Top Tax Reform Provisions Impacting Businesses

The House and Senate have voted and passed tax reform legislation, and President Trump has signed into law. Now that tax reform is definite, we have highlighted some of the major provisions impacting businesses. Read the individual tax provisions.

Revised 12/21/17

Business Tax Rates

  • Corporate tax rate from 35% to 21%
  • Pass-through companies allowed a 20% deduction on domestic qualifying business income not to exceed 50% of wage income for higher-income taxpayers, but not for specified service businesses, not including architects and engineers and smaller specified service businesses. Alternatively, for the higher-income taxpayers, the deduction would apply to 25% of wage income plus 2.5% of the unadjusted cost of depreciable tangible assets. Contact an Anders advisor for more information on the many moving parts within this provision

Increased Expensing and Section 179

  • Immediately expense 100% of qualifying property placed in service after September 27, 2017 and before January 1, 2023
  • Repeal of “original use” requirement for newly acquired property to qualify. Additional depreciation would be allowed if it was “first use” of the taxpayer. In other words, used property would now qualify for bonus depreciation
  • Section 179 expensing increased to $1,000,000 and phase-out amount increased to $2,500,000
  • Section 179 qualifying property would also include improvements to non-residential property such as roofs, heating, ventilation, fire alarm/security systems and air-conditioning property
  • Increased depreciation limits for listed property under section 280F. For listed property, such as certain vehicles not taking bonus depreciation, the maximum deduction per year is increased to $10,000 in year 1, $16,000 in year 2, $9,600 in year 3, and $5,760 in year 4 and on. Computers are removed from the definition of listed property
  • Certain farming equipment would be allowed a recovery period of 5 years, instead of 7. The 150% declining balance method would no longer be required for this equipment and farmers could use the 200% declining balance method

Qualified Improvement Property

  • Definitions for qualified leasehold improvement, qualified restaurant and qualified retail improvement property would be eliminated. The replacement would be a single definition for qualified improvement property
  • All qualified improvement property would be allowed a recovery period of 15 years. The depreciation method would be under MACRS and eligible for section 179 expensing

Accounting Methods and Recognition of Income

  • Cash method of accounting would be allowed for corporations and partnerships with a corporate partner as long as gross receipts are $25 million or less, indexed for inflation. The exceptions to the accrual method would remain for personal service corporations, partnerships without C-Corp partners, and other pass-through entities
  • Businesses with average gross receipts of $25 million or less would be allowed the cash method of accounting even with inventories and could use the method for inventory accounting reflected on their books. In addition, they would be exempt under current UNICAP rules
  • The $10 million average gross receipts exception for the percentage of completion method for accounting for long-term contracts would be increased to $25 million
  • A taxpayer would have to recognize income no later than the taxable year in which such income is taken into account as income on an Applicable Financial Statement, as defined in legislation. This would possibly modify the current “Constructive Receipt” and “All Events Test” doctrines for certain companies

Limitation on Net Interest Expense

  • Businesses would be subject to a disallowance of net interest expense in excess of 30% of adjusted taxable income as defined in legislation, EBITDA for first 4 years and then EBIT thereafter
  • The carryforward of disallowed net interest expense would be indefinite
  • An exemption to these rules would be allowed for businesses with average gross receipts under $25 million. Real Property Trades or Businesses would also be exempt

Net Operating Loss Deductions

  • Proposal would allow only to the extent of 80% of taxable income
  • All carrybacks would be generally repealed with some exceptions
  • NOLs generated effectively after the provision would be allowed to be carried forward indefinitely

Like-Kind Exchanges

  • Like-kind exchanges would only be allowed for real property

Alternative Minimum Tax

  • AMT would be eliminated for C-Corporations, but remains for individuals. The individual exemption would be increased

Meals and Entertainment Expenses

  • No deduction would be allowed for entertainment expenses including, but not limited to, such items as amusement or recreation, facilities or membership dues
  • Qualifying business meals and beverages would be only allowed deduction with the 50% limit remaining in place and this limitation would be expanded to employee meals. Employee meals would be fully non-deductible beginning in 2026

Miscellaneous Business Credits Repealed/Modified

  • The Orphan Drug Credit rate reduced from 50% to 25%
  • Repeals the 10% credit for pre-1936 buildings with respects to the Rehabilitation Credit. It would retain the 20% credit for qualified rehabilitation expenditures, but with various modifications
  • Introduces a new Employer Credit for Paid Family and Medical Leave credit
  • Most other general business and energy credits would be preserved

Bonds

  • Interest on newly issued Advance Funding Bonds (AFB) would no longer be tax exempt
  • Tax credit bonds would no longer be issued

Executive Compensation

  • The exceptions to the $1 million deduction limitation for compensation to covered employees would be eliminated. These exceptions under the current law are commissions, performance-based comp (including stock options), payments to the tax-qualified retirement plan, and amounts excludable from the executive’s gross income.  Covered Employees would include the CEO, the CFO and the three highest-paid employees

Other Corporate Tax Changes of Note

  • Deduction for lobbying expenses with respects to legislation of local governing bodies would be eliminated
  • The Domestic Production Activities Deduction (DPAD) would be eliminated
  • Gain or loss from the disposition of a self-created patent would be ordinary rather than capital
  • Technical termination rules of partnerships would be eliminated. There would no longer be a requirement for a short year return to be filed if ownership changed by more than 50% in a tax year
  • Specific tax law changes to the Insurance Industry, which includes but is not limited to Net Operating Losses and the computation of reserves
  • Various proposals to specific industries such as beverages and spirits. Contact an Anders advisor with questions regarding specific industries

Contact an Anders advisor with questions on how tax reform will affect you or your business. Read the tax reform changes for individuals.