Business Tax Planning Post-Tax Reform

The Tax Cuts and Jobs Act of 2017 resulted in sweeping changes to the tax code. In 2019, business owners should be aware of how the changes affect their businesses, and how to plan accordingly. 

First, the corporate rate cuts are significant. The TCJA provides for a 21 percent flat corporate tax rate. Businesses conducted as sole proprietorships, partnerships or S corporations are subject to a special deduction under the 2017 tax act beginning in 2018.

The 2017 tax act also significantly reforms international rules. This has made planning more difficult, particularly for businesses that must consider the impact of international tax rules. Below are highlights of the TCJA:

Business Deductions and Credits

  • Section 179 Expensing: For tax years beginning after Dec. 31, 2017, the expensing limitation is increased to $1 million and the phase-out amount to $2.5 million. The new limitations are to be adjusted for inflation. The TCJA further expands the definition of §179 property and the definition of qualified real property for improvements made to nonresidential real property.
  • Bonus Depreciation: Under the TCJA, a 100 percent first-year deduction for the adjusted basis is allowed for qualified property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. The additional bonus depreciation deduction is allowed for new and used property.
  • Research and Development Credit: The research and development credit is preserved.
  • Deductions for Income Attributable to Domestic Production Activities: For tax years beginning after Dec. 31, 2017, the deduction for income attributable to domestic production activities is repealed.
  • Entertainment Expenses Deductions: For tax years beginning after Dec. 31, 2017, no deduction is allowed generally for entertainment, amusement or recreation; membership dues for a club organized for business, pleasure, recreation or other social purposes; or a facility used in connection with any of the above.
  • New Interest Expense Limitation: For tax years beginning after Dec. 31, 2017 the TCJA created a new limitation, and it applies to all businesses on the deductibility of net business interest expense that exceeds 30 percent of a taxpayer’s “adjusted taxable income.”

Corporations

  • Corporate Tax Rate: For tax years beginning after Dec. 31, 2017, there is a 21 percent flat corporate tax rate; there is no special tax rate for personalservice corporations.
  • Alternative Minimum Tax: For tax years beginning after Dec. 31, 2017, the AMT is repealed. In 2018, 2019 and 2020, if the taxpayer has an AMT credit carryforward, that taxpayer is able to claim a refund of 50 percent of remaining credits (to the extent credits exceed regular tax for the year). For 2021, the taxpayer is able to claim a refund of all remaining credits.
  • Net Operating Loss (NOL) Deduction: For NOLs arising in tax years beginning after Dec. 31, 2017, the limit on the NOL deduction is 80 percent of the taxpayer’s taxable income and provides that amounts carried to other years be adjusted to account for the limitation. Amounts are to be carried forward indefinitely.

Pass-Through Entities

  • Pass-Through Tax Rate: For tax years beginning after Dec. 31, 2017, generally a 20 percent deduction for qualified business income is provided in lieu of tax rate changes. Special rules apply when computing the deduction. The deduction expires for tax years beginning after Dec. 31, 2025.

If you wish to discuss tax planning opportunities  in preparation for the new rules that are generally going into effect for 2018, please contact Ashley Dunn, CPA at 703.652.1124.

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Material discussed in this article is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.



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