The "Tax Cuts and Jobs Act” was passed by Congress on December 20, 2017 and signed by the President on Dec. 22, 2017. Here is summary of the major changes that might apply to Business Taxpayers. These changes are effective for tax years beginning after Dec. 31, 2017 and before January 1, 2026, unless indicated specifically.
Business Taxpayer Changes
- Corporate Tax Rates – The corporate tax rate has been adjusted to a flat rate of 21% (down from the pre 12/31/2017 maximum rate of 35%) beginning after 12/31/2017. Alternative minimum taxes for businesses have been repealed. These corporate tax rate changes were made permanent and do not revert back on January 1, 2026.
- Business Pass-Through Income (Code Sec. 199A) - The Owners of “Pass-Through Entities” receive a tax deduction of 20% of any net business income derived from those active businesses. Pass-through entities and structures include-
- Sole proprietorships (no entity, Schedule C).
- Real estate investors (no entity, Schedule E).
- Disregarded entities (single member LLCs).
- Multi-member LLCs.
- Any entity taxed as an S corporation.
- Trusts and estates, REITs and qualified cooperatives
There are 2 limitations to qualifying for this deduction:
Payroll Limitation: The 20% Pass-Through deduction is limited to the greater of:
- 50% of the W-2 wages of the qualified trade or business, or
- The sum of 25% of the W-2 wages of the qualified trade or business PLUS 2.5% of the undepreciated basis of all qualified tangible property of the trade or business.
Personal service business (e.g., law, health, accounting, consulting, athletes, brokers, financial planners, etc.) that you actively participate in do not qualify for this deduction. Interestingly, removed from the traditional service profession are engineers and architects.
These limitations do not apply to taxpayers that have taxable income less than $315,000 for married filing jointly taxpayers ($157,500 for Single), which is the top of the new 24% tax bracket.
- Meals and Entertainment Expense – For amounts incurred or paid after Dec. 31, 2017, deductions for entertainment expenses are disallowed, eliminating the subjective determination of whether such expenses are sufficiently business related.The current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or otherwise on the premises of the employer. For tax years beginning after Dec. 31, 2025, the Act will disallow an employer's deduction for expenses associated with meals provided for the convenience of the employer on the employer's business premises, or provided on or near the employer's business premises through an employer-operated facility that meets certain requirements.
- Increased Section 179 Expensing – For personal property and qualified real property placed in service in tax years beginning after Dec. 31, 2017, the maximum amount a taxpayer may expense under Code Section 179 is increased to $1 million, and the phase-out threshold amount is increased to $2.5 million. “Qualified real property.” The definition of Section 179 property is expanded to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. The definition of qualified real property eligible for Section 179 expensing is also expanded to include the following improvements to nonresidential real property after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
- Temporary 100% cost recovery of qualifying business assets “Bonus Depreciation” – A 100% first-year deduction “Bonus Depreciation” for the adjusted basis is allowed for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The new bonus depreciation deduction is allowed for new and used property.
- Luxury Vehicles Depreciation – Depreciation on passenger automobiles (where bonus depreciation is not taken) is increased to $10,000 in the first year placed in service (up from $3,160), $16,000 the second year (up from $5,100), $9,600 the third year ($3,050 in 2017) and $5,760 any year after ($1,875 in 2017).
- Real Property Improvements – Improvements on real property placed in service after December 31, 2017 are depreciated over 15 years using the straight line, half year convention. Thus, qualified improvement property placed in service after Dec. 31, 2017, is generally depreciable over 15 years using the straight-line method and half-year convention, without regard to whether the improvements are property subject to a lease, placed in service more than three years after the date the building was first placed in service, or made to a restaurant building. Restaurant building property placed in service after Dec. 31, 2017, that does not meet the definition of qualified improvement property, is depreciable as nonresidential real property, using the straight-line method and the mid-month convention.
- Limit on Deduction of Business Interest - For tax years beginning after Dec. 31, 2017, businesses that exceed the an average of $25 million per year gross receipts over the prior 3 years, regardless of form, are generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business's adjusted taxable income. The net interest expense disallowance is determined at the tax filer level. However, a special rule applies to pass-through entities, which requires the determination to be made at the entity level, for example, at the partnership level instead of the partner level.
- Like Kind Exchange repealed for other than real property – Like kind exchanges are only allowed for “real property”, meaning buildings such as rentals or commercial property used in business. Therefore, the like kind exchange is no longer allowed for “personal property” such as business equipment or vehicle trade-ins.
- Net Operating Loss Carryforward – For NOLs arising in tax years ending after Dec. 31, 2017, the two-year carryback and the special carryback provisions are repealed. For losses arising in tax years beginning after Dec. 31, 2017, the NOL deduction is limited to 80% of taxable income (determined without regard to the deduction). Carryovers to other years are adjusted to take account of this limitation, and remaining NOLs can be carried forward indefinitely.
- Five-year write-off of specified R&E expenses – Under pre-Act law, taxpayers may elect to deduct currently the amount of certain reasonable research or experimentation (R&E) expenses paid or incurred in connection with a trade or business. Alternatively, taxpayers may forgo a current deduction, capitalize their research expenses, and recover them ratably over the useful life of the research, but in no case over a period of less than 60 months. Or, they may elect to recover them over a period of 10 years.
Under the new law, amounts paid or incurred in tax years beginning after Dec. 31, 2021, “specified R&E expenses” must be capitalized and amortized ratably over a 5-year period (15 years if conducted outside of the U.S.), beginning with the midpoint of the tax year in which the specified R&E expenses were paid or incurred.
- Domestic production activities deduction repealed – For tax years beginning after Dec. 31, 2017, the DPAD is repealed.