Tax Cuts and Job Act Tax Reform Highlights for Small Businesses

Tax Cuts and Job Act Tax Reform Highlights for Small Businesses

The Tax Cuts and Jobs Act passed and was signed into effect on December 20, 2017. This is the largest tax reform seen since the 1980’s. Below are a few helpful items for you to know as a small business owner. Since some of these new rules are very complex, this is a very high-level summary, and is not wholly inclusive of all the changes. Please speak with your CPA to walk you through all the new definitions, limitations, and rules to help you determine what applies to your specific situation.

Quick Summary

  • Corporate tax rates are reduced to a flat 21% rate.

  • Pass-through entities should connect with their CPA to take advantage of the new 20% of profits deduction.

  • Starting in 2018, the corporate alternative minimum tax is repealed.

  • Planning to buy machinery, equipment, or depreciable assets? Learn the changes to Sec 179 to see if you can deduct or expense the costs.

  • If your business owns any luxury automobiles, the maximum amount of allowable depreciation has increased.

  • A 100% first-year deduction for the adjusted basis is allowed for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.

  • Under the new law, for years beginning after Dec. 31, 2017, the 80% dividends received deduction is reduced to 65%, and the 70% dividends received deduction is reduced to 50%.

  • Every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income with special rules for pass-through entities.

  • Net Operating Losses (“NOL”s) arising in tax years ending after Dec. 31, 2017, the deduction is limited to 80% of taxable income (determined without regard to the deduction).

  • The domestic production activities deduction is repealed.

  • For tax years after December 31, 2017 you won’t be able to use a like-kind exchange on personal property, like machinery or equipment, anymore.

  • Deductions for entertainment expenses are now disallowed and now there is a 50% limit on the deductibility of business meals including meals provided on the premises of the employer.

  • Employee achievement awards are still deductible but there is a definition of tangible personal property.

  • Deductions for employee transportation fringe benefits (e.g., parking and mass transit) are denied, including transportation expenses equivalent of commuting for employees.

  • Businesses can claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave (FMLA) if the rate of payment is at least 50% of the wages normally paid to an employee. Contact us at katesmithcpa.com if you have any questions!

Contact us at katesmithcpa.com if you have any questions!

Specifics

For tax years beginning after Dec. 31, 2017, the corporate tax rate is a flat 21% rate.
“Pass-through” entities (sole proprietors, LLCs, partnerships, S Corporations) are not left out of reduced rates. In order to provide a benefit to these businesses as well, there is now a 20% deduction on net profits allowed to all pass-through entities. But don’t get too excited yet, because there are several limitations and the law is so complex that even tax professionals are working hard to understand it all. If you are a pass-through entity, get with your CPA to see how this could work for you, and how to structure your business 2018 and forward in order to take advantage of this deduction.

For years beginning after Dec. 31, 2017, the corporate AMT is repealed. There are also changes to the AMT credit carryforward. Meet with your CPA if the AMT applied to your company previously to plan for these changes and how they can benefit you.

If you are planning on purchasing machinery or equipment, or other depreciable assets for your business for years after December 31, 2017, you need to know the changes to Sec 179. A business can elect to deduct (or “expense”) 100% of the cost of qualifying property, subject to limitations, but for years after December 31, 2017 the limitations have been changed favorably. Prior to tax reform, the maximum amount a taxpayer could expense for qualifying property placed in service for the year was limited to $500,000, with a phase out starting at $2 million. The new laws have increased this to $1 million, with a phase out starting at $2.5 million. Also, the definition of qualified property has been expanded to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. The definition is also expanded to include improvements to nonresidential real property including: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.

Does your business have a “luxury” automobile for you or employees of the company? If so, you need to know:
For passenger automobiles placed in service after Dec. 31, 2017, in tax years ending after that date, the maximum amount of allowable depreciation is increased.

A 100% first-year deduction for the adjusted basis is allowed for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (after Sept. 27, 2017, and before Jan. 1, 2024, for certain property with longer production periods). And the deduction is now allowed for new and used property. In later years, this depreciation deduction phases down, and sunsets after 2026.

Under the new law, for years beginning after Dec. 31, 2017, the 80% dividends received deduction is reduced to 65%, and the 70% dividends received deduction is reduced to 50%.

For tax years beginning after Dec. 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. The net interest expense disallowance is determined at the tax filer level. However, a special rule applies to pass-through entitles, which requires the determination to be made at the entity level, for example, at the partnership level instead of the partner level.

NOTE EXCEPTIONS from these rules applies for:
– taxpayers with average annual gross receipts that do not exceed $25 million for the three-tax year period ending with the prior taxable year.
– certain regulated public utilities and electric cooperatives.
– Real property trades or businesses can elect out of the provision if they use ADS to depreciate applicable real property used in a trade or business.
– Farming businesses can also elect out if they use ADS to depreciate any property used in the farming business with a recovery period of ten years or more.

For Net Operating Losses (“NOL”s) the deduction is now limited to 80% of taxable income (determined without regard to the deduction) for NOLs arising in tax years ending after Dec. 31, 2017. But some good news; Carryovers are adjusted and NOLs can now be carried forward indefinitely.

If you were manufacturing in the US and taking a “199” deduction, this is no longer available under the new law. For tax years beginning after Dec. 31, 2017, the DPAD is repealed.

Generally, for transfers after Dec. 31, 2017, the rule allowing the deferral of gain on like-kind exchanges is modified to allow for like-kind exchanges only with respect to real property (i.e. real estate) that is not held primarily for sale. So, for tax years after December 31, 2017 you won’t be able to use a like-kind exchange on personal property, like machinery or equipment, anymore.
*Please note that, under transition rules, the pre-Act like-kind exchange rules apply to exchanges of personal property if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before Dec. 31, 2017.

Under the new law, deductions for entertainment expenses are disallowed for amounts incurred or paid after Dec. 31, 2017.
And now there is a 50% limit on the deductibility of business meals including meals provided on the premises of the employer. If you provide lunch for your employees, or overtime meals, these are now limited to 50% deduction. For tax years beginning after Dec. 31, 2025, the Act will completely disallow an employer’s deduction for expenses associated with meals provided on the employer’s business premises

Deductions for employee transportation fringe benefits (e.g., parking and mass transit) are denied, for years starting after December 31, 2017.
Also, no deduction is allowed for transportation expenses that are the equivalent of commuting for employees (i.e., from employee’s home to the workplace), except as provided for the safety of the employee.

The new law states that for wages paid for the two years beginning after Dec. 31, 2017, but not beginning after Dec. 31, 2019, the Act allows businesses to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave (FMLA) if the rate of payment is at least 50% of the wages normally paid to an employee. The credit is increased incrementally when the rate of payment exceeds 50%. All qualifying full-time employees have to be given at least two weeks of annual paid family and medical leave (all less-than-full-time qualifying employees have to be given a commensurate amount of leave on a pro rata basis).

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