The Tax Cuts and Jobs Act has brought about significant and sweeping changes for businesses. Unless stated otherwise, the law and changes will go into effect for tax years beginning after December 31, 2017. The following are key components of the new legislation that will have immediate impact.
Tax Rate and Alternative Minimum Tax (AMT)
The most prominent change is the reduction of the C corporation tax rate, ranging from 20% – 35%, to a flat 21%. The 21% also applies to personal service corporations. The AMT for C corporations has been repealed.
Depreciation rules now provide more tax incentives to businesses with capital expenditures. The expensing under Internal Revenue Code Section 179 has been increased to $1 million, with the phase-out threshold increasing to $2.5 million. For qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023, a 100% first-year bonus deduction is allowed for both new and used property. Under the pre-Act law, the 50% bonus depreciation is only available for new original use property.
Tax depreciation deduction for luxury automobiles is also increased. For used passenger automobiles placed in service after December 31, 2017, the maximum amount of allowable depreciation is increased from $3,160 to $10,000 for the year in which it is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years. For new passenger automobiles, the first-year bonus depreciation remains at $8,000; therefore, the first year allowable depreciation is $11,160 ($3,160 + $8,000 bonus depreciation). The second year allowable depreciation is $5,100, the third year is $3,050, and following years are $1,875.
Net Operating Loss Limitation
The two-year carryback of net operating losses (NOL) has been repealed, and the NOL deduction is limited to 80% of taxable income. NOLs can now be carried forward indefinitely.
Tax Provision on Various Business Deductions
The domestic production activities deduction has also been repealed. Personal property can no longer be included in like-kind exchange. Deductions for entertainment expenses, which were previously 50% deductible, are now disallowed. Business meals are still 50% deductible, but meals that previously were 100% deductible (meals provided on the premises of the employer to employees for the benefit of the employer or through an in-house cafeteria) are now only 50% deductible. Deductions for employee transportation fringe benefits, like parking and mass transit, are now denied.
New Deduction for Pass-Through and Sole Proprietor’s Business Income
There is a new tax deduction (Section 199A) for individual taxpayer’s trade or business income. Generally, it is a 20% deduction on qualified business income, but the IRS has found a way to make it very complicated. There are many rules and limitations that can change the 20% deduction, including limitations based on W-2 wages paid and qualified property owned. Careful consideration should be made when reevaluating the choice of entity, classification of the workers and likelihood of profit distributions to the owners.
Now is the time to plan and make changes to take full advantage of the new laws.
If you have questions or would like additional details on the new tax law, please contact Jim Wilde at firstname.lastname@example.org or 844.4WINDES (844.494.6337).