What you should know about the changes in the Tax Law
By Brent Forbush, Special to bizNEVADA
The Tax Cuts and Jobs Act (TCJA) contains a treasure trove of tax breaks for businesses. Here are the most important changes in the new law that will affect businesses and their owners.
New 21% corporate tax rate
Under pre-TCJA law, C corporations paid graduated federal income tax rates ranging from 15% to 35%.
For tax years beginning in 2018, the TCJA establishes a flat 21% corporate rate.
Reduced corporate dividends deduction
Under pre-TCJA law, C corporations that received dividends from other corporations were entitled to partially deduct those dividends at either 70% or 80% dependent upon ownership percentage of the other corporation.
For tax years beginning in 2018, the TCJA reduces the 80% deduction to 65% and the 70% deduction to 50%.
Corporate alternative minimum tax repealed
Before the TCJA, the corporate alternative minimum tax (AMT) was imposed at a 20% rate. For tax years beginning in 2018, the new law repeals the corporate AMT. For corporations that paid the corporate AMT in earlier years, an AMT credit was allowed under prior law. The new law allows corporations to fully use their AMT credit carryovers in their 2018–2021 tax years.
New deduction for pass-through businesses
For tax years beginning in 2018, the TCJA establishes a new deduction based on a non-corporate owner’s qualified business income (QBI). This new tax break is available to individuals, estates and trusts that own interests in pass-through business entities. The deduction generally equals 20% of QBI, subject to restrictions that can apply at higher income levels.
QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss from any qualified business of the non=corporate owner. QBI doesn’t include certain investment items, reasonable compensation paid to an owner for services rendered to the business or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.
The QBI deduction isn’t allowed in calculating the non-corporate owner’s adjusted gross income (AGI), but it reduces taxable income.
W-2 wage limitation. The QBI deduction generally can’t exceed the greater of the owner’s share of:
- 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
- The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.
Qualified property is the depreciable tangible property (including real estate) owned by a qualified business as of year-end and used by the business at any point during the tax year for the production of qualified business income.
This limitation applies once taxable income exceeds $157,500 ($315,000 for joint filers).
Specified Trade or Service business limitation. Finally, the QBI deduction generally isn’t available for income from certain specified service businesses. Under an exception, the service business limitation doesn’t apply until an individual owner’s taxable income exceeds $157,500 ($315,000 for joint filers). Above those income levels, the service business limitation is phased in over a $50,000 phase-in range ($100,000 range for joint filers).
The W-2 wage limitation and the service business limitation don’t apply as long as your taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.
New limits on business interest deductions
Under the TCJA, affected corporate and non-corporate businesses generally can’t deduct interest expenses in excess of 30% of “adjusted taxable income,” starting with tax years in 2018.
Business interest expense that’s disallowed under this limitation is treated as business interest arising in the following taxable year. Amounts that cannot be deducted in the current year can generally be carried forward indefinitely.
There are some exceptions to this limit for business with gross receipts average of $25 million or less for the three previous tax years, real property businesses that elect to use a slower depreciation method for their real property, and interest expense from dealer floor plan financing.
Reduced or eliminated employer deductions for business-related meals and entertainment
Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed. Meal expenses incurred while traveling on business are still 50% deductible, but the 50% disallowance rule will now also apply to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will be nondeductible.
Changes to some employee fringe benefits
The new law disallows employer deductions for the cost of providing commuting transportation (unless for safety) and eliminates other qualified employee transportation fringe benefits.
Here are some of the other business-related changes in the TCJA:
- For business net operating losses (NOLs) that arise in tax years ending after December 31, 2017, the maximum amount of taxable income that can be offset with NOL deductions is 80%. In addition, NOLs incurred in those years can no longer be carried back to an earlier tax year (except for certain farming losses). Affected NOLs can be carried forward indefinitely.
- More generous business asset expensing and depreciation tax breaks are available. The maximum Section 179 deduction increases to $1 million, and the phaseout threshold amount is increased to $2.5 million along with increased bonus depreciation.
- Domestic production activities deduction is eliminated for tax years beginning after December 31, 2017.
- The eligibility rules to use the more-flexible cash method of accounting are liberalized to make them available to many more medium-sized businesses. Also, eligible businesses are excusedfrom the chore of doing inventory accounting for tax purposes.
- The Section 1031 rules that allow tax-deferred exchanges of appreciated like-kind property is allowed only for real estate for exchanges completed after December 31, 2017.
- Faster depreciation is allowed for eligible farming assets.
- Compensation deductions for amounts paid to principal executive officers generally cannot exceed $1 million per year.
- Specified R&D expenses must be capitalized and amortized over five years, or 15 years if the R&D is conducted outside the United States instead of being deducted currently.
The TCJA is the largest overhaul of the tax code in more than 30 years, and we’ve covered only the highlights of the business-related tax provisions here.
Brent Forbush is the audit and accounting manager at Forbush & Associates. He holds a Master of Business Administration with an emphasis in accounting and is a certified public accountant. For questions about information in this article call 775-337-6001.