The Tax Cuts and Jobs Act
Key Items affecting Businesses & Business Owners
Please note: The following summary of items is not intended to be a summary of all items contained in the Tax Cut & Jobs Act. These items are those that will likely affect the largest number of business tax filers. If you have specific questions about additional items that you may have heard about with respect to this Act, please contact our office.
- C-Corporation Tax Rate: The Act replaced the prior graduated corporate tax rate (15% – 35%) with a flat rate of 21%. The new rate took effect January 1, 2018. The Act makes the new rate permanent.
- Bonus Depreciation: Bonus depreciation has been increased to 100% for property placed in service after September 27, 2017 and before January 1, 2023. The amount of allowable bonus depreciation will then be phased down over four years: 80% will be allowed for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. The Act has also removed the rule that the bonus depreciation was only available for new eligible property, thus allowing bonus depreciation on the purchase of used property.
- Vehicle Depreciation: The Act raises the cap placed on depreciation write-offs of business-use vehicles. For passenger automobiles placed in service after 2017 and for which bonus depreciation is not claimed, the maximum amount of allowable depreciation is $10,000 for the first year a vehicle is placed in service (up from $3,160), $16,000 for the second year (up from $5,100), $9,600 for the third year (up from $3,050), and $5,760 for each subsequent year (up from $1,875) until the costs are fully recovered.
- Section 179 Depreciation: the Act increased the maximum amount a taxpayer may expense under Sec. 179 to $1 million. It also expanded the definition of qualified real property eligible for Sec. 179 expensing to include any of the following improvements to nonresidential real property: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
- Domestic Production Activities Deduction: The Code Sec. 199 domestic production activities deduction has been eliminated.
- Interest Expense Deduction Limitation: The Act caps the deduction for interest expense at 30% of adjusted taxable income, among other criteria. Exceptions would exist for small businesses, including an exemption for businesses with average gross receipts of $25 million or less. Any disallowed business interest deduction can be carried forward indefinitely.
- Like-kind Exchanges: Like-kind exchanges will only be allowed for real property not primarily held for sale.
- Entertainment Expenses: Entertainment expenses are no longer deductible for any activity generally considered to be entertainment, amusement or recreation or membership dues for any club organized for business, pleasure, recreation or other social purposes. Meals, however, will still be deductible at the 50% limitation.
- Pass-through Business Income Deduction: For tax years after 2017 and before 2026, individuals will be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorship. A limitation on the deduction is phased in based on W-2 wages above a threshold amount of taxable income. The deduction is disallowed for specified service trades or business owners with income above a threshold.
- Net Operating Losses: Net operating losses will be limited to 80% of taxable income for losses arising in tax years beginning after December 31, 2017. The Act also denies the carryback for NOLs in most cases while providing for an indefinite carryforward, subject to the percentage limitation.
- Employer Credit for Paid Family or Medical Leave: The Act allows eligible employers to claim a credit equal to 12.5% of the amount of wages paid to a qualifying employee during any period in which the employee is on family and medical leave if the rate of payment under the program is 50% of the wages normally paid to the employee. The credit is increased by .25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account for any employee in any tax year is 12 weeks. The credit is only available in 2018 and 2019.