New Tax Law Impact on Businesses

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Last week, our first Tax Cuts and Jobs Act Alert discussed the new tax law's impact on individuals. For businesses, tax benefits include a reduction in the corporate tax rate, increase in the bonus depreciation allowance, an enhancement to the Code Sec. 179 expense and repeal of the alternative minimum tax. Owners of partnerships, S corporations, and sole proprietorship's are allowed a temporary deduction as a percentage of qualified income of pass-through entities, subject to a number of limitations and qualifications. On the other hand, numerous business tax preferences are eliminated.

 

Corporate Taxes

For non-pass-through corporations (C corporations), a reduced 21-percent corporate tax rate is permanent beginning in 2018. Also, the 80-percent and 70-percent dividends received deductions under current law are reduced to 65-percent and 50-percent, respectively. The Tax Cuts and Jobs Act also repeals the alternative minimum tax on corporations.

 

Bonus Depreciation of Fixed Assets

The bonus depreciation rate has fluctuated wildly over the last 15 years, from as low as zero percent to as high as 100 percent. It is often seen as a means to incentivize business growth and job creation. The Tax Cuts and Jobs Act temporarily increases the 50-percent "bonus depreciation" allowance to 100 percent. It also removes the requirement that the original use of qualified property must commence with the taxpayer, thus allowing bonus depreciation on the purchase of used property.

 

Section 179 Fixed Asset Expensing

The Tax Cuts and Jobs Act 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 Sec. 179 expensing are now narrowed since both offer 100-percent write-offs for new or used property, some advantages and disadvantages for each remain. For example, Sec. 179 cannot be used when the business shows a loss, but bonus depreciation may. Sec. 179 property allows taxpayers more flexibility to pick and choose assets to be written off. While most states have "decoupled" from bonus depreciation, only a few (like New Jersey and California) limit Sec. 179. New York State and City disallow bonus depreciation but allow the full deduction of federal Sec. 179 expense.

 

Deductions and Credits

Numerous business tax preferences are eliminated. These include the Code Sec. 199 domestic production activities deduction and like-kind exchanges for other than real property. Additionally, the rules for business meals are revised, and business entertainment (such as inviting customers to sporting events) is completely disallowed. The Tax Cuts and Jobs Act makes changes to the rehabilitation credit, leaves the research and development credit in place, and requires five-year amortization of R&D expenditures. It also creates a temporary credit for employers paying employees who are on family and medical leave.

 

Interest Deductions

In an attempt to "level the playing field" between businesses that capitalize through equity and those that borrow, the Tax Cuts and Jobs Act generally caps the deduction for net interest expenses at 30 percent of adjusted taxable income, among other criteria. Exceptions exist for small businesses, including an exemption for businesses with average gross receipts of $25 million or less. Real estate businesses may elect to deduct interest expense in full, but if they do so the property will be depreciated over a longer time.

 

Pass-Through Businesses

Until the end of 2017, owners of partnerships, S corporations, and sole proprietorship's - as "pass-through" entities - paid tax at their individual rates, up to the highest rate of 39.6 percent. The Tax Cuts and Jobs Act allows a temporary deduction in an amount equal to 20 percent of qualified income of pass-through entities, subject to a number of limitations and qualifications. The 20 percent deduction is applied to the new 2018 tax rates that now top out at 37 percent, yielding a maximum federal tax on pass-through income of 29.6 percent.

 

The Tax Cuts and Jobs Act contains rules that will prevent pass-through owners-particularly service providers such as accountants, doctors, and lawyers-from converting their compensation income taxed at higher rates into profits taxed at the lower rate.

 

Net Operating Losses

The Tax Cuts and Jobs Act modifies current rules for net operating losses (NOLs). NOLs will be limited to 80 percent of taxable income for losses arising in years after 2017. It also eliminates the carryback of NOLs in most cases, while providing for an indefinite carryforward (subject to the 80 percent limitation).

 

These are just highlights of the business changes in the Tax Cuts and Jobs Act. Additional impacts under the law will be addressed in upcoming alerts. At LM Cohen & Company, we are focused on the immediate and long-term impact of the Tax Cuts and Jobs Act on your situation. Please call your LM Cohen professional for guidance on all of the provisions that directly affect you.

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