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By Timothy M. Singhel, Esq.
Spicer Rudstrom, PLLC
Nashville, Tennessee

Every “individual” residing in the United States needs to know at least a quick and dirty on the major new changes to the federal income tax system that were signed on December 22, 2017.  After all, not many people want to read the 500+ pages of text that constitutes the entire recitation of the legislation. I certainly do not. I have been told that even some members of Congress still have not, let alone before voting on it. For those of you who do, you can feel free to click on the link above and go crazy. For the rest of us, some may want to review the official word on the changes directly from the IRS, or peruse much longer and detailed articles, or use a tax calculator that requires a lot of inputs.  For anyone that is still not interested but still needs to know the major ways that the changes will affect their small or middle-sized business, fear not, just read the rest of this blog and then do your due diligence on any changes you want to make as a result.

First and foremost, as just about everyone knows, changes were made to both the individual and corporate tax rates. Those changes are the foundation for all the rest of the alterations because adjustments needed to be made in order to soften the blow to the federal coffers if, going forward, you really could file your taxes on a postcard as the legislation was originally designed to do, or because there were special interest considerations in play (e.g. the cap on the state and local tax (SALT) deductions, rather than the elimination of them). The individual rate changes expire in 2025, but the corporate rate change to 21% is permanent.  For some businesses, those changes may mean it is now more advantageous to incorporate or, for a smaller group, to cease being a corporation and take all of the business’s income as personal to the owner.  It is certainly a good time to review your business’s structure with your tax advisor and legal counsel to see if a change makes sense. Considering that changing your business structure has far larger consequences than how your business is taxed, meeting with just your tax advisor could end up making your situation far worse, not better, because you are only dealing with a small part of a much larger decision.

Second, on a related note, all of your employees should change their withholding asap in 2018.  Not only did the individual taxation rates change but, among other things, the standard deduction was doubled, the personal exemption was eliminated, there is a new child tax credit, there is a new temporary tax credit for non-child dependents ($500), the mortgage interest deduction has been lowered to only apply to the first $750,000 (down from $1million), and there is a $10,000 cap on state and local tax deductions. For most Tennessee residents, that cap should not be a problem, but it could trigger for some because that limit applies to both property taxes and sales taxes combined.  The IRS has committed to have new withholding guidance available by the end of this month with the ability to and expectation to implement the new withholding structure with employees starting at some point in February.

Third, whether you are an employee of your own company or not, you will want to research the tax law changes yourself and/or consult with your advisor about what you should be doing with your own withholding, even more so if you are one of the people who have to estimate and pay your taxes quarterly. The timeframe between the issuance of the new withholding guides and the March 1st quarter deadline is short, so you cannot sit on this for long. If you are forced to guess, the best rule of thumb, even though it can be painful to your wallet, is to overpay because although that means giving an interest-free loan to the federal government, the IRS is far less forgiving when you have given that interest-free loan to yourself.  There will probably be a bit more forgiveness offered this year, but I would not take that to the bank (pun intended).