(847) 496 - 7180 |

Business - Tax Changes

In December 2017, President Trump and Congress enacted the massive new “Tax Cuts and Jobs Act” (TCJA), which constituted nearly 1,100 pages and dramatically changes tax laws as applicable to individuals and businesses. 

The following summarizes the changes impacting business tax returns. Unless otherwise noted, the changes are effective for tax years beginning in 2018. 

New deduction for “qualified business income”. The most significant new provision affecting small business taxpayers is the new deduction for “qualified business income”. 

Beginning in 2018, taxpayers are allowed a deduction from Taxable income (not adjusted gross income) equal to 20 percent of "qualified business income", which consists of income from partnerships, S corporations, LLCs, and sole proprietorships. Investment income does not qualify, nor do amounts received from an S corporation as reasonable compensation or from a partnership as a guaranteed payment for services provided to the trade or business. As is the case with just about any provision involving tax law, qualifying for and calculating this deduction is not simple. There are numerous provisions and limitations applicable to this deduction, just a few of which are highlighted below: 

• Income must be from a trade or business within the United States. 
• The deduction is not used in computing adjusted gross income, just taxable income. Although most states have not issued guidance for this as of the date of this writing, it would appear that this deduction may not be available on state tax returns filed for states (such as Illinois) that calculate state income tax based on Federal adjusted gross income. 
• For taxpayers with taxable income above certain thresholds, limitations will apply based on W-2 wages paid by the business and depreciable tangible property used in the business. 
• Income from certain “specified service” businesses (such as health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners) will also be subject to limitations.

The IRS is still in the process of interpreting and providing guidance on this significant deduction, and we recommend consulting with a tax professional at Cukierski & Cochrane, LLC to determine the impact on your business and strategies to maximize your tax benefits from this new provision.

Domestic production activities deduction ("DPAD") repealed. For tax years prior to 2018, a deduction was allowed (subject to limitations for W-2 wages paid) for 9% of a taxpayer’s net income from property manufactured, produced, grown, or extracted within the U.S.; qualified film productions; production of electricity, natural gas, or potable water; construction activities performed in the U.S.; and certain engineering or architectural services. Effective with tax year 2018, this deduction will no longer be available. 

Corporate tax rates reduced. The corporate tax rate on so-called “C-Corporations” has been changed to a flat 21%. For years prior to 2018, rates were graduated, starting at 15% for taxable income up to $50,000, with rates at 25% for income between 50,001 and $75,000, 34% for income between $75,001 and $10 million, and 35% for income above $10 million. The corporate alternative minimum tax (AMT) has also been repealed starting in 2018. 

Net Operating Loss ("NOL") deduction modified. NOL’s arising in tax years ending after 2017 can only be carried forward, not back. The general two-year carryback rule, and other special carryback provisions, have been repealed. However, a two-year carryback for certain farming losses is allowed. These NOLs can be carried forward indefinitely, rather than expiring after 20 years. Additionally, under the new law, for losses arising in tax years beginning after 2017, the NOL deduction is limited to 80% of taxable income, determined without regard to the deduction. Carryovers to other years are adjusted to take account of the 80% limitation. 

Limit on business interest deduction. Business taxpayers regardless of business structure, who have average annual gross receipts of $25 million or more for the three-year period ending with the prior tax year, will be limited to a deduction for business interest equal to 30% of its adjusted taxable income. Any business interest disallowed under this rule is carried into the following year, and, generally, may be carried forward indefinitely. Certain additional rules and elections may be available to real estate trades or businesses and partnerships. 

Deduction for business entertainment. The 50% deduction for business-related entertainment expenses is repealed. This applies to entertainment expenses such as amusement facilities, recreational facilities, membership dues, season tickets, sporting events, and other entertainment. The 50% deduction for business meals remains in effect. 

Increased Code Sec. 179 Expensing. The maximum amount that may be expensed under Code Sec. 179 is increased in 2018 to $1 million. If more than $2.5 million of property is placed in service during the year, the $1 million limitation is reduced by the excess over $2.5 million. Both the $1 million and the $2.5 million amounts are indexed for inflation after 2018. The expense election has also been expanded to cover (1) certain depreciable tangible personal property used mostly to furnish lodging or in connection with furnishing lodging, and (2) the following improvements to nonresidential real property made after it was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; security systems; and any other building improvements that aren't elevators or escalators, don't enlarge the building, and aren't attributable to internal structural framework. 

Bonus depreciation. A 100% first-year deduction is allowed for qualified new and used property acquired and placed in service after September 27, 2017 and before 2023. Pre-Act law provided for a 50% allowance, to be phased down for property placed in service after 2017. Under the new law, the 100% allowance is phased down starting after 2023. 

Depreciation of qualified improvement property. Beginning in 2018, qualified improvement property is depreciable using a 15-year recovery period and the straight-line method. Qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property placed in service after the building was placed in service. It does not include expenses related to the enlargement of the building, any elevator or escalator, or the internal structural framework. There are no longer separate requirements for leasehold improvement property or restaurant property. 

Like-kind exchange treatment limited. The rule allowing the deferral of gain on like-kind exchanges of property held for productive use in a taxpayer's trade or business or for investment purposes is limited to cover only like-kind exchanges of real property not held primarily for sale. Under a transition rule, the pre-TCJA law applies to exchanges of personal property if the taxpayer has either disposed of the property given up or obtained the replacement property before 2018. As a result of this provision, starting in 2018, business taxpayers will be taxed on the difference between the trade-in allowance and the tax basis (cost less depreciation taken) of any vehicle or equipment trade-ins. 

Other provisions. The TCJA also made changes to numerous other provisions of business tax law, including transportation and bicycle fringe benefits, availability of the cash method of accounting, capitalization of inventory costs, and the completed contract method of accounting for contractors, among others. 

The changes on this list are not comprehensive, and the IRS is still in the process of providing interpretations for all these new provisions for 2018 tax returns. Accordingly, the impact of the new tax law on each business’ tax picture may vary. For personalized advice or if you have any questions regarding about the effect of the TCJA on your business taxes, please contact one of the tax professionals at Cukierski & Cochrane, LLC, who will be able to assist you.