Tax Cuts and Jobs Act 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 applies 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 allowed if it was “first use” of the taxpayer. In other words, used property now qualifies for bonus depreciation
• Section 179 expensing increased to $1,000,000 and phase-out amount increased to $2,500,000
• Section 179 qualifying property also includes 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 allowed a recovery period of 5 years, instead of 7. The 150% declining balance method is no longer 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 are eliminated. The replacement is a single definition for qualified improvement property
• All qualified improvement property is allowed a recovery period of 15 years. The depreciation method is under MACRS and eligible for section 179 expensing

Accounting Methods and Recognition of Income

• Cash method of accounting 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 remains for personal service corporations, partnerships without C-Corp partners, and other pass-through entities
• Businesses with average gross receipts of $25 million or less are allowed the cash method of accounting even with inventories and could use the method for inventory accounting reflected on their books. In addition, they are exempt under current UNICAP rules
• The $10 million average gross receipts exception for the percentage of completion method for accounting for long-term contracts increased to $25 million
• A taxpayer has 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 could possibly modify the current “Constructive Receipt” and “All Events Test” doctrines for certain companies

Limitation on Net Interest Expense

• Businesses are 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 is indefinite
• An exemption to these rules is allowed for businesses with average gross receipts under $25 million. Real Property Trades or Businesses are also exempt

Net Operating Loss Deductions

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• All carrybacks generally repealed, with some exceptions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

Like-Kind Exchanges

• Like-kind exchanges are only allowed for real property

Alternative Minimum Tax

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

Meals and Entertainment Expenses

• No deduction allowed for entertainment expenses including, but not limited to, such items as amusement or recreation, facilities or membership dues
• Qualifying business meals and beverages only allowed a deduction with the 50% limit remaining in place, and this limitation is expanded to employee meals. Employee meals will 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 retains 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 are preserved

Bonds

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

Executive Compensation

• The exceptions to the $1 million deduction limitation for compensation to covered employees are 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 include the CEO, the CFO and the three highest-paid employees

Other Corporate Tax Changes of Note

• Deduction for lobbying expenses with respects to the legislation of local governing bodies is eliminated
• The Domestic Production Activities Deduction (DPAD) is eliminated
• Gain or loss from the disposition of a self-created patent is ordinary rather than capital
• Technical termination rules of partnerships are eliminated. There is no longer 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.