Congress Passes Tax Reform Bill – Impact for Business Taxpayers
Posted On: 12-20-2017 | Posted By: WK Staff
The Tax Cuts and Jobs Act, H.R. 1, was passed by both the House and Senate on Wednesday. The bill now moves on to President Trump, who has said he plans to sign the bill before Christmas. This bill represents the most significant revision in the tax code in over 30 years, and will impact individuals, businesses, and nonprofit entities. This client alert outlines the changes in the bill affecting businesses. (Please see associated client alert on the implications to individuals). Unlike the individual tax portion of the bill where the provisions are set to expire on December 31, 2025, the business tax portion of the bill will be permanent legislation.
Most significantly, the bill replaces the existing graduated corporate tax rate structure (current maximum tax rate of 35%) with a flat tax rate of 21%. The new rate will take effect Jan. 1, 2018. The bill will also repeal the corporate alternative minimum tax.
The bill also makes significant changes to depreciation of fixed assets for tax purposes. The bill extends and modifies bonus depreciation, granting businesses the ability to immediately deduct 100% of the cost of eligible property in the year the property is put into service, through 2022 (the amount of allowable bonus depreciation will then be phased out over the next 5 years, beginning in 2023). The bill will now allow taxpayers to take bonus depreciation on both new and used property. These new rules for 100% bonus depreciation are in effect for assets purchased and placed in service after September 27, 2017, so the new rules will have an impact on 2017 taxes.
Additionally, Section 179 expensing will also be expanded under the tax bill. The expensing limit rises to $ 1 million and the phase-out threshold increases to $2.5 million. Luxury automobile depreciation limits are also increased in the bill. The maximum amount of depreciation businesses can take on the passenger automobiles will be $10,000 in the first year, $16,000 in the second year, $9,600 in the third year, and $5,760 for the fourth and later years.
Certain expenses, deductions, and credits are experiencing modifications as well:
- Business interest deductions will be limited to the sum of business interest income, 30% of the taxpayer’s adjusted taxable income, and the taxpayer’s floor plan financing interest. Any disallowed business interest deduction can be carried forward indefinitely. Note that there is an exception to this limitation for businesses that have average annual gross receipts of $25 million or less in the three prior tax years.
- Net operating losses (NOLs) will be limited to 80% of taxable income. The new bill will prevent the carryback of NOLs in most situations (farming businesses would still be allowed the two-year NOL carryback) but will now allow most NOLs to be carried forward indefinitely.
- Like-kind exchanges will be restricted to exchanges of real property that is not primarily held for sale.
- Domestic production activities deduction will be repealed.
- Entertainment expenses will be no longer be available as a deduction.
- The qualified transportation fringe benefits deduction will no longer be allowed in association with providing qualified transportation benefits to employees of the taxpayer.
- Certain credits are being eliminated or modified. Note that the Research and Development Credit has been retained.
In light of the impending changes, most businesses will benefit by deferring income into 2018, and accelerating deductions in 2017, to the extent possible. This will allow businesses to reduce tax in the current year when income tax rates are generally higher, and push income into future years when income tax rates will be lower. In addition, businesses should be mindful of certain deductions that will be limited in future years. For example, cash-basis taxpayers with business entertainment expenses should try to accelerate payment of entertainment expenses to be consumed in the next 12 months as those will no longer be deductible in 2018.
Likewise, if your business has equipment needs, we will be happy to discuss with you timing of purchases and associated elections to optimize those decisions from a tax standpoint. As always, we encourage you to contact your WK Advisor to discuss the impact of the tax bill on your individual situation.