New Tax Law: Overview of Changes for Businesses
Rulien + Associates
December 28, 2017
The recently enacted Tax Cuts and Jobs Act (TCJA) is a sweeping tax package. Here's a look at some of the more important elements of the new law that have an impact on Corporations, S Corps, Partnerships, and LLC’s. Unless otherwise noted, the changes are effective for tax years beginning in 2018 through 2025.
- Corporate income tax rate change. C corporations currently are subject to graduated tax rates of 15% for taxable income up to $50,000, 25% (over $50,000 to $75,000), 34% (over $75,000 to $10,000,000), and 35% (over $10,000,000). Personal service corporations pay tax on their entire taxable income at the rate of 35%. (The benefit of lower rate brackets was phased out at higher income levels.) Beginning with the 2018 tax year, the TCJA makes the corporate tax rate a flat 21%. It also eliminates the corporate alternative minimum tax.
- Corporate AMT repeal. The Tax Cuts and Jobs Act repealed the AMT on corporations. Conforming changes also simplified dozens of other tax code sections that were related to the corporate AMT. The TCJA also allows corporations to offset regular tax liability by any minimum tax credit they may have for any tax year. And, a corporation's MTC is refundable for any tax year beginning after 2017 and before 2022 in an amount equal to 50% (100% for tax years beginning in 2021) of the excess MTC for the tax year, over the amount of the credit allowable for the year against regular tax liability. Thus, the full amount of the corporation's MTC will be allowed in tax years beginning before 2022.
- Bonus depreciation. Before the TCJA, taxpayers were allowed to deduct 50% of the cost of most new tangible property (other than buildings and some building improvements) The “50% bonus depreciation” was to be phased down to 40% for property placed in service in calendar year 2018, 40% in 2019 and 0% in 2020 and afterward. But for property placed in service and acquired after Sept. 27, 2017 (with no written binding contract for acquisition in effect on Sept. 27, 2017), the TCJA raised the 50% rate to 100%. The post-Sept. 27, 2017 property eligible for bonus depreciation can be new or used.
- Code Sec. 179 expensing. Before the TCJA, most smaller taxpayers could immediately deduct the entire cost of section 179 property up to an annual limit of $500,000 adjusted for inflation. For property placed in service in tax years that begin in 2018, the inflation adjusted limit was scheduled to be $520,000. The annual limit was reduced by one dollar for every dollar that the cost of all section 179 property placed in service by the taxpayer during the tax year exceeded a $2 million threshold adjusted for inflation. For property placed in service in tax years that begin in 2018, the threshold was scheduled to be $2,070,000. But for tax years beginning after 2017, the TCJA substitutes as the annual dollar limit $1 million (inflation-adjusted for tax years beginning after 2018) and $2.5 million as the phase down threshold (similarly inflation adjusted).
- New deduction for "qualified business income." Starting in 2018, taxpayers are allowed a deduction equal to 20 percent of "qualified business income," otherwise known as "pass-through" income, i.e., income from partnerships, S corporations, LLCs, and sole proprietorships. The income must be from a trade or business within the U.S. Investment income does not qualify, nor do amounts received from an S corporation as reasonable compensation or from a partnership as a guaranteed payment for services provided to the trade or business. The deduction is not used in computing adjusted gross income, just taxable income. For taxpayers with taxable income above $157,500 ($315,000 for joint filers), (1) a limitation based on W-2 wages paid by the business and depreciable tangible property used in the business is phased in, and (2) income from the following trades or businesses is phased out of qualified business income: health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
- Conversions to C Corporation Status. Distributions from S Corporations that convert to C Corporations within two years of enactment of the TCJA generally would be treated as paid from the corporation’s accumulated adjustments account (amounts already passed through and taxed but not yet distributed) and from its earnings and profits (taxable as dividends) on a pro rata basis.
If you wish to discuss the impact of the law on your business tax situation, please give us a call.