The Tax Cuts and Jobs Act (TCJA) was signed by President Trump on December 22. The Act makes sweeping changes to the U.S. tax code and impacts every taxpayer. To sum it up as follows:
1) A Reduction in the Corporate Tax Rate
A graduated rate of 35% is reduced to 21% beginning in 2018 permanently. Also, the 70-percent dividends-received deduction has been reduced to 50 percent, and the 80-percent dividends-received deduction is reduced to 65 percent.
2) Repeal Alternative Minimum Tax (AMT) for Corporations
The alternative minimum tax (AMT) for corporations is repealed beginning after 2017. Any unused minimum tax credit of a corporation may be used to offset regular tax liability for any tax year. In addition, the portion of the unused minimum tax credit is refundable in 2018 through 2021. The refundable portion is 50 percent (100 percent in 2021) of any excess minimum tax for the year over any credit allowable against regular tax for that year.
Repeal of the AMT allows some corporations to use certain tax benefits to effectively pay significantly below the new 21-percent rate.
3) Bonus Depreciation and Section 179 Expense
Bonus Depreciation
Under the pre-TCJA law, taxpayers can claim 50% first-year bonus depreciation deduction for qualified new assets that their business placed in service in 2017. Used assets do not qualify. In contrast, the TCJA temporarily enhances the first-year bonus depreciation to 100%. It also removes the requirement that the original use of the qualified property must commence with the taxpayer, thus allowing bonus depreciation on the purchase of the used property.
Section 179 Expensing
The TCJA sets the Code Sec. 179-dollar limitation at $1 million and the investment limitation at $2.5 million. Although the differences between bonus depreciation and Code Sec. 179 expensing would now be narrowed if both offer 100-percent write-offs for new or used property, some advantages and disadvantages for each will remain. For example, Code Sec. 179 property is subject to recapture if business use of the property during a tax year falls to 50 percent or less; but Code Sec. 179 allows a taxpayer to elect to expense only particular qualifying assets within any asset class.
4) partnerships, S corporations, and sole proprietorships are allowed a temporary deduction as a percentage of qualified income of pass-through entities, subject to a number of limitations and qualifications
Pass-through entities include partnerships, S corporations, LLCs, and sole proprietorships – rates at the individual level, with the highest rate at 39.6 percent. The TCJA allows a temporary deduction in an amount equal to 20 percent of the qualified income of pass-through entities, subject to a number of limitations and qualifications.
The TCJA contains rules that will prevent pass-through owners—particularly service providers such as accountants, doctors, lawyers, etc.—from converting their compensation income taxed at higher rates into profits taxed at the lower rate.
5) Lastly, numerous business tax preferences are eliminated
Deductions and Credits
Numerous business tax preferences are eliminated.
- a) These include the Code Sec. 199 domestic production activities deduction,
- b) Non-real property like-kind exchanges and more.
- c) The rules for business meals are revised, as are the rules for the rehabilitation credit.
- d) The research and development credit is still in place but requires five-year amortization of research and development expenditures.
- e) It also creates a temporary credit for employers paying employees who are on family and medical leave.
Interest Deductions
Deduction for net interest expenses at 30 percent of adjusted taxable income, among other criteria. Exceptions exist for small businesses, if average gross receipt of $25 million or less, businesses can take fully exemption.
Net Operating Losses
The Tax Cuts and Jobs Act modifies current rules for net operating losses (NOLs). Generally, NOLs will be limited to 80 percent of taxable income for losses arising in tax years beginning after December 31, 2017. It also denies the carryback for NOLs in most cases while providing for an indefinite carryforward, subject to the percentage limitation.