The Tax Cuts and Jobs Act was signed by President Trump on December 22. The Act makes sweeping changes to the U.S. tax code and impacts virtually every taxpayer. For businesses, tax benefits include a reduction in the corporate tax rate, increase in the bonus depreciation allowance, an enhancement to the Code Sec. 179 expense and repeal of the alternative minimum tax. Owners of partnerships, S corporations, and sole proprietorships are allowed a temporary deduction as a percentage of qualified income of pass-through entities, subject to a number of limitations and qualifications. On the other hand, numerous business tax preferences are eliminated.
A reduced 21% corporate tax rate is permanent beginning in 2018. Also, the 80% and 70% dividends received deductions under current law are reduced to 65% and 50%, respectively. The Act also repeals the alternative minimum tax on corporations.
The “bonus depreciation” rate has fluctuated wildly over the last 15 years, from as low as 0% to as high as 100%. The Tax Cuts and Jobs Act temporarily increases the 50% bonus depreciation allowance to 100% through 2022. Beginning in 2023, the amount of allowable bonus depreciation will be phased down over four years, reaching 20% in 2026. Though previously only allowed for new assets, the Act also expands the use of bonus depreciation to the purchase of used property.
Section 179 Expensing
The Tax Cuts and Jobs Act sets the Code Sec. 179 dollar limitation at $1 million and the investment limitation at $2.5 million beginning in 2018, increased from $510,000 and $2,030,000 respectively. These new limitations will be indexed for inflation after 2018.
Deductions and Credits
Numerous business tax preferences are eliminated. These include the Code Sec. 199 domestic production activities deduction, non-real property like-kind exchanges, and more. Additionally, the rules for business meals are revised, as are the rules for the rehabilitation credit. However, the Act leaves the research and development credit in place, but with some modifications. It also creates a temporary credit for employers paying employees who are on family and medical leave.
A significant change made by the Act will generally allow owners of partnerships, S corporations, and sole proprietorships a temporary deduction in an amount equal to 20% of “qualified business income” from such pass-through entities. This deduction is subject to several limitations and qualifications.
The Act also contains rules that will prevent pass-through owners, particularly service providers such as accountants, doctors, lawyers, etc., from converting their compensation income taxed at higher rates into profits taxed at the lower rate.
Net Operating Losses
The Tax Cuts and Jobs Act modifies current rules for net operating losses (NOLs). Generally, NOLs will be limited to 80% of taxable income for losses arising in tax years beginning after December 31, 2017. It also denies the carryback for NOLs in most cases while providing for an indefinite carryforward, subject to the percentage limitation.
These are just highlights of the changes and impact of the Tax Cuts and Jobs Act that will effect businesses. Other significant changes were also made that will impact individuals. There is much more to discuss than can be covered in this blog post.
We can help you with the immediate and long-term impact of the Tax Cuts and Jobs Act on your situation. We would welcome the opportunity to meet with you to discuss how these changes will impact your business. Please contact our office for further guidance.