Pub. 16 2017-2018 Issue 4

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S I S S U E N O . 1 , 2 0 1 8 14 new jersey auto retailer How Will the Tax Reform Act Impact Auto Dealers? BY ROCHELLE KIMMINS, CPA T he 2017 Tax Reform Act makes major changes to the U.S. tax code for both individuals and corporations. If you’re like most people, the main question you’re asking yourself is how will these changes affect me? As auto dealers, you will need to carefully plan how your busi- ness can optimize the tax saving opportunities, while avoiding the multitude of limitations and exceptions included in this tax bill. Here is a guide to some of the key provisions impacting businesses, and auto dealers in particular. Corporate Tax Changes The bill provides a massive tax cut for corporations, lowering the rate to a flat 21 percent on all profits. In addition, the Alternative MinimumTax of 20 percent is repealed for corporations. Although C corporations are subject to “double taxation,” this dramatic tax cut will make the corporate structure more attractive. But before sole proprietors and owners of pass-through entities rush to convert to C corporations, they will have to factor in the new 20 percent deduction that will be allowed for owners of sole proprietorships, S corporations, partnerships and even stand-alone rental properties owned by individuals (discussed below). If you are starting a new business or considering a change in business entity type for an existing business, you will want to select the entity type with the best tax effect for your circumstances, including business succes- sion and exit planning. Qualified Business Income Deduction (The Pass- Through Deduction) The tax law adds a new deduction for noncorporate taxpayers that is generally 20 percent of a taxpayer’s qualified business income from partnerships, S corporations, and sole proprietorships. The essential features of the new deduction are as follows: Qualified business income (QBI) is the net amount of income, gain, deduction and loss to the extent these items are effectively con- nected with the conduct of a trade or business. If QBI is negative, the excess is carried forward to the next tax year. What is NOT included in QBI is: investment income (capital gains, dividends, interest), reasonable compensation paid to the taxpayer, and any guaranteed payment to a partner. For auto dealers, the ordinary operating income passed through to owners would be QBI. However, investment income would be excluded. Qualified trades or businesses. The excluded trades or businesses include service firms in the health, law, accounting, consulting and any trade or business where the principal asset of such trade