By Cynthia M. Kula, CPA/PFS, CFP
There have been many tax reforms over the years. The latest Tax Cuts and Jobs Act is one of the more complex and impacts all taxpayers. The TCJA was signed into law on Dec. 22, 2017, and people have not stopped talking about it since.
This is just an overview of the many business reforms and their impact on small- and medium-sized businesses. The majority of these changes are effective for tax years beginning after Dec. 31, 2017. It is imperative that you talk with your tax advisor to determine the impact on you and your business.
- C corps now have a 21 percent flat tax rate instead of rates ranging from 15-35 percent with a higher flat tax rate for personal service corporations. This is great for corporations that had been in the 25 percent and higher brackets.
- Gone is the corporate alternative minimum tax, which used to be 20 percent imposed on certain corporations (with exceptions). This is a big plus for corporations that were exposed to the AMT.
- There is now a 20 percent deduction for pass-through qualified business income from sole proprietorships, rental real estate, partnerships, limited liability companies and S corps. This is a complicated calculation as it is subject to exclusions and thresholds. The deductions will be valuable for owners of pass-through entities because it reduces taxable income and is available to individuals, estates and trusts. This income used to be taxed in full to the owners on their individual returns. This is a WIN for individuals and their businesses.
- The writing off of fixed assets was expanded – a big plus for business owners:
- The depreciation limits on new or used passenger vehicles increased. The first-year $8,000 bonus depreciation is still available and is in addition to the amount for Year 1. The following are the new limits:
- Year 1: $10,000
- Year 2: $16,000
- Year 3: $9,600
- Year 4 and following: $5,760
- The expensing limit increased to $1 million (from $510,000), and the definition of eligible property was expanded.
- Bonus depreciation for the first year of the asset is increased from 50 to 100 percent and applies to both new and used assets purchased and placed in service after Sept. 27, 2017 (this is subject to reduction after Dec. 31, 2022).
- The use of the cash method of accounting has been liberalized, which simplifies the recordkeeping of small- and medium-sized businesses as it is easier and does not require the keeping of inventory.
- Unfortunately, meals and entertainment deductions were curtailed. Check out our website for a full deductibility checklist.
- Employers can no longer deduct parking, van pooling and other types of transportation fringe benefits provided to their employees.
- Section 1031 like-kind exchanges are now only allowed with appreciated real estate (nondealers).
- The Domestic Production Activities Deduction is no longer allowed for applicable businesses in 2018 and beyond (2019 for C corps).
- Net Operating Losses generated post-2017 are not able to be carried back. On a carry-forward basis, they are limited to 80 percent of taxable income. Some exceptions do apply.
- The Chained Consumer Price Index is now the measure of inflation adjustment. This will impact items in the tax code that increase based on this index, such as tax brackets. This is a slower measure of inflation.
This is not an exhaustive list of the business changes under the TCJA. More guidance will be issued over the next several months, keep up to date with our TCJA resource center at www.reacpa.com/TCJA.