By Christina Quinones, Tax Senior Manager
With the passage of the 2017 Tax Cuts & Jobs Act (TCJA), the tax positions of various businesses across the spectrum were affected in some way– including those in the staffing industry. Today’s leaders in staffing have expressed an overall positive sentiment with the changes that will have an impact on not only their business but on themselves individually and their employees. However, there are still many unanswered questions and complexities in the law that can make it difficult to navigate and understand the true effect the tax bill will have on your staffing firm. There are also 3 tax credits that are available to staffing firms, and this article will provide information on whether your company qualifies.
Top tax reform changes impacting the staffing industry
Here are four stand-out items from the TCJA that have had an immediate effect on the industry:
#1: Lower tax rates across the board
Staffing companies structured as pass-through entities (which is most common in the industry) may benefit from the lowering of the individual tax rates. The highest individual tax rate was lowered from 39.6% to 37%. In addition, the total income amount that is taxed at the highest marginal tax rate was increased.
Effective January 1, 2018, staffing companies operating as C-Corporations will now be taxed at a flat 21% federal income tax rate. This is a substantial decrease from the prior law which provided for a maximum Federal rate of 35%. The tax rate applicable to qualified dividend distributions was unchanged.
#2: More demand for staffing firms – and some benefits to staffing firm employees
The effects of the TCJA on other industries have also had an indirect influence on the staffing industry. With the positive business sentiment that came with the passage of the TCJA, many companies have increased their hiring efforts in order to invest more in equipment, plant sites and properties, and they are using staffing firms to increase their labor force. In addition, several prominent staffing firms across the country, including Insperity, have announced bonuses to their workers after seeing the effect the TCJA has had on their business.
#3: 20% deduction for Qualified Business Income
A significant new provision in the TCJA is the creation of a 20% deduction for Qualified Business Income (QBI) for individuals and trusts/estates that own pass-through businesses, including LLCs, Partnerships and S-Corporations. In general, the 20% deduction (claimed on the individual’s personal tax return) is based on the lower of the owner’s overall taxable income, or their allocable share of QBI, which is a defined term in the TCJA. There are complex limitations on the deduction depending on the amount of employee wages paid by the business.
Most staffing companies are structured as pass-through businesses, so it is no surprise that this deduction is expected to have an impact on the owners of staffing companies. Because of the hasty passage of the TCJA earlier this year, the guidance on this deduction was limited. There was some clarification needed as to whether staffing companies would be considered PSOs or Professional Service Organizations and thus lose the full benefit of the deduction. However, in August, the IRS issued proposed guidance which seems to positively address the concerns sent to them by the American Staffing Association, advocating for staffing companies not to be included in the definition of a PSO.
#4: Meals and entertainment rules have changed
With the passage of the TCJA, it will now be more important than ever to separately track entertainment expenses, business meals, and employee meals in the business ledger. To the dismay of many business owners, a tax deduction will no longer be available for entertainment, amusement, or recreation costs, regardless of whether they are directly related to your business or are intended to generate business income.
Previously, the deduction for these costs was limited to 50%. Fortunately, additional guidance issued last month makes it clear that meals incurred incidental to entertainment are 50% deductible, as long as they are separately listed on an itemized receipt or invoice (for example, meals and beverages consumed while at a sporting event). Also at risk for extinction is the deduction for employee meals, previously 100% deductible if paid for the convenience of the employer. These deductions are now subject to a 50% limitation under the TCJA rules and are set to be dropped to a 0% deduction at the end of 2025.
Potential tax credits for staffing firms
In addition to the opportunities under the new tax law, here are three tax credits that may be beneficial to those operating in the staffing industry:
#1: Federal Work Opportunity Tax Credit:
Credit provided to employers for the hiring of individuals from target groups (e.g., veterans and SNAP recipients).
#2: Georgia Retraining Tax Credit:
Credit provided to employers related to costs incurred for the training of employees on new equipment and technology. “Employees” include any full-time worker who resides in Georgia, who is employed for a minimum of 25 hours per week, and who has been continuously employed by the employer for at least 16 consecutive weeks.
#3: Georgia Jobs Tax Credit:
Credit provided to employers for “new full-time employee jobs” created in distressed areas across Georgia. The jobs must offer a minimum of 35 working hours a week and pay at or above the average wage earned in the lowest average wage-earning county in Georgia.
For a consultation about how to plan around these changes in the new tax law, please contact a Moore Colson advisor.
About the author – Christina Quinones, CPA, is a Tax Senior Manager at Moore Colson CPAs and Advisors.