2017 Tax Cuts and Jobs Act – Businesses
See “Tax Act – Individuals” to learn more about the impact for you.
Tax Act Overview
The Tax Cuts and Jobs Act of 2017, is actually called “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”, but we will simply call it the “Tax Act”. Though one of the intentions of the Tax Act is to simplify the tax code, the official name should be some indication regarding its complexity. The Tax Act is not retroactive except for a very few unique expensing provisions, so for nearly everyone, your upcoming income tax filing due this spring for the 2017 tax year filing will NOT be effected. However, the changes are more significant than most realize, so now is the time to implement tax planning for 2018 to optimize the greatest tax advantages for your 2018 income tax filing. Below you will find a rundown of a few of the significant changes for individuals. If you are looking for insight regarding changes to your business, hopefully you saw the link above. Be sure to keep in mind our insight is not intended to replace advice from your CPA, but rather to help you better understand some of the key changes you may wish to seek further guidance on.
Also, be aware that many of provisions of the Tax Act are temporary and thus will revert in the future unless Congress takes action to make them permanent. Most of the tax changes expire December 31st, 2025. We recommend you contact your Congressman and encourage them to address the temporary nature of much of the Tax Act now. List of Congress members.
Finally, keep in mind that some of the old tax law provisions are grandfathered or may phase in after 2018; to clarifiy, some of the new tax provisions only apply to actions or transactions made starting in 2018 or may not start until after 2018.
The Tax Act itself . . . . a direct link to the actual full language.
Changes under the Tax Act for Businesses
- Starting in 2018 the Corporate Tax Rate is moving to a flat 21%. This ends the graduated brackets of 15% up to $50,000 in income, then varying between 25% and 39% from 50,001 and up depending upon numerous factors. Keep in mind that the new tax rate applies to corporations that have not applied for the S corporation election. So, if you have a C-corporation with minimal income, it may be time to look at making a change to a different type of corporate entity particularly given the new passthrough deduction. (See Below) For most “individuals” this will have little “direct” impact, however indirectly the effects could be significant in renewed capital deployment in the US, which should lead to more jobs, better pay, and higher returns on domestic securities in your retirement plan. If fact, this should be a significant positive factor in real economic growth for the US.
- Passthrough Deduction – This is another significant economic driver and could greatly help the small business owner, which is arguably even more impactful economically than big business. The details are somewhat complex, but in short, passthrough entities (e.g. S corps, LLCs, etc.) can receive a deduction of up to 20% of qualified business income. There are several stipulations, however. First, IRC Section 707(c) guaranteed payments, capital gains, and qualified cooperative dividends are excluded from qualified business income. Then the deduction is limited to 50% of the W-2 wages or 25% of wages plus tangible depreciable property. Services Businesses (e.g. health, law, accounting, performing arts, etc.) are limited to a threshold of $315,000 for married couples or $157,000 for individuals. All others receive a phase-out of the deduction beginning at those limits. We will also mention here that this new provision is rather complex and we are anticipating further guidance from the IRS.
- Bonus Depreciation – In the past, bonus depreciation for property with less than a 20 year life (e.g. automobiles) received a maximum of 50% depreciation. Under the new Tax Act, qualifying property can receive up to 100% depreciation, though for automobiles the limit is merely raised from $8,000 to $10,000. Also beneficial is that this depreciation applies to used property as well as new. This is a retroactive provision to September 27, 2017. However, there is a phase out of the amounts after 2022 dropping the depreciation available by 20% each year to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.
- Section 179 Expensing – The phase-out maximum has been increased, though most small businesses never hit this threshold. However, the definition of “qualified” property has been expanded and now includes items such as roofs, HVAC, and more to nonresidential real property.
- Reduced Recovery Period – For certain property (e.g. leasehold improvement, restaurant, retail improvement) a 15-year straight-line depreciation may now apply, though again there are various stipulations regarding when such property was placed into use and other factors.
- Business Interest Deduction – There is a new limit on deductions of net interest expense of a business to 30% of the business’ adjusted taxable income. However, interest above the 30% limit can be carried forward. And, there are some exceptions. There is an exemption for business with average annual gross receipts (most recent 3-year average) below $25 million. There is also an exception for interest incurred in any real property development, construction, operation, etc.
- Loss Carry Back – In the past, a Net Operating Loss (NOL) could be carried back two year as well as forward. The Tax Act no longer allows for a NOL carry back except in certain cases of farming. In addition, the NOL is limited to 80% of the taxable income.
- Corporate AMT – Like the personal AMT, if you’ve never heard of it, be thankful. However, all can be thankful now as corporate AMT is repealed.
- Entertainment Expense Deduction – Expenses for entertainment are no longer allowed as deductions in most cases, however, the 50% deduction for meals remains. The exclusion from income of such benefits from the employee also remains.