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How the TCJA Affects Tax Accounting Methods

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On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act into law. Known generally as the TCJA, this law immediately introduced some of the most dramatic changes to the tax code in years. While businesses around the nation were affected, perhaps no one felt the effects of the TCJA more intensely than accountants and accountancy firms. It’s easy to see why. With such a far-reaching adjustment to tax laws focused so heavily on businesses and corporations, CPAs and accounting firms will be in increased demand as their expertise on the new changes will be absolutely vital.

But how exactly does the TCJA affect accounting methods for American businesses? Let’s take a look at the main points of the TCJA, its effects on accounting and what it will mean for businesses and corporations who want to remain compliant amidst the new changes.

The Basics of the TCJA

First and foremost, let’s review the main elements of the TCJA that have the most impact on businesses and individuals nationwide. This is by no means an exhaustive look at everything included in the Tax Cuts and Jobs Act, but is designed to sum up the most vital points.

New 20% Qualified Business Income Deduction

With this dramatic new deduction, many owners of S-corps and Pass-through Entities will enjoy lower tax rates thanks to a 20% qualified deduction on business income. This may be the element of the new tax law that has made the biggest impact. It means that many business entities will be able to deduct 1/5 of business income from what they owe in taxes.

Corporate Tax Rate Lowered from 35% to 21%

This is another dramatic tax cut for corporations. It’s also one that led to some fierce political debate about whether it will result in a net good for the nation’s economy and citizens. Regardless of where you fall on the political spectrum, this will clearly have a massive impact on corporations who will benefit from a 15% drop in their tax rate.

Increased Standard Deduction

Standard deductions have been increased from $6,000 to $12,000 for individuals. As a result, people who used to rely on itemized deductions to reduce their taxable income will now be more likely to take the standard deduction instead. While this change is less specifically relevant to corporations and business owners, it’s worth noting if your business involves handling personal accounting concerns for clients.

The TCJA also adjusted limits on which deductions could be itemized on taxes, including charitable donations, medical costs, interest, taxes, and theft & casualty losses.

SALT deductions, which determine how much of your local and state tax liability can be deducted from your federal income, have also been capped through 2025.

Effects on International Business

If your business operates internationally, the TCJA will have further effects on your business and its tax liability.

In the past, the U.S. was considered to employ what’s called a worldwide taxation system. That meant that US-based entities would be taxed on the entirety of their global earnings no matter where or how that income came to be. In a territorial tax system, only income that occurs within the borders of the United States would be taxed by the nation.

A semi-territorial system splits the difference, meaning that some foreign income is subjected to United States taxation while other types of income are not. Here are the main income areas that will still be subjected to stateside taxes:

  • GILTI (global intangible low-taxed income)
  • Gains resulting from the sale of stocks or investments overseas
  • Income from Subpart F
  • Income derived from foreign branches of a US-based business.

Additionally, the TCJA repealed the Domestic Production Activities deduction. This will make it more financially viable for businesses to produce goods overseas as opposed to manufacturing here in the U.S.

There are other impactful changes to the tax code that affect international businesses. A one-time tax has been imposed on previously untaxed foreign earnings accumulated after 1986 for any controlled foreign corporations. If you’re a US shareholder in one of these corporations, you can opt to pay this tax over the course of eight years or, if you’re a shareholder in an S-corp, defer payment.

Another change in the tax law means that an American corporation with 10% or more ownership in a foreign corporation can receive a 100% deduction of dividends received overseas.

While these certainly aren’t all of the effects that the TCJA has had on business tax law, they cover the most significant changes to a wide sample of businesses operating internationally.

What does all of this mean for accounting?

All of these changes mean that accounting for your business will be anything but ‘business as usual’ moving forward. You’ll need to take into account (no pun intended) the new changes to tax law and ensure that you’re up-to-date and compliant on all of these adjustments. That can be difficult with changes as dramatic as some of the ones included in the TCJA.

So how can you stay on top of the TCJA’s changes?

Here are some valuable tips to keep in mind.

Communication is Key

The TCJA represents one of the most significant tax overhauls in recent U.S. history. It’s complex. It’s far-reaching. Now is not the time to keep your accounting department or third-party accounting firm at a distance. Accounting professionals are there to do more than silently fill out forms and track expenses on your behalf. They’re a resource that can be vital to staying on top of constantly changing tax laws so you’re never caught off-guard. Your tax professional will always strive to be proactive in keeping you informed. But if you have specific questions about how the TCJA will affect your business or other general concerns about tax compliance, you shouldn’t hesitate to bring them up with your accounting professional. They can help guide you through complex areas of the tax law so that you feel empowered to better understand where your business falls in terms of liability.

By staying in the loop and communicating clearly with your CPA, you’ll help your tax professional better serve you as they work to address your most vital areas of financial concern relating to tax law.

Tax Specialization is Key for Accountants

When selecting an accountant or accountancy firm to handle your finances, it’s become more vital than ever to choose someone with specific tax experience and specialization. The TCJA has made tax-expert CPAs more important than ever. Why? Because every change to the tax law, whether large or small, can have unexpected and far-reaching effects on other areas of the law. It takes a deep well of experience to understand how these changes interact with one another and, most importantly, how they will affect your business.

Don’t opt for a less-experienced accountant in order to save on costs. A deeply experienced, tax-centric accountancy firm will save you far more in tax liabilities, costs and potential penalties for uncompliant actions than you would save by choosing a ‘discount’ CPA. Don’t risk your tax compliance or the future of your business in a tax market that’s just undergone a dramatic change.

Conclusion

Tax law for businesses is complex enough without significant changes like the Tax Cuts and Jobs Act. While the TCJA was generally designed to be business-friendly and decrease the liability of businesses and corporations around the country, remaining compliant is still absolutely vital. The best way to ensure that your accounting practices are up-to-date on these changes is to communicate with your CPA or tax specialist. The more personally informed you can be on tax law and the TCJA, the more effective your relationship with your tax professional will be. As a result, you’ll be able to minimize the liability of your business and remain free from audits, fees, and other serious tax concerns.

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