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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 a look at some of the more important elements of the new law that have an impact on businesses. Unless otherwise noted, the changes are effective for tax years beginning in 2018 through 2025.

Here are some highlights:

  • Tax rates. The C corporation tax rate is a flat 21% rate.
 
  • New deduction for "qualified business income." Starting in 2018, taxpayers are allowed a deduction equal to 20 percent of "qualified business income," otherwise known as "pass-through" income, i.e., income from partnerships, S corporations, and sole proprietorships.
 
  • Section 179 expensing. For qualifying property and qualifying real property, the maximum amount a taxpayer may expense is increased to $1 million, and the phase-out threshold amount is increased to $2.5 million.
 
  • Temporary 100% bonus depreciation. A 100% first-year deduction is allowed for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. In later years, the first-year bonus depreciation deduction phases down, as follows:
    •  80% for property placed in service after Dec. 31, 2022 and before Jan. 1, 2024.
    •  60% for property placed in service after Dec. 31, 2023 and before Jan. 1, 2025. 
    • 40% for property placed in service after Dec. 31, 2024 and before Jan. 1, 2026.
    • 20% for property placed in service after Dec. 31, 2025 and before Jan. 1, 2027.

    For the first tax year ending after Sept. 27, 2017, a taxpayer can elect to claim 50% bonus first-year          depreciation (instead of claiming a 100% first year depreciation allowance). 

  • Automobiles. For passenger automobiles, for which the additional first-year bonus depreciation deduction is not claimed, the maximum amount of allowable depreciation is increased to $10,000 for the year.
 
  • Like-kind exchanges. 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.
 
  • Farming equipment and machinery. For new property placed in service, the cost recovery period is shortened from seven to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which begins with the taxpayer.
 
  • Business interest deductions. Every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of business adjusted taxable income. Business interest may be carried forward indefinitely, subject to certain restrictions.
 
  • Domestic production activities deduction (DPAD). DPAD has been repealed.
 
  • Meals and entertainment. Deductions for entertainment expenses are disallowed. The current 50% limit on the deductibility of in-house business meals is expanded.
 
  • Fringe benefits. Businesses no longer receive deductions for employee transportation fringe benefits (e.g., parking and mass transit). Employees however are still not taxed on such benefits.
 
  • Employer-paid family and medical leave (FMLA). For wages paid in tax years beginning in 2018, the Act allows businesses to claim a tax credit from 12.5% up to 25% of the amount of wages paid to qualifying employees. Businesses must meet certain qualifications to claim this credit. This credit ends in tax year 2019.
 
  • Net operating losses (NOL). The NOL two-year carryback and the special carryback pro-visions are repealed, but a two-year carryback applies in the case of certain losses incurred in the trade or business of farming. NOLs can be carried forward indefinitely.
 
  • Cash method of accounting. The cash method may be used by taxpayers that satisfy a $25 million gross receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor.
 
  • Accounting for inventory. Businesses that meet the $25 million gross receipts test are not required to account for inventories, but rather may use an accounting method for inventories that either (1) treats inventories as non-incidental materials and supplies, or (2) conforms to the taxpayer's financial accounting treatment of inventories.
 
  • Uniform capitalization (UNICAP) of expenses in inventory. Any producer or re-seller that meets the $25 million gross receipts test is exempted from the UNICAP rules.
 
  • Dividends-received deduction. For C corporations the 80% dividends received deduction is reduced to 65%, and the 70% dividends received deduction is reduced to 50%.
 
  • Alternative Minimum Tax (AMT). The corporate AMT is repealed.


As you can see from this overview, the new law affects many areas of taxation. As with most tax law there are numerous exceptions. If you wish to discuss the impact of the law on your particular situation, please call your tax advisor.