Make sure your business is aware of the changes implented via the passing of the Tax Cuts and Jobs Act last year, which aimed to simplify individual filings, cut the federal corporate tax rate and offer temporary tax deductions for comparatively small businesses. 

If you haven’t met your maker by April 15, Uncle Sam will be expecting his annual tax settlement. 

But small business owners throughout Arizona may appreciate some of the changes to the federal tax code, which was ratified by Congress in December 2017.

The federal Tax Cuts and Jobs Act aimed to simplify individual filings, slash the federal corporate tax rate and offer temporary tax deductions for comparatively small proprietors.

By 2027, the federal tax overhaul will also add more than $1.4 trillion to the national deficit, according to the Congressional Budget Office.

While local tax preparers are waiting to see if Arizona will conform to the new federal law, here’s what some professionals had to say about the changes.  

Small businesses eligible for 20 percent deduction

Under the new federal tax law, pass-through entities—which include sole proprietorships, partnerships, LLCs and S corporations—will be eligible for a 20 percent tax deduction on qualified income.

Even though owners of pass-through entities may get a significant savings from the new 199A deduction, it’s a more complex and time-consuming calculation, said Marshele Scherrer, marketing manager at R&A CPAs.

While the IRS classifies corporations as separate tax entities, taxes are levied for pass-through businesses on the individual owners’ personal returns. 

“Since the deduction is taken at the individual level, every pass-through entity tax return will need to report specific information to its owners so that they can determine if they are eligible for the deduction,” Scherrer said.

Businesses and individuals can expect longer tax preparation times due to this change, she said.

And there are limitations. 

Married couples filing a joint return for pass-through entities with earnings greater than $315,000 and all other taxpayers earning more than $157,500 may be subject to a limited deduction.

To further complicate the pass-through deduction, there’s leeway built into the ceiling for annual earnings: $100,000 for married couples filing a joint return; and $50,000 for single filers. 

And according to the IRS, the entity filing for this deduction must not be a specified service trade where the principal asset is based on the reputation or skill in the practice of: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading or dealing in certain assets.

But by and large, the pass-through deduction was Congress’ attempt to level the playing field between corporations and small businesses, said Jacquie Ivey, partner at HBL CPAs. Under the new federal law, the corporate tax rate was reduced from 35 to 21 percent.

For the past year, the IRS has been drafting the new tax documents, which has come to a halt due to the partial government shutdown (as of print deadline), Ivey said. While the rules contained in the new federal tax law won’t change, the documents haven’t been finalized.

The Arizona Legislature usually conforms the state tax code to its federal counterpart, Ivey explained. But until that happens, the pass-through deduction only applies to federal tax returns. 

While the Arizona Department of Revenue is acting as if there will be full state conformity, there’s no guarantee that will happen, she added.

Bonus depreciation on property purchases doubled

With the expansion of Section 179, bonus depreciation has increased to the full cost of eligible property acquired the year it was purchased, Scherrer explained. 

This expansion applies to property purchased and put to use from Sept. 28, 2017 through Dec. 31, 2022; before the change, bonus depreciation only covered 50 percent of the cost. 

For passenger autos, the first-year depreciation is $10,000, or $18,000 if its eligible for bonus depreciation, Scherrer said. And for vehicles weighing more than 6,000 pounds, 100 percent of the cost may be deductible using this tax break.

Scherrer said the new law also allows expensing of non-residential property enhancements, which includes qualified improvements, roofs, HVACs, fire protection, alarms and security systems. 

And the maximum annual deduction has doubled, capping out at $1 million.

However, not all states conform to these rules, which can cause higher income totals for state income tax purposes, Scherrer said.

This change in the federal tax law is quite generous, said Ivey, of HBL CPAs. But the lack of state tax law conformity complicates this issue, which may result in businesses over- or under-paying state taxes, she explained.

So Ivey’s clients are mulling whether to only file federal returns and apply for extensions on state taxes. “And honestly when people have a federal refund—they want to spend it.”

At the same time, the Arizona State Society of Certified Public Accountants is trying to convince local legislators how important it is to conform to federal tax standards as quickly as possible. 

“We’d really like this to be addressed quickly … because we don’t have a lot of answers right now,” Ivey said.

Net operating loss rebate changes

Before the new law, business owners had more ways to use a net operating loss to offset their current year’s taxable income. 

Now, excess business losses for non-corporate taxpayers is capped at $500,000 for married joint filers and $250,000 for everyone else. 

After 2017, any net operating loss deduction will only apply to 80 percent of a taxpayer’s current taxable income. Scherrer said this will be determined without regard to “carryforward,” which uses the current net operating loss to reduce the tax rate via a rebate for the following 20 years.

“This limitation may significantly curb the utilization of NOLs in subsequent years,” Scherrer said. 

Moreover, most people will not be able to use “carryback,” where a taxpayer could apply the current year’s loss to the last two years in order to generate a tax rebate. 

Will Arizona conform to federal change?

The federal bonus depreciation changes are largely not recognized by most states; plus, the pass-through entity income tax deduction is not codified under state statute, Scherrer said.

Since state tax code is inconsistent with the federal changes, the differences should be considered in a business owner’s tax planning and discussed with their accountants, she added.

There’s a lot of moving parts and state bureaucracy at work, said Ivey, of HBL CPAs, which may not come to pass until after the April filing deadline.

In the meantime, plenty of bean-counting eyes are fixed on Phoenix, Ivey said. 

“As a firm, we’re trying to determine how to inform clients,” she said. “And we’re not being cagey. We literally don’t know what they’re going to do.”