As we noted in this space last time, sweeping tax reform legislation was signed into law just before Washington celebrated the holidays. It was quite literally the largest reform of the tax code in over thirty years.
That column highlighted provisions pertaining to individual taxpayers. Today we address changes for businesses, from sole proprietors up to large corporations.
Corporate tax rate: The act replaced the prior-law graduated corporate tax rate, which taxed income over $10 million at 35%, with a flat rate of 21%. The new rate will take effect January 1, 2018.
Corporate AMT: The act repealed the corporate Alternative Minimum Tax.
Like-kind exchange: Tax deferred like-kind exchanges will now be possible only if they involve real estate that isn't held primarily for sale.
Bonus depreciation: The act extended and modified bonus depreciation, allowing businesses to immediately deduct 100% of the cost of eligible property in the year it is placed in service, through 2022. The act also removed the rule that made bonus depreciation available only for new property.
Business vehicles: For passenger automobiles placed in service after 2017 and for which the above bonus depreciation is not claimed, the maximum amount of allowable depreciation is $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.
Section 179 expensing: The act increased the maximum amount a taxpayer may expense under Section 179 to $1 million and increased the phase-out threshold to $2.5 million, to be indexed for inflation after 2018.
Net operating losses: The act limits the deduction for net operating losses (NOLs) to 80% of taxable income (determined without regard to the deduction for such losses). NOLs can be carried forward indefinitely. The two-year carryback and special NOL carryback provisions were repealed, except for farming businesses, which are still allowed a two-year NOL carryback.
Pass-throughs: Individuals receiving income through partnerships, limited liability companies and S-corporations that pass their incomes to their owners receive a 20 percent deduction on the profits, subject to limits.
Domestic production activities: The act repealed the Section 199 domestic production activities deduction.
Entertainment expenses: The act disallows a business deduction for (1) an activity generally considered to be entertainment, amusement, or recreation; (2) membership dues for any club organized for business, pleasure, recreation, or other social purposes; or (3) a facility or portion thereof used in connection with any of the above items.
Meals: Under the act, you still can generally deduct 50% of the food and beverage expenses associated with operating a trade or business (e.g., meals consumed by employees on work travel). For amounts incurred and paid after December 31, 2017, and until December 31, 2025, the act expands this 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer.
Rehabilitation credit: The act modified the Section 47 rehabilitation credit to repeal the 10% credit for pre-1936 buildings and retain the 20% credit for certified historic structures. However, the credit must be claimed over a five-year period.
Employer credit for paid family or medical leave: The act allows eligible employers to claim a credit equal to 12.5% of the amount of wages paid to a qualifying employee during any period in which the employee is on family and medical leave if the rate of payment under the program is 50% of the wages normally paid to the 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%. The maximum amount of family and medical leave that may be taken into account for any employee in any tax year is 12 weeks. However, the credit is only available in 2018 and 2019.
Business Interest Deduction: Under the act, the deduction for business interest is limited to the sum of (1) business interest income; (2) 30% of the taxpayer’s adjusted taxable income for the tax year; and (3) the taxpayer’s floor plan financing interest for the tax year for taxpayers exceeding the $25 million gross-receipts test. Any disallowed business interest deduction can be carried forward indefinitely (with certain restrictions for partnerships).
The limitation will also not apply to any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Farming businesses are allowed to elect out of the limitation.
Finally, I failed to mention last time that the exclusion amount for estate, gift and generation-skipping transfer taxes was doubled from $5 million to $10 million through 2025, and is indexed for inflation, providing a 2018 exclusion of $11.2 million. While this is an individual tax provision, it definitely has consequences for many business owners.
Lane Keeter, CPA is Office Managing Partner of the Heber Springs Office of EGP, PLLC, CPAs & Consultants