Tax reform has passed, and was signed by President Trump into law on December 22, 2017. What does it mean for your business? Here are some of the most significant business tax changes:
• The federal corporate tax rate has been changed to a flat 21%. Previous rates were graduated, with taxable income up to $50,000 taxed at 15%; of between $50,001 and $75,000 taxed at 25%; of between $75,001 and $10 million at 34%; and over $10 million at 35%.
• The corporate alternative minimum tax (AMT) is eliminated under the new law.
• The Net Operating Loss (NOL) provision has been significantly modified. For most businesses, NOLs applicable to tax years ending after 2017 can now only be carried forward, not backward. The previous rule allowing a 2-year carryback has been eliminated for most businesses, with the exception of certain farming losses, which may remain eligible for a 2-year NOL carryback. In addition, the NOL carryforward is limited to 80% of taxable income, regardless of the NOL amount. Carryforwards into other years are adjusted to account for the 80% limitation.
• The deduction for business related entertainment expenses, which had been capped at 50% of such expenses, has been eliminated in the new law. The 50% deduction for business related meals remains, and has been expanded to include meals provided via an in-house cafeteria, or otherwise provided on an employer’s premises. Parking and mass transit expenses are no longer deductible for employers, but employees who are reimbursed for these expenses will still see these reimbursements excluded from their taxable income. Expenses related to bicycle commuting are deductible for employers, but not excludable by the employee. Transportation expenses covering employees’ commutes are not deductible, except in cases where the transportation is provided for an employee’s safety.
• Section 199A of the new tax code allows owners of sole proprietorships, S Corporations, partnerships, and stand-alone rental properties reported on Schedule E to deduct 20% of business income from these entities. This provision reduces the effective top tax rate on business income from such entities from 40.8% to 29.6%.
• The maximum amount which can be expensed under Code Section 179 has been increased to $1 million. If property placed in service during a given tax year exceeds $2.5 million, the allowable $1 million deduction will be reduced by the amount by which the value of the property placed in service exceeds $2.5 million. The new law also expands the definition of “qualifying” business property to include certain depreciable, tangible personal property used to furnish, or in connection with furnishing, lodging, and certain improvements to non-residential real property made after the property was placed in service. Qualifying improvements include roof-related expenditures, heating, air-conditioning, and ventilation, fire protection and alarm systems, security systems, and other building improvements. Elevators and escalators are excluded, as are expenditures which enlarge a building or are attributable to internal structural framework.
• The new law allows a 100% first-year deduction (increased from 50%) for qualified property (new or used) placed in service after September 27, 2017, and before 2023. The previous 50% deduction was to be phased down for property placed in service after 2017; the new law provides that the phase-down of the 100% deduction will begin in 2023.
• The rules covering like-kind exchanges (1031), which allow the deferral of gain on such exchanges of property held for productive use in trade or business or investment purposes, has been limited to cover only like-kind exchanges of real property not held primarily for sale. A transition rule allows the application of the previous provisions to like-kind exchanges if the property was disposed of, or the replacement property obtained, before 2018.
Until next Wednesday –