As 2018 begins and businesses plan for the months ahead, they will have to take into consideration drastic new changes to U.S. tax law. After months of Congressional debate, President Trump signed the Tax Cuts and Jobs Act into law on December 22, and all provisions went into effect on January 1. This law, which contains over $1.4 trillion in tax cuts for individuals and businesses, represents the most significant overhaul of the tax code in more than 30 years.
Despite the several major changes ushered in by the new law, other key provisions that are crucial to business taxpayers remain intact. For example, the Research and Development (R&D) Tax Credit is still a permanent part of the tax code as it was added under the PATH Act of 2015, and cost segregation remains available as a tax-saving strategy for commercial building owners. Furthermore, the Tax Cuts and Jobs Act does not address the §179D deduction for energy-efficient commercial buildings. The §179D deduction expired at the end of 2016, and although several bills have been introduced proposing its renewal, Congress has not taken action to pass any of these bills. At Capital Review Group, we are staying tuned for any news on §179D and will post an update if this valuable incentive is renewed.
One of the stated goals of the Tax Cuts and Jobs Act is to stimulate the economy, hiring, and wage growth by alleviating the tax burden on businesses. In pursuit of this goal, the law includes several provisions that will bring sweeping changes for business taxpayers, from small businesses to large corporations. Here are some of the most important provisions:
- Lower corporate tax rate. Previously, corporations with over $10 million of annual income were taxed at a rate of 35 percent. In recognition of the fact that this was far higher than corporate tax rates in many other developed countries, the new law has permanently lowered corporate taxes to a flat rate of 21 percent.
- Corporate AMT repealed. The law eliminates the alternative minimum tax (AMT) for businesses. Designed to prevent high-income taxpayers from whittling away their tax burdens with credits and deductions, the corporate AMT required businesses to pay taxes at a rate of at least 20 percent—regardless of any incentives for which they qualified. Although the new tax law retains an AMT for individuals, businesses will no longer need to worry about this long-detested barrier to minimizing their tax burdens.
- Expanded bonus depreciation. Previously, the concept of bonus depreciation allowed business taxpayers to depreciate a certain percentage of the cost of new business property during the year it was placed into service, and then depreciate the remainder over the property’s useful life. This enabled businesses to seize more substantial and immediate tax savings than they would if they depreciated the item’s cost in equal proportions over the course of its useful life. However, from now through 2022, the new tax law will permit businesses to immediately deduct 100 percent of the cost of eligible property during the year it is placed into service. In subsequent years, the maximum amount of bonus depreciation allowed up-front will reduce gradually: 80 percent will be allowed in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026. In addition, the new law eliminates the restriction that bonus depreciation is only available for brand-new property.
- Expanded use of the cash method of accounting. The new law will increase the number of business taxpayers that use the cash method of accounting by authorizing its use for businesses with $25 million or less in average annual gross receipts for the three previous tax years.
- Deduction for pass-through entities. The law grants pass-through entities—which encompass many small businesses, like S-corporations, partnerships, and sole proprietorships—a tax deduction of up to 20 percent. Although this deduction will be a boon to most smaller businesses, it is not available to those that provide services (such as law firms and medical practices) and earn $315,000 or more per year.
- Changes to the taxation of foreign profits. In addition to facing a higher-than-average corporate tax rate, American businesses have traditionally dealt with another costly obstacle: U.S. taxation of profits earned abroad. In shifting to a more territorial tax system—or one in which a company is only taxed on income earned within a country’s borders—the new law will exempt American businesses from taxation on most future profits earned in other countries. The law also addresses the issue of stockpiled foreign cash, which many companies have accrued over the years as a way to avoid the high U.S. corporate tax rate. This cash will now be subject to a mandatory, one-time tax of 15.5 percent upon repatriation to the U.S.
- Increased §179 expensing. Section 179 of the tax code allows businesses to deduct the purchase price—up to a specified amount—of certain types of equipment, furniture, software, vehicles, or other items used for business purposes. Previously, businesses could claim a maximum §179 deduction of $500,000 for up to $2 million of qualifying purchases (with both amounts indexed for inflation). In addition to expanding the definition of §179 property, the new tax law raises the maximum deduction to $1 million for up to $2.5 million of qualifying assets.
With these sweeping changes and many more now in place under the Tax Cuts and Jobs Act, businesses must be aware of the new opportunities and potential pitfalls that could impact their bottom lines. At Capital Review Group, our team of tax experts stays updated on the latest changes in tax law. We will provide guidance for your business or your clients’ businesses, ensuring that all available opportunities for tax savings are maximized. Contact CRG today to schedule a pro bono analysis!
(Sources: https://www.journalofaccountancy.com/news/2017/dec/tax-reform-bill-changes-for-businesses-201718071.html, https://www.congress.gov/bill/115th-congress/house-bill/1?q=%7B%22search%22%3A%5B%22hr+1%22%5D%7D&r=1, https://www.businessnewsdaily.com/10357-small-business-tax-reform-changes.html).