As you are very likely aware, Congress finally passed the tax reform legislation today. There is a tremendous amount of language in this bill that will impact business taxes, and it will take us some time to get our heads fully wrapped around it to devise the most optimal planning techniques for our business clients to take advantage of it all. In the meantime, here are some of the more salient points and how this bill will likely impact our clients.
The c-corporation tax rate cuts are significant. It is now a 21% flat corporate tax rate. Businesses conducted as sole proprietorships, partnerships, or S corporations potentially receive a special deduction (similar to what was included in the Senate proposal) under the final bill.
The law significantly reforms international rules. This has made planning difficult for our clients that have international business footprints.
Below are some major highlights of the final law passed by Congress today.
2018 Tax Reform Changes for Businesses
Section 179 Expensing: The expensing limitation increases to $1 million and the phase-out amount to $2.5 million. The new limitations will be adjusted for inflation in the coming years. The law further expands the definition of §179 property and the definition of qualified real property for improvements made to nonresidential real property. Some important items that are now allowed to be deducted via Section 179 for Real Estate Entities include roofs and other major repairs.
Research and Development Credit has been preserved.
Deductions for Income Attributable to Domestic Production Activities is repealed starting in 2018.
Entertainment Expenses Deductions: Beginning in 2018, no deduction is allowed generally for entertainment, amusement, or recreation; membership dues for a club organized for business, pleasure, recreation, or other social purposes; or a facility used in connection with any of the above.
NOL Deduction: Starting in 2018, the law limits the NOL deduction to 80% of the taxpayer’s taxable income and provides that amounts carried to other years be adjusted to account for the limitation. Amounts may be carried forward indefinitely.
Corporate Tax Rate: Beginning in 2018, there is now a 21% flat corporate tax rate; no special tax rate for personal service corporations.
Alternative Minimum Tax on Businesses that file their own tax returns (not included on Schedule C): Starting in 2018, the law repeals the alternative minimum tax. In 2018, 2019 and 2020, if taxpayers would have AMT credit carryforwards, they are able to claim a refund of 50% of remaining credits (to the extent credits exceed regular tax for the year). For 2021, taxpayers are able to claim a refund of all remaining credits.
Pass-Through Tax Rate: Beginning in 2018, generally a 20% deduction for qualified business income would be provided in lieu of tax rate changes. Special rules apply when computing this deduction. The deduction expires after December 31, 2025.
Please don’t hesitate to contact us if you have any questions or want to schedule a tax planning meeting.