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Highlights of the Tax Cuts and Jobs Act for Businesses
The recently enacted Tax Cuts and Jobs Act (TCJA) is a sweeping tax package. Here's an overview of some of the more important business tax changes in the new law. Unless otherwise noted, the changes are effective for tax years beginning in 2018.
- Corporate tax rates reduced. One of the more significant new law provisions cuts the corporate tax rate to a flat 21%.
- Dividends-received deduction. The dividends-received deduction available to corporations that receive dividends from other corporations has been reduced under the new law. For corporations owning at least 20% of the dividend-paying company, the dividends-received deduction has been reduced from 80% to 65% of the dividends. For corporations owning under 20%, the deduction is reduced from 70% to 50%.
- Alternative minimum tax repealed for corporations. The corporate alternative minimum tax (AMT) has been repealed by the new law.
- Alternative minimum tax credit. Corporations are allowed to offset their regular tax liability by the AMT credit.
- Net Operating Loss ("NOL") deduction modified. Under the new law, generally, NOLs arising in tax years ending after 2017 can only be carried forward, not back. The general two-year carryback rule, and other special carryback provisions, have been repealed. However, a two-year carryback for certain farming losses is allowed. These NOLs can be carried forward indefinitely, rather than expiring after 20 years.
- Limit on business interest deduction. Under the new law, every business, regardless of its form, is limited to a deduction for business interest equal to 30% of its adjusted taxable income. The limitation does not apply to taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the three-year period ending with the prior tax year.
- Domestic production activities deduction ("DPAD") repealed. The new law repeals the DPAD for tax years beginning after 2017.
- New fringe benefit rules. The new law eliminates the 50% deduction for business-related entertainment expenses. The pre-Act 50% limit on deductible business meals is expanded to cover meals provided via an in-house cafeteria or otherwise on the employer's premises.
- Family and medical leave credit. A new general business credit is available to eligible employers for tax years beginning in 2018 and 2019 equal to 12.5% of wages they pay to qualifying employees on family and medical leave if the rate of payment is 50% of wages normally paid to the employee.
- Increased Code Sec. 179 expensing. The new law increases the maximum amount that may be expensed under Code Sec. 179 to $1 million. If more than $2.5 million of property is placed in service during the year, the $1 million limitation is reduced by the excess over $2.5 million. Both the $1 million and the $2.5 million amounts are indexed for inflation after 2018.
- Bonus depreciation. Under the new law, a 100% first-year deduction is allowed for qualified new and used property acquired and placed in service after September 27, 2017 and before 2023.
- Depreciation of qualified improvement property. The new law provides that qualified improvement property is depreciable using a 15-year recovery period and the straight-line method. Qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property placed in service after the building was placed in service.
- Depreciation of farming equipment and machinery. Under the new law, subject to certain exceptions, the cost recovery period for farming equipment and machinery the original use of which begins with the taxpayer is reduced from 7 to 5 years. Additionally, in general, the 200% declining balance method may be used in place of the 150% declining balance method that was required under pre-Act law.
- Luxury auto depreciation limits. Under the new law, for a passenger automobile for which bonus depreciation (see above) is not claimed, the maximum depreciation allowance is increased to $10,000 for the year it's placed in service, $16,000 for the second year, $9,000 for the third year, and $5,760 for the fourth and later years in the recovery period. For passenger autos eligible for bonus first year depreciation, the maximum additional first year depreciation allowance remains at $8,000 as under
- New rules for post-2021 research and experimentation ("R & E") expenses. Under the new law, specified R & E expenses paid or incurred after 2021 relating to a trade or business must be capitalized and amortized ratably over a 5-year period (15 years if conducted outside the U.S.).
- Like-kind exchange treatment limited. Under the new law, the rule allowing the deferral of gain on like-kind exchanges of property held for productive use in a taxpayer's trade or business or for investment purposes is limited to cover only like-kind exchanges of real property not held primarily for sale.
If you wish to discuss any of these provisions and their impact on your situation, please contact your SEK&Co tax advisor.