By Alexandra Eaker Pérez
This article was originally published in the March/April 2020 edition of San Diego Lawyer.
As tax season approaches, lawyers and business owners alike can potentially benefit from keeping a few things in mind about the Tax Cuts and Jobs Act, commonly known as the TCJA. The TCJA now has two tax years behind it, tax year 2018 and tax year 2019, the latter of which is coming due for tax filing this July 15, 2020.
The Tax Cuts and Jobs Act presented the most sweeping business tax reform in the United States in over 30 years, and with the new changes come new opportunities for business owners and lawyers alike. The TCJA created a potential business deduction for pass-through entities like sole proprietorships, S corporations, and partnerships to allow for a business deduction of up to 20% of qualified income.
The potential deduction against qualified business income is limited by the amount of taxable income of the business owner(s) and the kind of business. Congress limited the amount of the deduction for businesses “in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics and financial services.” This means that in 2019, the threshold for law firm business owners is taxable income up to $321,400 if married filing jointly, or up to $160,700 for others.
For income within this threshold, the pass-through deduction is equal to 20% of the business owners’ qualified business income (QBI), the maximum possible pass-through deduction. The deduction is phased out and null once total income reaches $421,400 for married filing joint or $210,700 for others. Law firm business owners are encouraged to check in with their
tax professionals now as this 20% deduction on business income is set to sunset and expire on December 31, 2025.
Non-pass-through business entities also benefit from the revisions of the TCJA. The reduction in corporate tax rates has created an interesting environment in the U.S. with a maximum corporate tax rate of 21%, prompting a substantial increase of inbound foreign investment. To put it another way, through the tax reform passed by Congress, the U.S. may be positioning itself to become the world’s next tax haven.
Bonus depreciation further sweetens the corporate tax reform. For certain qualified property placed in service after September 27, 2017 through December 31, 2022, taxpayers may be able to expense 100% of the cost of the property. It is important to work with a qualified tax professional to help assess and determine what property is qualified and appropriate for each business.
All of the business tax reform above means that now is a great time for a form of entity checkup. Working with a qualified tax professional will help business owners evaluate their current business structure and options. Another crown jewel of the TCJA for business owners and investors alike is the creation of Opportunity Zone properties. In order for real estate to be classified as an Opportunity Zone, the property or area must be designated by the state and subsequently certified by the Secretary of the U.S. Treasury, via the IRS. To be eligible for the tax advantages of investing in the specified real estate, a corporation or partnership must create an investment fund and comply with the IRS requirements for designation.
Once the Qualified Opportunity Zone Fund is designated, the fund must
invest in at least 90% of assets in designated Opportunity Zones to be eligible for the preferential tax treatment. If the investor invests in substantial improvements equal to the original value paid by the fund in the property within the specified time frame to do so and holds the property for 10 years, the gains on the sale of the property will be tax-free.
Now more than ever it is important to work with a qualified tax professional.
When Congress passed the TCJA, it created new tax laws which left the IRS to pass treasury regulations promulgating and clarifying the application of the tax laws.
With new law comes new levels of ambiguity that create new challenges in application. The IRS is just beginning to audit 2018 tax returns, the first year of tax filing under the TCJA. Case law has not yet allowed the courts to fully vet the TCJA application through judicial review and judicial challenges to the TCJA are inevitable.
Alexandra Eaker Pérez is the founder of Eaker Pérez Law, a law firm dedicated to representing business owners in civil tax litigation, criminal tax defense and administrative tax issues.