V i s i t S G I A a t S G I A . o r g

feature

S G I A J o u r n a l ■ M a y / J u n e 2 0 1 8 | 5 7

While the tax reform bill has some drawbacks, it may also have some benefits for the US labor market.

By Marci Kinter, Vice President, Government & Business Information, SGIA

In December 2017, both the US Senate and House of Representatives passed the most significant overhaul of the tax code in three decades. The $1.5 trillion “Tax Cuts and Jobs Act” makes cuts across the board on both corporate and individual tax rates. The bill, mostly Republican-supported, was vehemently opposed by Congressional Democrats, who claim the bill will only benefit the wealthy and will drive up the nation’s debt.

One of the key provisions of the rule is a change in the corporate tax rate. Previously, the tax rate was graduated, and businesses with over $10 million in income paid a 35% tax and those with over $15,000,000 in income paid 38%. Now in 2018, the corporate tax has permanently changed to a flat 21% rate. This means larger businesses with over $10 million in revenue pay less in taxes, but those smaller businesses with around $50,000 or less in revenue, who previously had a tax rate of 15%, end up paying more.

Additionally, under the new law, owners of sole proprietorships, S corporations or partnerships are entitled to take a deduction equal to 20% of the qualified business income (QBI) earned from the business. QBI includes the net domestic business taxable income, gain, deduction and loss with respect to any qualified trade or business.

The bill also removes the corporate alternative minimum tax, which prevented corporations from not having to pay any taxes through certain deductions, exclusions and credits.

While the tax reform bill has some drawbacks (smaller businesses paying more taxes and a potentially increased federal deficit), it may also have some benefits for the US labor market. Supporters of the bill argue that it will keep jobs in the United States and prevent issues like corporate inversion — a scenario in which a US-based company moves overseas or merges with a foreign company to reduce their tax burden.

The Tax Cuts and Jobs Act: Changes in the Corporate Tax Rate and What You Need to Know

feature

5 8 | S G I A J o u r n a l ■ M a y / J u n e 2 0 1 8 V i s i t S G I A a t S G I A . o r g

On the other hand, the bill a lso introduces what is known as a “territorial tax system,” meaning US companies would only pay taxes on what they earn in the United States and any profits made elsewhere would be subject to the tax rate of the country where the money is made. These two elements are intended to encourage companies to keep their manufacturing and labor efforts and workforces in the United States rather than countries like China.

The bill also modifies the tax rates for pass-through or S-corp businesses. Pass-through businesses do not pay the corporate income tax. Rather, the profits are passed through to the owner of the business. The owner then reports that income on their individual tax returns and pays tax on it, along with the rest of their normal income. S-corps are corporations that are taxed as a partnership. The corporation can pass income directly to shareholders. Requirements include being a domestic corporation, having 100 or fewer shareholders and having only one class of stock.

The Tax Cuts and Jobs Act creates a 20% deduction for pass-through income for these types of businesses. To discourage high earners from recharacterizing regular wages as pass-through income, the deduction is capped at 50% of wage income plus 2.5% of the cost of qualifying property. The deduction — available as of January 1, 2018 — expires after Dec. 31, 2025.

The net interest deduction, a deduction for taxpayers who pay certain types of interest, has previously had no cap. Under the new tax bill, however, it is initially limited to 30% of earnings before interest, taxes, depreciation and amortization. After four years, it will be capped at 30% of earnings before interest and taxes.

Additionally, the bill gets rid of net operating loss carrybacks — a situation in which a business suffers losses during a ca lendar year and deducts those losses against previous tax returns. Carryforwards, where businesses deduct these losses against future tax returns, are now capped at 90% of taxable income. In 2022, this cap will fall to 80%.

The Base Erosion and Anti-Abuse Tax (BEAT) provision requires multinational companies to determine tax owed using two ca lculat ions. One ca lculat ion determines 10% of a company’s taxable income and the other determines tax liability, minus any tax credits, including those from renewable investments. The tax is designed to discourage multinational

corporations from moving profits and jobs offshore. For every dollar earned through a wind or solar tax credit, the government could tax an additional dollar through the BEAT tax, potentially canceling out renewable subsidies going forward and retroactively.

One deduction that signif icantly impacts the printing industry is the advertising deduction. Under the previous law, businesses could deduct most of their advertising and promotional expenses from their taxable income. This has included outdoor advertising, online marketing, copywriting ads and logos and costs for working with a marketing firm or advertising agency. Other deductible costs included printing flyers and business cards with company logos.

During negotiations on the new tax rule, some members of Congress wanted to remove the advertising deduction — a move that would have a negative impact on the printing industry. Despite these talks, the deduction was ultimately left intact in the final rule, and businesses can still deduct their printed ads and business cards.

With all the recent changes coming into play for businesses, it may seem a bit overwhelming to figure out how this new rule affects you and what you can do. There are a few strategies you can take, however, to get the most out of your tax refund. First, you can convert your 1099 contractors to W-2 status. This would increase the amount of W-2 wages paid which would then provide you with a potentially higher QBI deduction.

Second, if you are not already filing as a pass-through business, it may benefit you to do so. As stated previously, in these cases, the owner of the business would pay taxes on an individual level, rather than corporate taxes, and would receive the 20% deduction for pass-through businesses.

Overall, this bill is a positive development for businesses in the printing industry. The bill provides more opportunities for deductions while maintaining the advertising deduction that benefits our industry. Some of the bill’s provisions have already gone into effect as of January 1, 2018, including the reduced corporate tax rate, while other parts of the rule will be phased in through 2019.

SGIA will continue to monitor the impact of these policy changes. Sign up at sgia.org/first-know to receive the most up-to-date regulatory and legislative information about specialty imaging.

Marci Kinter is the Vice President for Government and Business Information for SGIA. She oversees the development of management resources for the association and represents the screen printing and digital imaging industries, as well as their associated supplier base, before federal and state regulatory agencies and the US Congress on environmental, safety and other government issues directly impacting the screen printing and graphic imaging industries. She is responsible for directing the activities of not only the government affairs portion of SGIA’s activities, but the development and implementation of business resources for membership.