventory. Previous tax codes dictated that since you have inventory still in the warehouse at the end of the year, you can’t expense all the rent paid for the warehouse. A portion of the rent was capitalized as part your inventory increasing taxable income.
Under the new tax code, you can ignore that if your company is under $25 million. You can now deduct these costs as they are incurred.
Time for a Change?
It may be time to change your accounting method.
There’s another bonus in the new tax code for companies under $25 million in gross receipts. You now qualify to use the cash method of accounting, which taxes revenue only when the money is received and allows a deduction for expenses when money is paid out.
Previous rules put very strict limits on manufacturing and distribution companies that maintained inventory. Most manufacturing companies were required to use the accrual method of accounting. Under this type of accounting, revenues are reported on the income statement when they are earned, and expenses are matched with related revenues when the expense occurs, not when cash is paid.
This is an important change because a company under $25 million will no longer have to pay taxes on its accounts receivable. That can add up to big savings.
Summary: Simplify Your Company Taxes
In the long run, many changes laid out in the recent tax reform could mitigate the tax burden on smaller manufacturing and other companies. A CPA-based advisory firm can help you make plans that are right for you and could simplify your company taxes. As you weigh the impact of tax reform, consider:
- Taking on debt must be more carefully considered since larger companies may no longer have the ability to deduct 100 percent of interest paid.
- Not having to capitalize certain overhead costs into inventory could lead to a sizable deduction. There may be a big planning opportunity for companies looking to switch to the cash method of accounting.
Assess the impact of these new rules for your business sooner rather than later. While it’s true that changes to the tax code will impact your 2018 tax return, educate yourself as you’re calculating your 2018 estimated taxes.
This much really is simple: There just might be savings that could be put to good use now.