The Tax Cut and Jobs Act (“TCJA”) made many changes affecting businesses

Business, Taxes

Tax rates

  • The TCJA changed the tax calculation for corporations from a tiered bracket system to a flat 21% (previously was a high of 35%)
  • New flat rate applies to personal service corporations (previously was a flat 35%)
  • Alternative minimum tax (“AMT”) repealed completely

Changes to net operating losses (“NOL”)

  • An NOL is where your businesses deductions exceed its income for the year
  • Prior to TCJA, losses could be carried back two years and then forward twenty years
  • You can no longer carry losses back
  • Can only offset up to 80% of the taxable income for the year the NOL is carried to
  • Any unused NOL is carried forward indefinitely

Changes to income

  • Changes to Like-Kind exchange rules
    • Non-recognition of gain under the like-kind exchange rules are now only available to real property
    • Prior to TCJA, applied to most exchanges (most common was the trade in of a vehicle)
  • Method of accounting changes
    • TCJA changed the definition of small business to be a business with a three year average annual gross receipts above $25 million
    • Prior law was $5 million three year average
    • Accounting changes available to small business:
      • cash basis of accounting
      • treat inventory as non-incidental materials and supplies (but must follow the same methodology used for financial statement purposes)
      • excluded from the 263A uniform capitalization rules
      • excluded from long-term contract income recognition
  • Revenue recognition
    • Changed the “all events” test to be no later than when the income is considered income for financial statement purposes

Changes to deductions

  • Entertainment expenses
    • Entertainment expenses are no longer deductible, including the cost of meals included in the entertainment unless purchased separately or separately stated on the invoice or receipt
    • In the past, the entertainment was deductible if business was conducted either before, during or after the entertainment
    • The business meal is still 50% deductible so long as it is
      • ordinary and necessary for the business
      • it is not lavish or extravagant
      • the taxpayer or employee is present at the meal
      • the meal is provided to a current or potential business customer, consultant or other business contact
  • Employer provided meals
    • Employer provided meals now fall under the business meal rules whereby only 50% of the cost of the meal is deductible
    • Prior to the TCJA, the employer could deduct 100% of the cost of meals provided for the benefit of the employer
  • Interest expense deduction could be limited
    • Limitation does not apply to businesses with average annual gross receipts of $25 million or less
    • Deduction is limited to the sum of interest income, 30% of adjusted taxable income (taxable income before depreciation and amortization) and floor plan financing interest (auto dealers)
    • Any amount disallowed is carried forward indefinitely
  • Moving expenses
    • No longer a non-taxable fringe benefit
    • If paid for the employee, must be added to W-2 and is subject to Social Security and Medicare taxes
  • Employee achievement awards
    • Award of tangible personal property under $400 ($1,600 in certain circumstances) are still deductible by the business and not included in the income of the employee
    • TCJA redefined tangible personal property to exclude cash, gift cards, vacations, tickets to entertainment events, stocks, bonds or securities (basically cash and anything convertible to cash)
    • Includes watch, plaque, ring, pin, pen and similar items within the dollar limitation
  • Qualified transportation fringe benefits are no longer deductible and if offered to employees would need to be included in wages (transit passes)
  • Legal settlements and related legal fees related to sexual harassment or abuse case is non-deductible if subject to a nondisclosure agreement

Depreciation rules

  • Bonus depreciation
    • 100% first year deduction of qualified property
    • Beginning 2023, the 100% begins to be reduced by 20% a year until 2027
    • Now includes used property
  • 179 expense
    • Up to $1 million per year of asset additions are eligible for direct expensing under IRC 179
    • The $1 million is phased out if the total asset additions for the year exceed $2.5 million
    • Definition of qualified real property expanded to include improvements to nonresidential real property
  • Passenger auto limits (listed property)
    • Depreciation limited to $10,000 in the first year, $16,000 in the second year, $9,600 in the third year and $5,760 for all subsequent years until fully depreciated

Domestic production activity deduction (DPAD) repealed

  • Was a 9% deduction for qualified production activity income
  • Repealed for tax years beginning after December 31, 2017
  • Replaced for pass-through entities and individuals by the new Qualified Business Income 20% deduction

Qualified business income deduction

  • 20% deduction for individuals, trusts and estates with QBI from partnerships, limited liability companies, S corporations, sole proprietorships and certain rental real estate activities
  • QBI is determined separately for each qualified business
  • Gains and losses, interest and dividends not properly allocable to the trade or business is not QBI
  • QBI does not include the wages or guaranteed payments paid to the taxpayer from the qualified business
  • Overall limit of 20% of the taxpayer’s taxable income in excess of any net capital gains
  • May be limited by wage and capital and or if in a “specified service trade or business”
  • If taxpayers taxable income is under $157,500 for a single taxpayer or $315,000 for a married taxpayer filing jointly the 20% QBI deduction is not limited
  • If taxpayers taxable income is above $157,500 but below $207,500 for a single taxpayer or $315,000 but below $415,000 for a married taxpayer filing jointly, the 20% QBI deduction is limited
  • If taxpayers taxable income is above the higher threshold of $207,500 for a single taxpayer or $415,000 for a married taxpayer filing jointly, and the QBI is from specified services, the 20% QBI deduction is not allowed
  • If taxpayers taxable income is above the higher threshold of $207,500 for a single taxpayer or $415,000 for a married taxpayer filing jointly, 20% QBI deduction is limited by a W-2 wage and capital limitation
  • Specified service trade or business includes any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading or where the principal asset is the reputation or skill of one or more of its employees
  • W-2 wage and capital limitation is the greater of 50% of the W-2 wages for the business or 25% of the W-2 wages plus 2.5% of the business’s unadjusted basis in all qualified property
  • Qualified property is depreciable property held and used by the business for which the depreciable period has not ended
  • The depreciable period is 10 years
  • The basis of qualified property is the acquisition cost

Partnership technical termination

  • The TCJA repealed the technical termination rules
  • Prior to TCJA, if 50% or more of the capital and profits interest changed within a 12-month period, the partnership was deemed to have terminated for tax purposes

Other 2018 notable amounts:

  • 401K maximum salary deferral $18,500
  • 401K additional catch-up contribution (those age 50 and older) $6,000
  • SIMPLE maximum salary deferral $12,500
  • SIMPLE additional catch-up contribution $3,000
  • Standard mileage rate for business 54.5 cents per mile

If you would like to meet to discuss how these changes impact you and what you can do before year end please call the office for an appointment.