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Matthew Litz, CPA

Congress Passes Final Tax Cuts and Jobs Act: What it Means for Businesses

2017-12-20

Tax rates

The final version of the bill calls for a permanent corporate tax rate of 21% effective January 1, 2018. The new rate will replace the existing graduated rate structure currently topping out at 35%.

The dividends received deduction, which aims to alleviate double taxation of dividends in multi-level corporate structures, will be reduced from 80% and 70% under current law to 65% and 50%, respectively.

Alternative minimum tax (AMT) for corporations will be fully repealed effective January 1, 2018.

Pass-through businesses, including partnerships, S corporations, and sole proprietorships, will continue to pass-through profits and pay tax at their owners’ individual rates. However, the final version of the bill calls for a deduction of up to 20% of pass-through income. Service-based business owners with income under $157,500 ($315,000 for married taxpayers filing a joint return) are eligible for the deduction, however, the income limits do not apply to the owners of architecture or engineering firms. The final bill includes rules preventing business owners from converting their compensation taxed at higher rates into pass-through profits eligible for deduction.

Investments in Depreciable Property

The final version of the bill calls for bonus depreciation of 100% immediate expensing for qualified property placed in service after September 27, 2017 and before January 1, 2023. Qualified property generally includes most property that is depreciable over 20 years or less. Business owners may see the benefits of this provision as soon as their 2017 tax return for capital purchases made in the fourth quarter. Current law allows 50% bonus depreciation on qualified NEW property. The final bill also extends the 100% immediate expensing to USED property.

Vehicle depreciation caps for business-use vehicles are increased under the final rules, allowing for a quicker recovery of vehicle costs placed in service after December 31, 2017, when bonus depreciation is not claimed.

Section 179 limitations are increased in the final bill to a $1 million maximum with a $2.5 million phase-out. The advantages and disadvantages to applying bonus depreciation elections or Section 179 must be considered, as both include 100% write off.

Other Business Changes

The final bill eliminates many tax deductions and credits effective January 1, 2018, including domestic production activities deductions and non-real property like-kind exchanges. The Work Opportunity Tax Credit (WOTC) and New Markets Tax Credit (NMTC) have been retained in the final version of the bill.

Certain research and development costs are to be capitalized and amortized over a five-year period, beginning with the midpoint of the taxable year the expenditures are paid or incurred. There are no proposed changes for existing alternative energy provisions.

The final bill creates a new incentive for businesses providing a temporary tax credit for employers who offer paid family and medical leave to employees.

Interest deductions are capped under the final bill at 30% of adjusted taxable income—however exceptions for small businesses with average gross receipts of $25 million or less will be available. Disallowed interest deductions are to be carried forward indefinitely under the final bill.

Net operating losses (NOLs) arising in tax years beginning after December 31, 2017 will no longer be eligible for carryback under the final bill. NOLs may be carried forward and used to offset up to 80 percent of taxable income in future years.

Foreign Earnings

The final bill moves the US from a worldwide tax system to a territorial system, taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when foreign earnings are distributed. In addition, a deemed repatriation will be enacted and a portion of deferred overseas-held earnings and profits of foreign subsidiaries will be taxed at a rate of 15.5% for cash assets and 8% for illiquid assets.