In our last article, we discussed the major provisions of the Tax Cuts and Jobs Act — which was signed into law by President Trump on December 22 — that affect individuals and families. Here, we cover the major provisions that affect businesses.
Lower Corporate Tax Rate
The centerpiece of tax reform on the business side is a permanent reduction of the top corporate income tax rate. Starting in 2018, this rate falls from from 35%, which was one of the highest corporate tax rates in the developed world, to 21%.
In fact, the entire graduated corporate tax rate schedule — which included eight different tax rate brackets — is being replaced with this 21% flat rate. Also, the 20% corporate Alternative Minimum Tax (AMT) is repealed, effective in 2018. And there will be a new 20% qualified income deduction for owners of pass-through business entities like sole proprietorships, partnerships, LLCs and S corporations through 2025.
International companies currently holding cash overseas can move this cash into the U.S. at a 15.5% one-time deemed repatriation rate. Additionally, the U.S. will move to a territorial system in which money is taxed where it’s earned. The legislation includes rules designed to prevent businesses from hiding taxable income, including income generated from intangible assets like intellectual property.
Bonus Depreciation Doubled
One of the biggest potential benefits of the tax reform act for many businesses is the doubling of bonus depreciation to 100% for new and used assets acquired and placed in service between September 27, 2017, and December 31, 2022. In other words, businesses can immediately expense and deduct, rather than depreciate, all qualifying assets purchased and placed in service over the next five years.
Qualifying assets include common business purchases such as computer systems, software, vehicles, office furniture, and machinery and equipment. Qualified television and film productions are also now included. This provision is designed to accelerate business investment and boost productivity growth, which in turn could strengthen overall economic growth and job creation.
After 2022, bonus depreciation will be scaled back to 80% of property placed in service in 2023, 60% in 2024, 40% in 2025 and 20% in 2026.
An op-ed piece in the December 15, 2017, issue of The Wall Street Journal called these changes “supply-side reforms that will increase the economy’s productive capacity.” They will help keep the long-running economic expansion going even in the face of the Federal Reserve’s rate-hike campaign, stated the article.
Section 179 Expensing Limit Raised
In addition to the doubling of bonus depreciation over the next five years, the tax reform act also more than doubles the Section 179 expensing limit — from $510,000 to $1 million in 2018. And it raises the expensing phase-out threshold from $2 million to $2.5 million in 2018. These amounts will be indexed for inflation in tax years after 2018.
Section 179 expensing provides businesses with similar tax benefits to 100% bonus depreciation when the latter isn’t available. It allows businesses to deduct the cost of qualifying new or used depreciable property and most software (up to the expensing limit) during the first year.
In addition, qualified real property improvement costs are also eligible for the Section 179 deduction. These typically include improvements to the interior of leased non-residential buildings, improvements to certain restaurant buildings, and improvements to the interior of retail buildings.
The Tax Cuts and Jobs Act includes several other provisions that are beneficial to businesses. For example, there is now a new tax credit for employer-paid family and medical leave that’s effective for tax years 2018 and 2019.
And while the annual depreciation deduction for new or used passenger vehicles that are used over 50% for businesses is slightly lower in 2018 than it was before tax reform — $10,000 vs. $11,160 — the new annual deductions are much higher for subsequent years. This will allow faster depreciation of these vehicles overall.
Some Popular Deductions Eliminated
Tax reform does eliminate or limit some popular deductions that many businesses have claimed in the past. These include the domestic production activities deduction (or Section 199 deduction) and deductions for net interest expense in excess of 30% of a business’s adjusted taxable income.
The tax act also limits deductions for net operating losses, limits like-kind exchanges to real property that is not held primarily for sale, and places new limits on deductions for employee fringe benefits. These changes are designed to help offset the impact of the business tax cuts on federal revenue.
Seek Professional Guidance
The provisions and potential impacts of Tax Cuts and Jobs Act go well beyond those discussed here. Therefore, be sure to consult with a tax professional for more details on how the legislation could affect your business.