On December 20, Congress completed passage of the largest federal tax reform law in more than 30 years. Commonly called the “Tax Cuts and Jobs Act” (TCJA), the new law means substantial changes for business taxpayers.
The following is a brief overview of some of the most significant provisions.
- C-Corporate Tax Rates Reduced – For tax years beginning after Dec. 31, 2017, the corporate tax rate is a flat 21% rate.
- Dividends-Received Deduction Percentages Reduced – For tax years beginning after Dec. 31, 2017, the 80% dividends received deduction is reduced to 65%, and the 70% dividends received deduction is reduced to 50%.
- Alternative Minimum Tax Repealed – For tax years beginning after Dec. 31, 2017, the corporate AMT is repealed.
- New 20% deduction for qualified business pass-through income – The deduction is 20% of income from a partnership, S corporation or sole proprietorships. The deduction is taken below the line so that it reduces taxable income but not adjusted gross income. There are limitations for high income taxpayers as well as certain other restrictions that attempt to deter taxpayers from converting wages into income eligible for the deduction.
- Increased Code 179 Expensing – For property placed in service in tax years beginning after Dec. 31, 2017, the maximum amount a taxpayer may expense under Code Sec 179 is increased to $1 million, and the phase-out threshold amount is increased to $2.5 million. For tax years beginning after 2018, these amounts (as well as the $25,000 sport utility vehicle limitation) are indexed for inflation. Property eligible for Code Sec 179 expensing has also been expanded.
- Temporary 100% Bonus Depreciation Deduction – A 100% first-year deduction for the adjusted basis is allowed for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The bonus depreciation deduction is allowed for new and used property. The Act refers to the new 100% depreciation deduction in the placed-in-service year as “100% expensing,” but the tax break should not be confused with expensing under Code Sec. 179, which is subject to entirely separate rules (see above). In later years, the first-year bonus depreciation deduction phases down, until it is completely phased out after 2026.
- Luxury Automobile Depreciation Limits Increased – For passenger automobiles placed in service in tax years after December 31, 2017, for which bonus depreciation is not claimed, the maximum amount of allowable depreciation is increased to: 1) $10,000 for the year in which the vehicle is placed in service; 2) $16,000 for the second year; 3) $9,600 for the third year; and 4) $5,760 for the fourth and later years in the recovery period. For passenger automobiles placed in service after 2018, these dollar limits are indexed for inflation.
- Limits on Deduction of Business Interest – For tax years beginning after Dec. 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’ adjusted taxable income. An exemption from these rules applies for taxpayers (other than tax shelters) with average annual gross receipts for the three-tax year period ending with the prior tax year that do not exceed $25 million.
- Modification of Net Operating Loss Deduction – For NOLs arising in tax years ending after Dec. 31, 2017, the two-year carryback and the special carryback provisions are repealed. For losses arising in tax years beginning after Dec. 31, 2017, the NOL deduction can only be carried forward and is limited to 80% of taxable income (determined without regard to the deduction).
- Domestic Production Activities Deduction Repealed – For tax years beginning after Dec. 31, 2017, the DPAD is repealed.
- Like-Kind Exchange Treatment Limited – For transfers after Dec. 31, 2017, the rule allowing the deferral of gain on like-kind exchanges will only be allowed for real property. The exchange treatment will not apply to tangible personal property.
- Meals and Entertainment – For amounts incurred or paid after Dec. 31, 2017, deductions for entertainment expenses are disallowed. Meals while traveling are deductible at 50%. Meals provided to employees on the employer’s premises are now deductible at 50%.
- New Credit for Employer-Paid Family and Medical Leave – During 2018 and 2019, the Act allows businesses to claim a general business credit for wages paid to qualifying employees during any period in which such employees are on family and medical leave (FMLA) under some conditions.
- Cash Method of Accounting – For tax years beginning after Dec. 31, 2017, the cash method may be used by taxpayers that satisfy a $25 million gross receipts test.
- Capitalization and Inclusion of Certain Expenses in Inventory Costs – For tax years beginning after Dec. 31, 2017, the uniform capitalization rules (UNICAP) no longer apply to any producer or re-seller that meets the $25 million gross receipts test.
- Accounting for Long-Term Contracts – For contracts entered into after Dec. 31, 2017, taxpayers that meet the $25 million gross receipts test are not required to use the Percentage of Completion Method for contracts under two years in duration.