Tax Cuts and Jobs Act: Top 10 Takeaways for Businesses
The Tax Cuts and Jobs Act was signed into law on December 22, 2017, and introduces a host of changes to the nation’s tax laws. While it will likely take months for the Treasury Department to adapt to the new law and more changes could be coming, it’s important that we share our current understanding of potential impacts on your company’s finances.
1. The corporate tax rate was reduced to 21%.
Since the prior law imposed taxes at a top rate of 35%, the new rate represents a 40% decrease in corporate tax liability. The new 21% tax rate is a flat rate applicable to all income ranges for C corporations. With this new tax rate in place, the 20% alternative minimum tax (AMT) for corporations was repealed.
2. There is a new 20% qualified business income deduction (QBID).
The new QBID applies to pass-through entities such as S corporations, partnerships, LLCs and sole proprietorships and, in some situations, can reduce the tax rate business owners pay on their pass-through income from 37% to 29.6%. At higher income levels, the 20% deduction is limited to the higher of either 1) 50% of W-2 wages, or 2) 25% of W-2 wages plus 2.5% of the unadjusted basis, immediately after acquisition, of depreciable assets.
3. The rules for taxing service businesses have changed.
- The old personal service corp’s (PSC’s) 35% tax rate for C corporations whose principal activity is accounting, actuarial science, architecture, consulting, engineering, health, and the performing arts is repealed.
- Non-C corporation owners of specified service businesses (SSBs), such as accountants, lawyers, health professionals and consultants, are generally not entitled to the 20% QBID for pass-throughs unless their taxable income is below $415,000 (MFJ), with the phaseout beginning at $315,000 (MFJ).
- Architects and engineers are excluded from the definition of SSBs.
4. The repatriation tax will have an impact.
With an estimated $2 trillion of corporate profits harbored oversees waiting for relief from the old 35% corporate tax rate, the new repatriation rates (8% for illiquid assets and 15.5% for cash and equivalents) have major U.S. corporations already reporting one-time charges to repatriate billions in overseas cash.
5. Like-kind exchanges are now confined to real estate.
For exchanges completed after December 31, 2017, only real property will qualify for Sec. 1031 treatment.
6. The Sec. 179 deduction for equipment increased and expanded.
The annual expense limits and phaseout ceiling for this deduction have been increased to $1,000,000 and $2,500,000 respectively. Sec. 179 property has been expanded to include certain depreciable tangible property placed in service and used in lodging. In addition, certain improvements to non-residential real property such as HVACs, fire protection, alarms and security systems now qualify for the Sec. 179 deduction.
7. Bonus depreciation was expanded.
The new law allows 100% expensing of tangible business assets (except structures) and applies to new and used property if it is the taxpayer’s first use of the asset. Bonus depreciation phases out from 2023 through 2026.
8. The business interest deduction has been limited.
Businesses are subject to disallowance of a deduction of net interest expense in excess of 30% of the business’s taxable income, regardless of deductions for depreciation, amortization or depletion. The amount of any business interest not allowed as a deduction for a taxable year is carried forward as business interest paid or accrued in the next taxable year.
9. Operating losses can be carried forward, but not backward.
The two-year net operating loss (NOL) carryback provision was repealed except for certain farm losses. Beginning 2018, NOLs can be carried forward indefinitely, but the deduction is limited to 80% of taxable income (determined before the NOL deduction).
10. The threshold permitting cash accounting was increased.
The gross receipts test for allowing the cash method of accounting has been increased from $5,000,000 to $25,000,000. The cash method can be used regardless of inventory and whether the purchase, production or sale of merchandise is an income-producing factor as long as the average gross receipts for the prior three years does not exceed $25,000,000.
While the 50% deduction for meals (food and beverage) was retained, no deduction is allowed for activities considered to be entertainment, amusement or recreation, or for membership dues with respect to any club organized for business pleasure, recreation or social purposes.