2018 Tax Reform Notice for Business Owners

Dear Business Clients:

On December 22, 2017 The Tax Cuts and Jobs Act became law. This is the first major tax reform in over 30 years and makes a lot of changes to the tax code. All businesses will be impacted by these changes, and we want to help you navigate these changes and answer any questions you may have.

Corporate taxes: Beginning with the 2018 tax year, the C corp tax will be reduced to 21% from a top rate of 35%. Corporate alternative minimum tax was completely repealed.

Bonus depreciation: There will be a temporary increase the 50% bonus depreciation allowance to 100% for qualifying property placed in service after September 27, 2017 and before January 1, 2023. The act also removes the requirement that the original use of qualified property must begin with the taxpayer. Now, bonus depreciation will be allowed on the purchase of used property.

Section 179 expensing: The 179 expensing amount is increased to $1 million and the investment limitation to $2.5 million. Additional real property (roof for a non-residential property) can qualify for a 179 expensing deduction.

Pass-through businesses: The new tax law allows noncorporate taxpayers to deduct up to 20% of domestic qualified income from an S corporation, partnership, LLC, sole proprietorship, or farm. In some situations, net rental income can qualify for some or all of the 20% deduction. Limitations apply based on wages paid or if the qualified business income is from a specified service business (law, accounting, medical, etc.) Neither limitation applies if the taxpayer’s taxable income on his or her 1040 is less than $157,5000 for a single person, $315,000 for a married filing joint couple.

Listed Property: Depreciation for passenger automobiles placed in service after December 31, 2017 increased. The maximum allowable depreciation is $10,000 for the year the vehicle is initially placed in service, $16,000 for the second year, $9,600 for the third, and $5,760 for the fourth year. Computers and peripheral equipment have been removed from the designation of listed property. As a result, laptops (for example) are not subject to the strict substantiation requirements that apply to other listed property.

Tax deferred exchanges: Now only apply to real property. Personal property (autos, machines, tractors, etc) will no longer qualify under tax deferred exchange rules.

Deductions and credits: The entertainment deduction has been repealed. The cost of tickets to events like concerts, sports events, or ballet is no longer deductible. The 199 domestic production activities deduction is eliminated. The research and development credit now requires five-year amortization of research and development expenditures. There is also a temporary credit for employers paying employees who are on family and medical leave.

Interest deductions: The net interest expense is capped at 30% for businesses with gross receipts in excess of $25 million.

Stock options: Qualified employees of private companies are allowed to defer tax on the exercise of options for up to five years. CEOs, CFOs, highly compensated employees and 1% owners are not eligible.

Net operating losses: Net operating loss deduction is limited to 80% of taxable income for losses arising in years after December 31, 2017. The carryback of NOLs is eliminated, except for qualifying farm losses. NOL loss carryforwards will be indefinite, subject to the percentage limitation.

These are only a few of the changes the Tax Cuts and Jobs Act brings, and as we discover more we will keep you informed.

As always, we’re here if you need us—call, email, or come in anytime!