Changes Affecting Businesses
Below are just a few of the many changes affecting businesses.
Corporate Tax Rates Reduced. For tax years beginning after Dec. 31, 2017, the corporate tax rate is a flat 21% rate. This applies to personal service corporations, as well, which are subject to a maximum corporate tax rate of 35% before 2018. Personal service corporations include those for doctors, lawyers, accountants, and other professionals.
Corporate Alternative Minimum Tax Repealed. For tax years beginning after Dec. 31, 2017, the corporate AMT is repealed. For tax years 2018 through 2021, AMT credit carryforwards are refundable and can offset regular tax liability up to 50% (100% beginning in 2021) of the excess of the minimum tax credit for the year over the credit allowable against regular tax liability.
New Section 179 Limits. For property placed in service in tax years after Dec. 31, 2017, the maximum Section 179 expense a taxpayer can claim is $1 million. This amount begins to phase out when the total eligible property placed in service is $2.5 million. In addition, the definition of Section 179 property includes depreciable property used to furnish lodging. The definition of qualified real property eligible for Section 179 also includes improvements to nonresidential real property after it was first placed in service, such as roofs; heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems.
Temporary 100% Deduction for Qualifying Business Assets. A 100% first-year deduction is allowed for qualified property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. The deduction is allowed for new or used property. After 2023, the first-year bonus depreciation deduction phases down, and then sunsets in 2027 as follows:
- 80% for property placed in service after Dec. 31, 2022 and before Jan. 1, 2024.
- 60% for property placed in service after Dec. 31, 2023 and before Jan. 1, 2025.
- 40% for property placed in service after Dec. 31, 2024 and before Jan. 1, 2026.
- 20% for property placed in service after Dec. 31, 2025 and before Jan. 1, 2027.
Luxury Automobile Depreciation Limits Increased. For passenger automobiles placed in service in 2018 and after, for which the additional first-year depreciation deduction is not claimed, the maximum allowable depreciation is increased to: $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $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. For passengers autos eligible for bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000.
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’s adjusted taxable income. The net interest expense disallowance is determined at the tax filer level. However, a special rule applies to pass-through entitles, which requires the determination to be made at the entity level, for example, at the partnership level instead of the partner level. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2022, adjusted taxable income is computed without regard to deductions for depreciation, amortization, or depletion. Taxpayers with average annual gross receipts for the three-tax year period ending with the prior taxable year that do not exceed $25 million are exempt from the interest limitation as are regulated public utilities, electric cooperatives, and certain other businesses.
Net Operating Losses (NOLs). For net operating losses arising in tax years ending after Dec. 31, 2017, the two-year carryback and the special carryback provisions are repealed, but a two-year carryback applies in the case of certain losses incurred in the trade or business of farming. The NOL deduction is limited to 80% of taxable income (determined without regard to the deduction). Carryovers to other years are adjusted to take account of this limitation, and, except as provided below, NOLs can be carried forward indefinitely. However, NOLs of property and casualty insurance companies can be carried back two years and carried over 20 years to offset 100% of taxable income in such years.
Domestic Production Activities Deduction (DPAD). For tax years beginning after Dec. 31, 2017, the domestic production activities deduction is repealed for non-corporate taxpayers. For tax years beginning after Dec. 31, 2018, the DPAD is repealed for C corporations.
Like-Kind Exchanges. Generally effective for transfers after Dec. 31, 2017, the rule allowing the deferral of gain on like-kind exchanges is modified to allow for like-kind exchanges only with respect to real property that is not held primarily for sale. However, under a transition rule, the pre-Act like-kind exchange rules apply to exchanges of personal property if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before Dec. 31, 2017.
Five-Year Write Off for R&E Expenses. For amounts paid or incurred in tax years beginning after Dec. 31, 2021, “specified R&E expenses” must be capitalized and amortized ratably over a 5-year period (15 years if conducted outside of the U.S.), beginning with the midpoint of the tax year in which the specified R&E expenses were paid or incurred. Specified R&E expenses subject to capitalization include expenses for software development, but not expenses for land or for depreciable or depletable property used in connection with the research or experimentation (but do include the depreciation and depletion allowances of such property). Also excluded are exploration expenses incurred for ore or other minerals (including oil and gas). In the case of retired, abandoned, or disposed property with respect to which specified R&E expenses are paid or incurred, any remaining basis may not be recovered in the year of retirement, abandonment, or disposal, but instead must continue to be amortized over the remaining amortization period.
Employer’s Deduction for Fringe Benefit Expenses Limited. Beginning in 2018, deductions for entertainment expenses are disallowed. The current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or on the premises of the employer. And deductions for employee transportation fringe benefits (e.g., parking and mass transit) are denied, but the exclusion from income for such benefits received by an employee is retained. In addition, no deduction is allowed for transportation expenses that are the equivalent of commuting for employees (e.g., between the employee’s home and the workplace), except as provided for the safety of the employee. Beginning after Dec. 31, 2025, the Act will disallow an employer’s deduction for expenses associated with meals provided for the convenience of the employer on the employer’s business premises, or provided on or near the employer’s business premises through an employer-operated facility that meets certain requirements.
Employee Compensation Over $1 Million. Starting in 2018, wages for commissions and performance-based compensation are included in the $1million limit on compensation of a covered employee. The definition of “covered employee” is revised to include the principal executive officer, the principal financial officer, and the three other highest paid officers. If an individual is a covered employee with respect to a corporation for a tax year beginning after Dec. 31, 2016, the individual remains a covered employee for all future years.
Employer-Paid Family and Medical Leave. For 2018 and 2019, the Act allows businesses to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave (FMLA) if the rate of payment is 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. All qualifying full-time employees have to be given at least two weeks of annual paid family and medical leave (all less-than-full-time qualifying employees have to be given a commensurate amount of leave on a pro rata basis).
Cash Method of Accounting. Starting in 2018, the cash method may be used by taxpayers (except tax shelters) with less than $25 million of gross receipts for the three prior tax years, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor. However, qualified personal service corporations, partnerships without C corporation partners, S corporations, and other pass-through entities are still allowed to use the cash method without regard to whether they meet the $25 million gross receipts test, so long as the cash method clearly reflects income.
S Corporations Converted to C Corporations. Starting in 2018, distributions from an “eligible terminated S corporation” are treated as paid from its accumulated adjustments account and its earnings and profits on a pro rata basis. Resulting adjustments are taken into account ratably over a 6-year period. An eligible terminated S corporation is any C corporation which (i) was an S corporation on the date before the enactment date, (ii) revoked its S corporation election during the 2-year period beginning on the enactment date, and (iii) had the same owners on the enactment date and on the revocation date (in the same proportion).