Tax Reform Law – Significant Changes Affecting Business
The new tax reform law, commonly called the “Tax Cuts and Jobs Act” (TCJA), is the biggest federal tax law overhaul in 31 years, and it has both good and bad news for taxpayers.
Below are highlights of some of the most significant changes affecting business. Except where noted, these changes are effective for tax years beginning after December 31, 2017.
Tax Cuts and Jobs Act
- Replacement of graduated C-corporation tax rates ranging from 15% to 35% with a flat rate of 21%
- Repeal of AMT for C-corporations.
- New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025. This is a highly complex provision with many limitations and nuances. Individuals and trusts with an ownership interest in any non-C corporation business should meet with their tax advisor soon to make sure their business is situated to maximize the deduction for 2018.
- Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
- Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
- Other enhancements to depreciation-related deductions
- New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply). This is another new provision that has traps for the unwary. Business that are highly leveraged should meet with their tax advisor to understand how this provision may affect their tax liability.
- New limits on net operating loss (NOL) deductions.
- Excess business losses for trusts and individuals are no longer available to offset non-business income and are treated as net operating losses.
- Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C-corporation taxpayers
- Changes the revenue threshold from average gross receipts for the three previous tax years of $10 million to $25 million:
- Businesses are required to use the accrual method of accounting;
- Businesses are required to capitalize certain non-direct costs under Section 263A;
- Businesses with long-term contracts are required to use the percentage of completion;
- New rule limiting like-kind exchanges to real property that is not held primarily for sale.
- New tax credit for employer-paid family and medical leave — through 2019
- New limitations on excessive employee compensation
- New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation
More to consider
This is just a brief overview of some of the most significant TCJA provisions. There are additional rules and limits that apply, and the law includes many additional provisions. Contact your Cornwell Jackson tax advisor to learn more about how these and other tax law changes will affect you in 2018 and beyond.
Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries, and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.