Tax Cuts and Jobs Act - Business Taxes
With the passage of the Tax Cuts and Jobs Act (“Act”), there is much concern, as well as confusion, as to the impact the new legislation has on both businesses and individuals alike. The tax changes contained in the Act are the most sweeping since the Tax Reform Act of 1986. As with any tax change, there will be winners and losers, but all taxpayers should be familiar with how the new legislation could impact their specific situation. Below we address the impact on business taxes.
Pass-through businesses, such as S corporations, LLCs, partnerships, and sole proprietors, will receive a new 20% deduction from their income. That benefit will be phased out for professional service businesses owned by individuals with taxable income of more than $157,500 (single filers) or $315,000 (joint filers). The deduction is equal to 20% of qualified business income. However, there are several limitations, including a limitation based on W-2 wages and assets relative to the qualified business.
The corporate AMT is repealed.
There is a new corporate tax rate of 21%, replacing the 35% maximum tax rate.
The dividends received deduction percentages will be reduced.
There is an increase in the section 179 limit, increasing the maximum deduction from $500,000 to $1 million and increasing the phase-out of such deduction for assets placed in service during the year, from $2 million to $2.5 million. Qualified property will now also include Qualified Improvement Property (QIP) and improvements to non-residential rental property placed in service after the property was first placed in service, such as roofs, HVAC, fire protection, and alarm systems. The updated rules are effective for the 2018 tax year.
With respect to small taxpayer provisions, the limitations in section 448 (relating to the use of the cash method of accounting) have been modified so that taxpayers with annual average gross receipts under $25 million (historically under $5 million) (“Small Taxpayers”) will be permitted to use the cash method of accounting. Small Taxpayers with inventory will no longer be required to apply uniform capitalization rules (UNICAP). Also, Small Taxpayers subject to section 460, utilizing long term contact accounting methods, would no longer be required to use the percentage of completion method of accounting.
When reviewing full expensing, subject to certain limitations, 100% bonus depreciation would apply to qualified property acquired and placed in service on or after September 28, 2017. For the 2017 tax year, taxpayers can choose to simplify their bonus depreciation calculation by electing to apply 50% bonus depreciation to all assets placed in service that year in lieu of applying 50% bonus to assets placed in service before September 28, 2017 and 100% bonus to assets placed in service on or after September 28, 2017. Qualified property is expanded to include used property.
Beginning in 2022, research and development costs must be capitalized and amortized over five years.
Revenue recognition – Revenue cannot be deferred for tax purposes beyond when the revenue is recognized for financial statement purposes. The bill also codifies a rule similar to the rule set forth in Rev. Proc. 2004-34 for deferred revenue.
Interest expense limitation – Interest expense is limited to business interest income, plus 30% of “adjusted taxable income.” The new law contains numerous exceptions to this rule, as well as special rules relating to flow-through entities.
Limitation on NOL usage – NOL usage will be limited to 80% of taxable income. Additionally, the bill repeals the ability to carry-back NOLs (historically a 2 year carryback was allowed) and increases the NOL carryforward from 20 years to until the NOL is used.
Like-kind exchange – Section 1031 exchanges will be limited to real property only.
Limitation on fringe benefits – Most entertainment expenses will no longer be deductible. Business meals would still be deductible subject to the existing rules (50% limitation).
Repeal of 199 deduction – The section 199 (Domestic Production Activities) deduction will be repealed.
Carried interest – A new three-year holding period is required to qualify for capital gain treatment.
Technical terminations – Technical terminations are repealed for tax years beginning after December 31, 2017.
Substantial built-in loss in the case of transfer of partnership interest – A reduction in the tax basis of partnership property following a transfer of a partnership interest is now required if the transferee partner would be allocated a loss of $250,000 or more under a hypothetical liquidation immediately after the transfer.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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