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Business Provisions of the Tax Cuts and Jobs Act

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA). This sweeping tax package drastically changes the way businesses and their owners calculate their federal taxes. From a significantly lower corporate tax rate to a new deduction for qualified business income, the TCJA brings a host of provisions that will impact your business’s tax situation. This letter summarizes what we think are the key points in the TCJA. We have organized our discussion according to questions already asked by clients. Should you have additional questions, please don’t hesitate to contact us.

Does My Business Need to Convert to a C Corporation?

Not necessarily. You may have heard that C corporations receive a huge tax cut under the TCJA. That is generally true for income taxed at the corporate level. Under prior law, C corporations were subject to graduated tax rates, with a top rate of 35%. Under the TCJA, C corporations are taxed at a flat rate of 21%. This is substantially lower than the top individual tax rate of 37% (29.6% if you factor in the new deduction for qualified business income—more on that later). However, converting to a C corporation means that business income can be taxed twice—once at the corporate level and again when it’s distributed to shareholders. There are planning techniques to minimize the sting, but we would need to analyze your circumstances to determine if a C corporation is right for you.

Will the TCJA Affect My Business’s 2017 Tax Return?

For the most part, no. Most of the business tax changes apply to tax years beginning in 2018. However, there are a few provisions that may affect your business’s 2017 return. The biggest one involves a new 100% first-year bonus depreciation deduction for qualified new and used assets acquired and placed in service after September 27, 2017. Under a special transition rule, your business can claim the new 100% deduction or stick with pre-TCJA law, which provides a 50% deduction for new property only. Don’t worry—we’ll help you decide which option to choose.

Is the Corporate Alternative Minimum Tax (AMT) Still Around?

No. Starting in 2018, the TCJA repeals the AMT for C corporations. However, individual taxpayers are still subject to the AMT rules.

Did My Business’s Favorite Deduction or Credit Go Away?

Possibly. The TCJA alters the rules for many of our favorite tax deductions and credits. Here are some of the more notable changes:

  • Domestic Production Activities Deduction. Under prior law, businesses could deduct a percentage of the income earned from certain manufacturing and other production activities conducted within the U.S. The TCJA eliminates this deduction for tax years starting in 2018.
  • Net Operating Losses (NOLs). Under the TCJA, a business’s NOL deduction is limited to 80% of taxable income. In addition, most businesses can no longer carry back their NOLs to the prior two tax years. However, rather than expiring after 20 years, NOLs can be carried forward indefinitely.
  • Interest Expense. Regardless of its form, every business will be subject to a net interest expense disallowance. Starting in 2018, net interest expense in excess of 30% of your business’s adjusted taxable income will be disallowed. However, your business won’t be subject to this rule if its average annual gross receipts for the prior three years is $25 million or less.
  • Meals and Entertainment. Unfortunately, the TCJA eliminates the 50% deduction for business-related entertainment expenses. Also, the deduction for meals provided in an in-house cafeteria is now limited to 50%.
  • Fringe Benefits to Employees. Your business may no longer deduct the cost of providing transportation fringe benefits (parking, for example) to employees. However, your employees can still exclude the value of such benefits from their income. Also, no deduction is allowed for transportation expenses that are the equivalent of commuting for employees (except as provided for the employee’s safety).
  • Research and Development (R&D) Credit. In a bit of good news, the TCJA preserves the R&D tax credit. However, certain R&D expenses (for software development, for example) paid or incurred after 2021 must be capitalized and amortized ratably over five years.
  • Like-kind Exchanges. The TCJA limits the like-kind exchange rules so they apply only to real property that isn’t held primarily for sale. However, the rules continue to apply to personal property if you disposed of the relinquished property or acquired the replacement property on or before December 31, 2017.

What Is This New Pass-through Deduction?

You may have heard a lot of talk in the news about a new deduction for “pass-through” income, but it’s actually available for qualified business income from a sole proprietorship (including a farm), as well as from pass-through entities such as partnerships, LLCs, and S corporations. Under the TCJA, individuals may deduct up to 20% of their qualified business income. (For individuals in the new 37% tax bracket, qualified business income may be taxed at an effective top marginal rate of 29.6%.) However, the deduction is subject to various rules and limitations. We can help determine your eligibility for this new deduction.

Is This a Good Year for My Business to Purchase New Assets?

Yes. In addition to the new 100% bonus depreciation deduction we mentioned earlier, the TCJA increases the maximum amount of qualifying property a taxpayer may expense in 2018 to $1 million (up from $510,000 in 2017). If more than $2.5 million of property is placed in service during 2018, the $1 million limit is reduced by the excess over $2.5 million. In addition, the TCJA expands this deduction to cover more types of property, including roofs, HVAC, fire protection and alarm systems, and security systems. If your business buys a passenger auto this year (and bonus depreciation isn’t claimed), the maximum amount of allowable depreciation is increased to $10,000 for the placed-in-service year, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years. If your business claims bonus depreciation, it can increase the first-year amount by $8,000.

Are There Any New Tax Credits?

Yes, the TCJA establishes a new credit for employer-paid family and medical leave. The credit is for tax years beginning in 2018 and 2019 and is equal to 12.5% of the amount of wages paid to qualifying employees on family and medical leave. However, the employer must pay at least 50% of the wages normally paid to the employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percent by which the payment rate exceeds 50%. This could be a valuable incentive for your business, so let’s discuss at your earliest convenience.

As you can see, the TCJA touches many areas, and this letter only scratches the surface of all the new rules. Please call us if you have questions or want more information.

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