Summary of Business Tax Changes in the Tax Cuts and Jobs Act

The 2018 Tax Cuts and Jobs Act (TCJA) contains many tax law changes. The following summary covers the highlights of  the TCJA for businesses.  

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New Income Tax Flat Rate

In prior years, corporations were taxed under eight brackets with a 35% top rate, with personal service corporations taxed at a flat 35%. For tax years beginning after 2017, the corporate tax rate is a flat 21% and there is no special rate for personal service corporations.

Dividends-Received Deduction Percentages Reduced

Corporations that receive dividends from other corporations are entitled to a deduction that is increased if the receiving corporation owns at least 20% of the other corporation. The TCJA reduces the deduction to 50% for dividends from a 20%-owned corporation and 65% for other dividends.

Corporate AMT Repealed

Corporations with gross receipts of more than $7.5 million for the preceding three tax years were previously required to pay a 20% AMT, with an exemption amount of up to $40,000. For tax years beginning after 2017, the Act repeals corporate AMT. For tax years beginning in 2018 to 2020, AMT credit utilization limitation is increased by 50%, and AMT credit carryforward becomes a refundable credit.

Net Operating Loss Deduction Modified

For NOLs arising in tax years beginning after December 31, 2017, the carryback period is eliminated and the carryforward period is made indefinite. There is an exception for certain losses incurred in the trade or business of farming; for these, a two-year carryback applies. For NOLs arising in tax years beginning after 2017 and before 2023, NOL utilization is limited to 80% of taxable income. NOLs of property and casualty insurance companies can be carried back two years and forward 20 years to offset 100% of taxable income in such years.

Small Business Election to Expense Assets Increased

Under Code §179, taxpayers may elect to deduct the cost of qualifying property currently, rather than recover the cost over several years through depreciation. Qualifying property is generally defined as tangible personal property, including computer software and real property, purchased for use in a trade or business. Prior tax law limited the deduction to $500,000 in a given tax year, phased out when the cost of qualifying property exceeded $2 million.

For property placed in service in tax years beginning after 2017, the maximum amount that may be expensed per year is raised to $1 million, and the phase-out threshold amount is increased to $2.5 million. The definition of qualified property under §179 is expanded to include tangible personal property used to furnish lodging and certain improvements to nonresidential real property: roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems.

Cost Recovery of Qualifying Business Assets Temporarily Accelerated

The TCJA allows 100% immediate expensing for qualified property placed in service from Sep. 27, 2017 through December 31, 2022. The allowed amount is phased down annually through 2026 (80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026). For property with a longer production period, phaseout begins in 2024 instead. The definition of qualified property is expanded to include used property acquired by the taxpayer, provided the property was not used by the taxpayer before being acquired.

Recovery Period for Real Property Shortened

The cost recovery periods for most real property are 39 years for nonresidential real property and 27.5 years for residential rental property. The straight-line depreciation method and mid-month convention are required for such real property.

Pre-TCJA law treated qualified leasehold improvement, qualified restaurant and qualified retail improvement property separately; the TCJA erases these distinctions and provides a 15-year recovery period and straight-line depreciation for qualified improvement property. Thus, qualified improvement property placed in service after December 31, 2017, is generally depreciable over 15 years using the straight-line method and half-year convention, without regard to whether the improvements are to property subject to a lease, placed in service more than three years after the date the building was first placed in service, or made to a restaurant building.

Like-Kind Exchange Treatment Limited

Previously Code §1031 provided that no gain or loss was recognized on the exchange of a wide range of property held for productive use or investment. For transfers after December 31, 2017, the rule is modified to allow like-kind exchanges only for real property not held primarily for sale. Transactions begun before 2018 may be completed under a transition rule if the taxpayer has either disposed of the relinquished property or acquired the replacement property by December 31, 2017.

Use of Cash Method Expanded

A gross receipts test applies to limit what entities may use the cash method of accounting. Previously the threshold for farms, qualified personal service corporations and C corporations who use cash accounting was $5 million annually. For tax years beginning in 2018 or later, taxpayers with annual gross receipts that do not exceed $25 million for the three prior tax years may use the cash method. In addition, the requirement that the threshold must be satisfied for all prior years is repealed.

Deductibility of Fines and Penalties Expanded

Taxpayers are not allowed deductions for expenses that include bribe payments, health care fraud, lobbying payments, or any fines paid to the government for breaking the law. The TCJA adds to this list any amount paid to or for the government in relation to the violation of any law or the government investigation of any potential violation. An exception applies to restitution or remediation payments and any amount paid or incurred as taxes due.

Employee Achievement Awards

The value of tangible property given to an employee as an award, either in recognition of length of service or safety achievement, is excludable to the extent the employer can deduct the cost of the award (generally up to $400 per employee). The TCJA tweaks the definition of “tangible property” to exclude cash, cash equivalents, gifts cards, gift coupons, gift certificates, vacations, meals, lodging, tickets for theatre or sporting events, stock, bonds or similar items.

New Credit for Employer-Paid Family and Medical Leave

The TCJA introduces a credit to employers for compensation paid to employees while they are on family or medical leave. For tax years beginning after 2017 and before 2020, eligible employers may claim a credit for 12.5% of wages paid to qualifying employees during any period in which such employees are on family and medical leave if the payment rate under the program is 50% of the wages normally paid to an employee. The credit increases by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50% of normal wages.

Technical Termination of Partnerships Repealed

Under existing rules, a partnership terminates if, within a 12-month period, there is a sale or exchange of 50% or more of the total interests in partnership capital and profits. For partnership tax years beginning after December 31, 2017, the technical termination rule is repealed. The TCJA does not change the existing rule that a partnership is considered terminated if it ceases to carry on all of its business operations.

Domestic Production Activities Deduction Repealed

Pre-TCJA law allowed up to a 9% deduction on qualified production activity income. Qualifying receipts came from property manufactured, produced, grown or extracted within the U.S.; certain film productions and construction activities; and certain engineering or architectural services. For tax years beginning after 2017, the TCJA repeals the domestic production activities deduction for non-corporate taxpayers. For tax years beginning after 2018, the deduction is repealed for C corporations.

Qualifying Beneficiaries of an ESBT

Eligible beneficiaries of an electing small business trust (ESBT) include individuals, estates, and certain charitable organizations eligible to hold S corporation stock directly. Nonresident aliens may not hold S corporation shares and, therefore, are not eligible ESBT beneficiaries. For tax years beginning after 2017, the Act permits nonresident alien individuals to be current beneficiaries of an ESBT.

Charitable Contribution Deduction for ESBTs

When an ESBT makes a charitable contribution, prior tax law applied the deduction rules for trusts to the amount, rather than the deduction rules for individuals. The Act switches this, so that the charitable contribution deduction of an ESBT is determined by individual rather than trust rules. Under these rules, the deduction is allowed subject to certain AGI percentage limitations, and a five-year carryforward of amounts in excess of the limitation is allowed.

Employer’s Deduction for Meals and Entertainment Limited

Previously a taxpayer could deduct up to 50% of expenses related to meals and entertainment, while housing and meals provided for the convenience of the employer, along with other fringe benefits including transportation, were excluded from an employee’s gross income.

For amounts paid after 2017, the deduction for entertainment expenses is disallowed; the 50% deduction for business meals is expanded to include meals provided on the premises of the employer; and the deduction for employee transportation fringe benefits is denied, but such amounts are still excluded from an employee’s income. Beginning in 2026, the employer deduction for on-premises meal expenses is disallowed.

For more information or questions, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337).

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