Congress passed a sweeping tax overhaul bill, the “Tax Cuts and Jobs Act” (the Act). Here are a few things you need to know on business tax reform.
Tax rates: The corporate tax rate is reduced to a flat 21% rate from the previous graduated tax rates of 15% up to 35%, for tax years beginning on or after January 1, 2018. There will be a blended rate for fiscal year corporations.
· Personal service corporations tax rate will be reduced from a flat tax rate of 35% to a flat tax rate of 21%
Corporate alternative minimum tax (AMT): This provision would be repealed.
· Credit for prior-year minimum tax would be available up to the regular tax liability for tax year 2018, partially refundable in 2019-2021; the balance refundable in 2022
Depreciation and Fixed Assets:
Section 179 deduction: for property placed in service in tax year beginning after December 31, 2017, taxpayers will be able to expense up to $1 million, and the phase-out threshold amount is increased to $2.5 million. Expansion on types of real estate improvements that qualify for Section 179.
Bonus depreciation: The Act allows 100% first-year deduction for qualified property acquired and placed in service on or after September 28, 2017 through December 31, 2022. Bonus depreciation phases out from 2023 through 2026.
Luxury automobile depreciation: The Act would increase the maximum amount of allowable depreciation on passenger automobiles placed in service after December 31, 2017 to $10,000 for the first year the vehicle 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 in the recovery period. Please note the additional first-year depreciation under Code Section 168(k) (“Bonus” depreciation) cannot be combined.
Farm equipment: The recovery period for new farming equipment and machinery is going to be shortened from 7 years to 5 years under new provisions.
Interest expense deductions: The allowable deduction for interest expense will be limited to 30% of adjusted taxable income (EBITA through 2021, EBIT thereafter). Businesses with less than an average of $25 million annual gross receipts for the prior three years are exempt from the limitation. Contact our consultants to discuss other limitations and exceptions.
Net operating loss (NOL): The NOLs generated in years prior to 2018 can offset 100% of taxable income. The NOLs generated in 2018 and after would be limited to 80% of taxable income (determined without regard to the NOL deduction). The two-year carryback rule would be repealed, and now it can be carried forward indefinitely.
· The NOL two-year carryback rule would still be allowed for farming businesses.
Domestic production activities deduction (DPAD): The DPAD is repealed starting after December 31, 2017 for Non-corporate taxpayers and repealed after December 31, 2018 for C-corporations.
Entertainment expenses: Deductions for entertainment expenses now are disallowed. Entertainment is considered to be activities undertaken for amusement or recreation.
Meals expenses: In general taxpayers will still be able to deduct 50% of meal expenses associated with business operations. For amounts incurred after December 31, 2017 and before December 31, 2025 meal expenses associated with providing employees with de minimis fringe benefit for the convenience of the employer will also be subject to the 50% deduction limit. After December 31, 2025 the de minimis fringe benefit meal expense will not be deductible.
Lobbying expense deduction: Deduction for lobbying expenses carried in associated with local government/legislative bodies will be eliminated under the new tax bill.
Like-kind exchanges: the Act repeals like-kind exchanges except for real estate not held primarily for sale. In general exchanges in process as of December 31, 2017 will be allowed.
Family and medical leave act (FMLA): A tax credit will be allowed for up to 25% of wages paid under FMLA.
Cash method of accounting: Under the new provision the cash basis method can be used by taxpayers with annual average gross receipts under $25 million, for the three prior tax years.
Inventory: Under the new provision taxpayers with annual average gross receipts under $25 million, for the three prior tax years, may treat inventory as non-incidental materials and supplies.
Uniform capitalization (UNICAP): Under the new provision the $10 million average annual gross receipts test increased to $25 million, for the three prior tax years. Therefore, any producer or reseller that meets the $25 million gross receipts test is exempt from uniform cap rules under IRC §263A.
Note there are several limitations and exceptions to many of these changes. Contact our consultants at 877.FOR.HWCO or hwco@hwco.com to discuss the best action for your specific tax situation and structure.