BUSINESS TAX REFORM
Because of tax reform, there may be planning opportunities available or other changes that will be necessary to comply with the new law that fall outside the scope of normal tax return preparation. We can help you with 2018 tax strategies based on this new tax legislation.
All provisions are effective for tax years beginning after Dec. 31, 2017, unless otherwise noted.
Corporate tax rates – rates are reduced from a top rate of 35 percent to 21 percent.
Corporate alternative minimum tax (AMT) – the corporate AMT is repealed.
Pass-through businesses – pass-through businesses (partnerships, S-Corps, Sch. C) are allowed a deduction equivalent to excluding 20 percent of the business income of many pass-through entities and sole proprietors. For owners otherwise subject to the top 37 percent individual tax rate, the effective tax rate on qualified income will be reduced to 29.6 percent.
Pass-through owners whose taxable income exceeds $315,000 for a joint return (or lower amounts for single filers) are subject to restrictions on the deduction in situations where the business did not have a specified level of wage payments or a specified amount of tangible, depreciable assets used in the business. In addition, restrictions on the deduction apply to certain service businesses and other businesses described in the new law. Trusts and estates are eligible for the 20 percent deduction.
This is a great tax benefit for small business but not an easy calculation to make. There are tax planning opportunities that should be explored by all small business owners.
Capital expensing – immediate expensing (i.e., 100 percent bonus depreciation) for certain qualified assets acquired and placed in service after Sept. 27, 2017. The 100 percent bonus depreciation benefit will begin to phase out in 2023. Also, there is an increase in the expensing allowance under section 179 to $1 million, also subject to a phase-out.
Business interest – The deduction for net business interest of corporations and many pass-through businesses is limited under a formula. Deductions cannot exceed 30 percent of EBITDA (earnings before interest, taxes, depreciation and amortization) for the next four years. After that period, interest deductions may not exceed 30 percent of EBIT (earnings before interest and taxes). Disallowed interest deductions can generally be carried forward indefinitely, but may be subject to certain limitations applicable to partnerships. Certain taxpayers are exempted from these rules, including taxpayers with average gross receipts of $25 million or less for the three years immediately preceding the effective date of this provision, as well as taxpayers involved in certain real estate activities.
Net operating losses (NOLs) – limits the NOL deduction to 80 percent of taxable income. Carrybacks are generally eliminated, but unused losses can be carried forward indefinitely.
Domestic manufacturing deduction – the section 199 domestic production deduction is repealed.
Research credits and expenses – retains the research and development credit and requires capitalization and amortization of research and experimental expenses over a five-year period. The capitalization provisions apply to amounts paid or incurred in tax years beginning after Dec. 31, 2021.
Overall methods of accounting – increases the gross receipts threshold above which C corporations and partnerships with C corporation partners must generally use the accrual method of accounting from $5 million to $25 million.
Like-kind exchanges – like-kind exchanges under section 1031 are limited to real property that is not held primarily for sale. Personal property no longer qualifies for tax-deferred treatment.
If you have questions, send me an email or give me a call.
