Understanding the Impact of the Tax Cuts and Jobs Act
The passage of new tax law introduces a number of changes that may impact your business for 2018. Below is a summary of key items to consider for business tax planning.
Corporate Tax Rate
For C Corporations, the corporate tax is now a flat 21% rate. Previously, C Corporations were taxed on a graduated scale from 15% to 39%. Also for C Corporations, alternative minimum tax (AMT) at the corporate level has been repealed. In general, Subchapter S Corporations remain a more desirable tax choice for closely-held businesses. However, the reductions to the C Corporation tax rates could warrant revisiting corporate tax status in cases where profits are generally retained rather than distributed to stockholders.
Passthrough Business Deduction
Owners of pass-through entities may receive a deduction for up to 20% of qualified business income from a partnership, S corporation, or sole proprietorship. There are several limitations and phase-outs of this deduction, including limitations based on W-2 wages the business paid per each business. In general, there is little planning possible to change this credit. However, action may be needed to avoid the wage limitation if you currently outsource your employees from a related company or professional employer organization (PEO).
Meals, Entertainment, and Transportation Fringes
Deductions for business entertainment expenses are now disallowed. Business meals are still 50% deductible and now include in-house cafeteria or employer-premises meals. Employee transportation fringe benefits (e.g. parking and mass transit) are nondeductible, but such benefits are still excluded from employee income.
- The separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated and replaced by one category: qualified improvement property. Qualified improvement property is subject to a 15-year recovery period for straight-line depreciation without regard to whether the improvements are property subject to a lease. Qualified improvement property is qualified real property, and is therefore eligible for Section 179 expensing. The property must be used in an active trade or business.
- The Section 179 expense limit has been expanded to $1 million (from $500,000), and the cost of qualifying property threshold phaseout has been increased to $2.5 million (from $2 million). Qualified real property eligible for Section 179 expenditure includes qualified improvement property and has been expanded to include nonresidential real property improvements such as roofs, HVAC, fire protection and alarm systems, and security systems.
- Bonus depreciation now allows for a 100% first-year deduction for qualified new or used property (previously, the property had to be new to qualify).
Net Operating Losses
Net operating losses may only offset up to 80% of taxable income when carried to future tax years, and carrybacks of those losses to prior years are generally not allowed.
Accounting Method Changes
Taxpayers with average annual gross receipts of $25 million or less:
- May elect to utilize the cash basis of accounting
- Are no longer subject to the Section 263A uniform capitalization (UNICAP) rules
- May elect to utilize the completed contract method of accounting
The gross receipts test threshold was previously lower for each of these three accounting methods.
Interest Expense Limitation
Businesses with average annual gross receipts in excess of $25 million may not deduct net interest expense in excess of 30% of the business’s adjusted taxable income. Any business interest in excess of 30% is carried forward indefinitely.
Like-Kind Exchange Limitation
The deferral of gain resulting from like-kind exchanges under Section 1031 are now limited to include only real property not held primarily for sale. The most common impact is that trading in business vehicles will now trigger tax gain, with gain generally equal to the stated value received for the trade-in.
Charitable Deductions for Athletic Event Tickets
A deduction is no longer available for payments made to colleges and universities in exchange for the right to purchase tickets at an athletic event. 80% of these payments had been deductible as charitable contributions in the past.
Domestic Production Activities Deduction
The Domestic Production Activities Deduction has been repealed.
Credit for Employer-paid Family and Medical Leave
Businesses may claim a credit for 12.5% of employee wages paid for family and medical leave if the wages are at least 50% of the wages normally paid to an employee. This provision is only for 2018 and 2019 only.
If you have any questions on the above changes in tax law and how it might impact your specific situation, please feel free to contact us.