3rd January 2018
2017 Tax Reform: Corporate Tax Changes
On Wednesday, December 20, 2017, Congress passed H.R. 1, commonly known as the Tax Cuts and Jobs Acts, which will completely overhaul the current tax law. President Trump signed the law into existence on December 22, 2017. Most changes would begin in the 2018 tax year unless otherwise noted. Below are some of the changes to corporate income taxes.
Changes to Tax Rates
For tax years beginning on January 1, 2018, the corporate tax rate is a flat 21%. Under the previous law, corporations were subject to graduated tax rates beginning at 15% and up to 35%. Personal service corporations were taxed at the maximum 35% tax rate. Now all corporations, including personal service corporations, will be taxed at the 21% tax rate.
Alternative Minimum Tax Repealed
Under the previous tax law, the corporate minimum tax (AMT) rate was 20%, with an exemption amount of up to $40,000. However, under the new law, corporate AMT has been repealed.
Dividends-Received Deduction Changes
Under the previous law, corporations that receive dividends from other corporation were entitled to a deduction for dividends received. If the corporation owns at least 20% of the stock of another corporation, an 80% dividends received deduction was allowed. If the corporation owned less than 20%, a 70% deduction was allowed. Under the new law, the 80% dividends received deduction is reduced to 65% and the 70% dividends received deduction is reduced to 50%.
Increased Section 179 Expensing
Under the new law, property placed in service for tax years beginning after December 31, 2017, may be expensed under Code Section 179 up to $1 million and the phase-out threshold amount is increased to $2.5 million. Under the prior law, the amounts were $500,000 and $2 million respectively. Property that is eligible for Section 179 expensing includes equipment, furniture & fixtures, and certain non-luxury vehicles.
Changes to Bonus Depreciation
Under the previous law, an additional first-year bonus depreciation deduction was allowed equal to 50% of the adjusted basis of qualified new property. Under the new law, a 100% first-year deduction for the adjusted basis is allowed for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2024. This deduction is allowed for both new and used property. The main differences between Section 179 expensing and bonus depreciation is that bonus depreciation does not have a phase-out limit and bonus depreciation can be used to create a loss, while Section 179 cannot.
Changes to Luxury Automobile Depreciation Limits
Under the old law, there were limits to depreciation deductions for luxury automobiles. Taxpayers could only receive a depreciation deduction of $3,160 for the first year, $5,100 for the second, $3,050 for the third, and $1,875 for all subsequent year. Under the new law, passenger automobiles placed in service after December 31, 2017 can received a depreciation deduction of $10,000 in the first year, $16,000 in the second, $9,600 in the third, and $5,760 for the later years.
Limits on Deductions of Business Interest
Under the pre-Act law, interest paid or accrued by a business is deductible in the computation of taxable income. Under the new law, businesses cannot deduct interest expenses in excess of 30% of the business’ adjusted taxable income.
Net Operating Loss Deduction Changes
Under the prior law, corporations could carry back a net operating loss (NOL) two years and carried forward over 20 years to offset taxable income in such years. However, under the new law, NOLs arising in tax years ending after December 31, 2017, can only be carried forward and the NOL deduction is limited to 80% of taxable income. NOLs can be carried forward indefinitely.
Domestic Production Activities Deduction Repealed
The Act eliminates the domestic production activities deduction (DPAD). Under the old law, taxpayers could claim a deduction equal to 9% of the lesser of the taxpayer’s qualified production activities income or the taxpayer’s taxable income for the tax year. Qualifying activities were derived from any property that was manufactured, produced, grown, or extracted within the U.S.
Research and Experimentation Expense Changes
Under the pre-Act law, taxpayers could elect to deduct the amount of certain reasonable research or experimentation (R&E) expenses paid or incurred in connection with the business. However, under the new law, certain amounts paid or incurred in tax year beginning after December 31, 2021 must be capitalized and amortized ratably over a 5-year period.
Like-Kind Exchange Treatment Limited
Under the previous law, the like-kind exchange rule provided that no gain or loss was recognized to the extent that property held for productive use in the taxpayer’s trade or business was exchanged for property of a like-kind that also is held for productive use in a trade or business. However, under the new law, like-kind exchanges are only allowed with respect to real property (buildings and land) and not tangible property such as equipment and vehicles.
Entertainment Deduction Changes
Under the previous law, the taxpayer may deduct up to 50% of expenses relating to meals and entertainment. Under the new Act, deductions for entertainment expenses are not allowed. Meals are still allowed a 50% deduction.
Limitation on Excessive Employee Compensation
Under the previous law, a deduction for compensation paid or accrued with respect to a covered employee of a publicly traded corporation was limited to $1 million per year. There were exceptions in regards to commissions, performance-based remuneration, including stock options, and payments to a tax-qualified retirement plan. Under the new law, the exceptions to the $1 million deduction limitation has been repealed.
Changes to Cash Method of Accounting Taxpayers
Under the previous law, businesses could only use the cash method of accounting if the average annual gross receipts of the past three years did not exceed $5 million. Under the new law, this limit has been raised to an average $25 million for the past three years.
Capitalization and Inclusion of Certain Expenses in Inventory Costs
Under the previous law, uniform capitalization (UNICAP) rules generally required certain direct and indirect costs associated with real or tangible property manufactured by a business to be included in either inventory or capitalized into the basis of such property. However, taxpayers with average annual gross receipts of $10 million or less in the past three tax years were not subject to these UNICAP rules. Under the new law, this limit has been increased to $25 million.
If you have any questions on how this new law may affect you, please feel free to contact David Zajac at The Ten Key Group at (234) 334-1966.
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