Here are some of the key features of TCJA that will have an impact on business taxes effective January 1, 2018. This article was written by Kislay (Sal) Shah, CPA. Kislay has been in practice for over 25 years.
Deduction for Qualified Business Income (Sec 199A)
This deduction is available to sole proprietors, LLC’s, S-Corporations (pass-through entities) under Section 199A, which allows a deduction of up to 20% of qualified business income subject to limits based on adjusted gross income of the taxpayer and type of business.
Corporations
In an effort to be more competitive and keep profits in the United States, the corporate tax rate was permanently reduced from a progressive rate of 39% to a flat rate of 21%. In addition to this significant tax rate reduction, the corporate alternate minimum tax was also eliminated.
Limits of Deduction of Meals and Entertainments
Effective January 1, 2018, TCJA has eliminated deductions for entertainment, amusement or recreation. Taxpayers can continue to deduct 50% of reasonable cost of business meals expenses if the taxpayer or its employees are present.
Deduction of Business Interest Expense
The deduction for business interest incurred will now be limited for tax years beginning after 2017 for all taxpayers, except for those with average gross receipts of $25 million or less; real estate or farming businesses that elect to exempt themselves; and certain regulated industries. The deduction will be limited to the sum of:
- Business interest income for the taxable year
- 30% of the taxpayer’s adjusted gross income for the tax year and
- The taxpayer’s floor plan financing interest paid by vehicle dealers for the tax year
For calculation purposes, adjusted gross income is taxable income before any net operating loss, Section 199A deduction, depreciation, amortization or depletion.
Sexual Harassment or Sexual Abuse Cases
Such deductions are completely disallowed.
Lobbying Expenses
Lobbying and political expense disallowance now also include local legislation as well.
Depreciating Business Assets-Section 179 expensing and bonus depreciation
Business taxpayers can generally depreciate tangible property except land, but including buildings, machinery, vehicles, furniture and equipment.
- Businesses can immediately expense 100% of cost of such business property acquired (Bonus Depreciation) and placed in service after September 27, 2017 and before January 1, 2023; taxpayers may elect to expense the cost of any property and deduct it in the year the property is placed in service. The 100% deduction decreases by 20% per year for years beginning after 2022 and ends January 1, 2027.
- Maximum Section 179 expense deduction allowed is increased from $500,000 to $1 million.
- The phase-out threshold for Section 179 increased from $2 million to $2.5 million.
TCJA allows taxpayers to elect to include improvements made to nonresidential property as long as the improvements are not structural in nature and do not enlarge the building . The improvements must have been made after the date the property was first placed in service.
These improvements include improvements to building’s interior, roofs, heating and air conditioning systems, fire protection systems, alarm and security systems.
Improvements that do not qualify include enlargement of the building, service to elevators or escalators and Internal structural framework of the building.
Net Operating Losses
Prior to the TCJA, the net operating losses (NOL) were generally able to be carried back up to 2 tax years and forward up to 20 tax years to offset taxable income. For NOLs arising in tax years beginning after December 31, 2017, the TCJA now limits the NOL deduction to 80% of the taxable income, eliminates the 2 year carry back period and allows for an indefinite carry forward.
Like-Kind Exchange
Like-Kind exchange now applies only to certain exchanges of real property. Personal and intangible properties are no longer eligible for like-kind exchange.
Luxury Vehicles
TCJA increased depreciation limits for passenger vehicles (if not claimed as a Bonus Depreciation) at a maximum graduated amount each year from the year of purchase.
Listed Property
Listed property is property under the IRS code that generally tend to be used for both personal and business. Some common examples are automobiles, computers and cell phones. TCJA has explicitly removed computer or peripheral equipment as listed property.
Recovery Period for Real Property
The general depreciation recovery system (GDS) are still 39 years for nonresidential real property and 27.5 years for residential rental property. The alternative recovery period (ADS) for nonresidential real property is still 40 years. However, TCJA changes ADS recovery period for residential rental property from 40 years to 30 years. Qualified leasehold improvements, qualified restaurant and rental improvement property have a special 15-year recovery period.
Employee Moving Expenses
Under TCJA, moving expenses are part of employee wages and subject to employment taxes.
Employee Achievement Award
These expenses are deductible if tangible personal property. An employer can generally deduct tangible personal property (does not include cash or cash equivalent, gift cards, theater or sporting tickets, vacation, etc.)
Employer credit for paid family and medical leave
TCJA allows a tax credit based on percentage of wages which can range from 12.5% to 25% depending on percentage of wages paid during the leave to a qualified employee while on paid family and medical leave for up to 12 weeks per taxable year, for the year beginning after December 31, 2017 and before January 1, 2020.
Business Structure
TCJA allows small businesses with average annual gross revenue of $25 million or less in prior three years to use cash method of accounting. It also exempts these small businesses from accounting rule for inventories, cost capitalization and long-term contracts. They can switch to cash method of accounting starting after December 31, 2017.
Conversion from an S corporation to C Corporation
Under TCJA an S Corporation on December 21, 2017 and revokes its S corporation election after December 21, 2017, but before December 22, 2019, and has same owners in identical proportions on the date of revocation, can make the modification where the net adjustment needed to prevent amounts being duplicated or omitted as a result of accounting change is spread over six years. This adjustment applies to both increase and decrease to taxable income. The distribution of cash post change during the transition period are treated as coming out of the accumulated adjustment account (AAA) and accumulated earning and profits (E&P) proportionally.
For any questions you may contact Kislay (Sal) Shah at kislay@shahcpaus.com or call 646-328-1326.