Tax Cuts and Jobs Act – December 22, 2017
Business Tax Changes:
For business net operating losses (NOLs) that arise in tax years ending after December 31, 2017, the maximum amount of taxable income that can be offset with NOL deductions is generally reduced from 100% to 80%. In addition, NOLs incurred in those years can no longer be carried back to an earlier tax year but can be carried forward indefinitely.
More generous business asset expensing and depreciation tax breaks are available. The maximum Section 179 deduction increases to $1 million, and the phase-out threshold amount is increased to $2.5 million (from $510,000 and $2.03 million respectively). There are also much more liberal first-year bonus depreciation rules, including allowing used property to qualify for bonus depreciation.
The Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction, is eliminated for tax years beginning after December 31, 2017.
The Section 1031 rules that allow tax-deferred exchanges of like-kind property is allowed only for real estate in exchanges completed after December 31, 2017. Beginning in 2018, there are no more like-kind exchanges for personal property assets. However, the prior-law rules still apply if one leg of an exchange has been completed as of December 31, 2017, but one leg remains open on that date.
Specified R&D expenses must be capitalized and amortized over five years, or 15 years if the R&D is conducted outside the United States instead of being deducted currently. This begins with tax years beginning after December 31, 2021. The R&D credit remains available for qualifying expenditures.
Entertainment expenses that previously were 50% deductible are no longer deductible. Employer provided meals are reduced from a 100% deduction to 50%. The 50% deductible “business meal’ is not affected.
All the above have virtually no effect on the small business owner under $2 million in sales who is not in manufacturing or a related business, or heavy on entertainment expenses.
20% business income deduction for all business; except that for accountants, health care professionals and other ‘personal service’ income types, the deduction phases out between $315,000 and $415,000 taxable income.
Big winners for the above are all businesses whose owners have taxable income under $315,000
21% flat rate for C corporations replaces the prior bracketed rates of 15% up to $50,000, 25% for the next $25,000, and so on up to 35%
Most smaller biz with C corps will lose. Some strategy to use a regular C corporation still exists for S Corporation owners whose taxable income is over around $350,000.
The big winners are public corporations.
New vehicle purchases will depreciate more favorably - $10,000 in the first year plus $8000 bonus (versus $3,160 previously plus $8000 bonus); $16,000 in the 2nd year (versus about $6,000 previously); and $9,600 in the third year (versus about $5,000 or so previously)
Certain property in a rental will be considered personal property and receive a greater depreciation rate
Leasehold improvements: It’s a mess. Improvements between September 17 and December 31, 2017 are 100% deductible. The intent I think is that leasehold improvements after January 1, 2018 will be 100% deductible and that % reduced over time. Until a technical change to the law is written, the leasehold improvement deduction goes back to a 39 year life.
Generally, it is expected that the leasehold improvement issue will be amended by Congress to a 15 year life, with a 100% bonus depreciation option.
Claims that the United States’ corporate tax rate is uniquely burdensome to U.S. business when compared with the corporate tax rates of its industrial peers are incorrect. While the United States has one of the highest statutory corporate income-tax rates among advanced countries (up to a 35% bracket), the effective corporate income-tax rate (27.7 percent) is quite close to the average of rich countries (27.2 percent, weighted by GDP).
The U.S. corporate income-tax rate is also not high by historic standards. The statutory corporate tax rate has gradually been reduced fr