THINGS TO KEEP IN MIND FOR 2018 TAX FILINGS
Article by: Jeff Skolnick, CPA, M.S. Taxation
This article is a recap of the major provisions passed in the Tax Cuts and Jobs Act that relate to businesses.
Corporate rate is cut to 21% after 2017. Prior to 2018 the corporate tax rates paid by “C” corporations ranged from 15% on the first $50,000 of taxable income to 25% for the next $25,000 of income and then the rates went to 34% and 35% thereafter. There is no longer a special tax rate on personal service corporations. These were previously taxed at 35%. Personal service corporations were defined as C corporations that performed services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.
Alternative Minimum Tax has been repealed for corporations after 2017. This applied to corporations with average annual gross receipts for a three-year period of over $7.5 million in most cases ($5 million if it was within the corporation’s first 3 years of existence).
New Code Section has been to the Internal Revenue Code. The new section is 199A. Qualified Business Income. This code section allows a 20% deduction for Qualified Business Income of a Pass-Thru Entity. There are a number of limitations that may apply. Think of the 20% deduction on Qualified Business Income as the first hurdle.
Increased Section 179 Expensing. Section 179 is the Internal Revenue Code Section that allows fixed assets to be fully written off in the year of purchase rather than depreciated over a number of years. Beginning after 2017 the annual first year expensing amount will be $1,000,000 (up from $500,000). The phaseout which currently begins at $2,000,000 is raised to $2,500,000. This deduction is available for new and used equipment. Most assets with the exception of real property are eligible. Qualified real property is eligible. Qualified real property is certain improvements made by either a landlord or a tenant in a nonresidential property.
Bonus Depreciation. Beginning September 28, 2017 through December 31, 2022 eligible property may be expensed 100% in the year of acquisition. Each year subsequent to 2022 the percentage will drop (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and 0% thereafter). Bonus depreciation will now apply to both new and used property (previously it only applied to new property). This provision applies to basically the same assets as discussed in the Section 179 expensing paragraph. One important exception is that Qualified Improvement Property, this is Leasehold Improvements made to a commercial building while they are eligible for Section 179 due to an error in the writing of the law are not eligible for bonus depreciation.
Increased Limits to Luxury Automobile Depreciation. Certain automobiles considered to be “luxury” automobiles had limitations placed on the amount of depreciation that was allowed each year. TheLuxury automobile depreciation limitation has increased to $10,000 in year 1, $16,000 in year 2, $9,600 in year 3 and $5,760 each year thereafter beginning in 2018. This yields a total depreciation deduction of $47,120 over five years. The limitations for automobiles placed in service in 2017 were $11,160 in year 1, $5,100 in year 2, $3,050 in year 3 and $1,875 each year thereafter. This yielded a depreciation deduction of only $23,060 over the first five years.
Limitation on Business Interest. For years after 2017 certain companies that average $25,000,000 or more in sales are limited in the amount of interest that may be deducted as an expense on their tax returns. This number is limited to 30% of adjusted taxable income. Taxable income is adjusted by adding back certain deductions such as depreciation in years before 2022, net operating losses and the new Section 199A deduction for Qualified Business Income of Pass-Thru Entities.
Net Operating Losses. If a company incurred a net operating loss (expenses exceeded income) prior to 2018 then the rule was the loss would be carried back to the tax return filed 2 years ago and would reduce the income of that return. The return would be amended and the taxpayer would receive a refund or credit. If not all of the loss was absorbed by that tax year (for example there was not enough income in the earlier tax year to totally use the loss, then the loss would be carried forward to the tax year filed 1 year ago and then forward to the tax years for the next 20 years until it was used in it’s entirety).Beginning in 2018 net operating losses will no longer be carried back 2 years and forward for 20 years. The new law repeals loss carrybacks and modifies carryforwards from 20 years to indefinite. This applies to all companies other than property and casualty insurance companies which remain bound by the old laws. Additionally, upon utilization they are limited to 80% of the taxable income without regard to the NOL deduction.
Entertainment Expenses which were formerly allowed as deductions (although limited to 50% of cost) are no longer deductible in 2018.
Meals provided at or near business premises by an employer, beginning in 2018, are now only 50% deductible rather than the 100% that they have been.
Transportation Reimbursements made to employees for commuting to and from a place of employment from the employee’s residence are no longer deductible.
Domestic Production Activities Deduction has been repealed after 2017. This deduction amounted to 9% of “Qualified Production Activities Income” limited by taxable income and W-2 wages paid.
Partnership Technical Terminations are repealed in 2018. Under prior law if there was a sale or exchange of 50 percent or more of the total interest in partnership capital and profits then the partnership would be terminated.
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