What the new tax law means for businesses filing U.S. tax returns
Keeping abreast of the swiftly changing tax landscape for our clients is an important part of the work we do at ShindelRock. The recently enacted Tax Cuts and Jobs Act (TCJA) is a sweeping tax package, with implications for nearly every tax filer in the United States. Here’s a look at some of the more important elements of the new law that may impact your business tax liability in the future. Unless otherwise noted, the changes are effective for tax years beginning in 2018 through 2025.
- Limits of deductions 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’s adjusted taxable income. For pass-through entities, the limitation is determined at the entity level, and not the shareholder or partner level.
- Modification of Net Operating Loss Deduction. Under-pre-Act law, a net operating loss (NOL) may generally be carried back two2 years and carried over 20 years to offset taxable income in such years. Under the new law, for NOLs arising in tax years ending after 12/31/17, a carry back no longer applies (in most cases). Additionally, for NOLs arising in tax years beginning after 12/31/17, NOLs can be carried forward indefinitely, but the NOL deduction is limited to 80% of taxable income (before the NOL deduction is taken into account).
- Domestic Production Activities Deduction (DPAD). The DPAD is repealed for C corporations for tax years beginning after 12/31/18, and is repealed for all other taxpayers for tax years beginning after 12/31/17.
- Deductions for Entertainment Expenses. For amounts incurred or paid after 12/31/17, deductions for entertainment expenses are disallowed. The 50% deduction for qualifying business relatedbusiness-related meals is still allowed.
- Corporate income tax rates reduced. C corporations currently are subject to graduated tax rates of 15% for taxable income up to $50,000, 25% (over $50,000 to $75,000), 34% (over $75,000 to $10,000,000), and 35% (over $10,000,000). Personal service corporations pay tax on their entire taxable income at the rate of 35%. (The benefit of lower rate brackets was phased out at higher income levels). Beginning with the 2018 tax year, the TCJA makes the corporate tax rate a flat 21%. It also eliminates the corporate alternative minimum tax (AMT).
- Depreciation changes. There are several changes to the depreciation rules, including the following items:
Code Sec. 179 expensing.
- Before the TCJA, most smaller taxpayers could immediately deduct the entire cost of section 179 property up to an annual limit of $500,000, with a phase-out of the Sec 179 expense once total property placed in service reached a $2 million threshold. But for tax years beginning after 2017, the TCJA increases the annual dollar limit to $1 million, and the property placed in service threshold to $2.5 million. Additionally, before the TCJA, section 179 property included most tangible personal property as well non-customized (“off-the-shelf”) computer software. Generally, the only buildings or other land improvements that qualified were restaurant buildings and certain improvements to leased space, retail space or restaurant space that were treated as section 179 property under an election. The TCJA, for tax years beginning after 2017, eliminated these categories and substituted as an elective category the much broader qualified improvement property category (that is no longer eligible for bonus depreciation, see above).
- Also, taxpayers can, for buildings other than rental real estate buildings, elect to treat as section 179 property previously ineligible building components that are roofs, heating, ventilation and air conditioning property, fire protection and alarm systems, or security systems. And Iitems (for example, refrigerators) used in connection with residential buildings (though not the buildings themselves) are eligible to be section 179 property.
- Bonus depreciation. Before the TCJA, taxpayers were allowed to deduct 50% (which was to be phased out starting in 2018) of the cost of most new tangible property (other than buildings and some building improvements) and most new computer software in the year placed in service. But for property placed in service and acquired after Sept. 27, 2017, the TCJA raised the 50% rate to 100%. (Appropriately, 100% bonus depreciation is also called “full expensing” or “100% expensing”). Additionally, the post-Sept. 27, 2017 property eligible for bonus depreciation can be new or used.
- Vehicles. The TCJA triples the annual dollar caps on depreciation (and Code Sec. 179 expensing) of passenger automobiles and small vans and trucks.- Vehicles. The TCJA triples the annual dollar caps on depreciation (and Code Sec. 179 expensing) of passenger automobiles and small vans and trucks.
As you can see, there are a myriad of new and complex regulations surrounding the filing of business tax returns compliant with the TCJA. If you’d like to know more about how your specific tax situation will be affected by the changes, please do not hesitate to contact your ShindelRock professional. For information on the TCJA will affect individuals filing tax return, please click here.