The Tax Cuts and Jobs Act of 2017 is the largest tax reform legislation in 30 years. Below, you will find the significant tax provisions that will impact businesses.
If you would like to download a copy of this summary that will also include individual updates, please visit here: Tax Cuts and Jobs Act of 2017 Summary
Corporate Tax Rates: The current 35% top corporate rate will be reduced permanently to a flat tax rate of 21% for years beginning after 2017. The current combined average federal and state rate is 38.9% and this rate will drop to 25.75%. The special corporate tax rate on personal service corporations is eliminated.
This rate is still 2% higher than the average rate for all OECD nations, but lower than all other G-7 countries, except the United Kingdom.
Corporate Alternative Minimum Tax: The corporate AMT will be repealed for tax years beginning after 2017. AMT credit carryovers may be utilized up to the taxpayer’s regular tax liability. For tax years beginning in 2018, 2019 and 2020, 50% of the excess AMT credit carryovers are refundable. Any remaining credits after 2020 can be claimed in full in tax years beginning in 2021.
Net Operating Losses (NOLs): For net operating losses arising in tax years beginning after 2017, the net operating loss deduction for a given year is limited to 80% of taxable income for losses arising in tax years beginning after December 31, 2017.
The Act repeals the current carryback provisions for net operating losses. There are some exceptions: a new two-year carryback will be permitted for certain farming losses and property and casualty insurance companies will retain the current law for net operating losses.
The Act provides for the indefinite carryforward of NOLs arising in tax years ending after December 31, 2017.
Any NOLs prior to January 1, 2018 will require separate tracking and are still subject to the 20-year carryforward and allows 100% of taxable income.
Capital Contributions: Section 118 is modified for certain non-shareholder contributions made after December 22, 2017. Contributions to capital would be included in income if any contribution is in aid of construction or any other contribution as a customer or potential customer; or any contribution by any government entity or civic group (other than a contribution made by a shareholder).
Code Section 199A Qualified Business Income: The Act provides a new deduction for pass-through business income. Effective for tax years beginning after December 31, 2017 and before January 1, 2026, pass-through businesses (i.e., partnership, S corporation or sole proprietorship) may be eligible for a deduction of up to 20% of qualified business income (QBI). This would result in a top rate of 29.6% when considering the 20% deduction and the top tax rate of 37% in the absence of other limitations.
QBI is defined as domestic business income other than investment income connected with a qualified trade or business. A qualified trade or business is any business other than a specified service trade or business defined as a business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.
The deduction would generally be limited to 50% of the taxpayer’s allocable or pro rata share of W-2 wages of the qualified trade or business or the sum of 25% of the taxpayer’s share of W-2 wages plus 2.5% of the unadjusted basis, immediately after acquisition of all qualified property (property subject to depreciation under Section 167).
The deduction is not allowed in computing adjusted gross income, but instead is a deduction in reducing taxable income available to non-itemizers and itemizers; this may result in conformity issues with states due to differing starting points for the tax base.
Business Non-Corporate Losses: Effective for tax years beginning after December 31, 2017 and before January 1, 2026, net business losses in excess of $250,000 (single)/$500,000 (joint) will not be deductible in the current year. Excess losses will be carried forward and added to the taxpayer’s net operating loss. Previous excess farm loss limitation no longer applies.
Section 179 Business Expensing: Expense amount increased to $1 million and phase-out threshold increased to $2.5 million. The application of Section 179 has been expanded to depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging.
The definition of qualified real property eligible for Section 179 has been expanded to include certain improvements to nonresidential real property: roofs, heating, ventilation and air conditioning property, fire protection and alarm systems and security systems.
Bonus Depreciation: The entire cost of certain depreciable assets placed in service after September 27, 2017 and before January 1, 2023 can be expensed, an additional year is allowed for certain aircraft and longer production period property.
The bonus depreciation is extended for:
|Year||Applicable Expensing Percentage|
For certain aircraft and longer production period property, the depreciation is extended to 2027.
Qualified property acquired before September 28, 2017 and placed in service after September 27, 2017 would fall under current law.
The definition of qualified property would be expanded by repealing the requirement that the original use of the property begin with the taxpayer. The Act excludes certain regulated public utility property as defined in Section 163(j)(7)(A)(iv) and property used in a trade or business that had floor plan financing indebtedness that was deducted as business interest.
Taxpayer’s continue to have the ability to elect out of 100% expensing. Since many states already decouple from or modify Section 168(k), continued nonconformity is expected in this area and additional states may enact legislation to decouple.
Real Property Business Expensing: The Act eliminates distinctions between qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. It also provides a general 15-year recovery period for qualified improvement property (with a 20-year ADS period). Real property trade or businesses that opt out of the business interest limitation are required to use ADS recovery method.
Luxury Automobiles: Depreciation limits have been increased for passenger automobiles placed in service after 2017. If bonus depreciation is not claimed, allowable depreciation is limited to $10,000 in year one, $16,000 in year two, $9,600 in year three and $5,760 in all subsequent years.
New Farming Equipment and Machinery: For property placed in service after December 31, 2017, the cost recovery period is shortened from seven to five years for certain machinery or equipment used in a farming business. The required use of the 150% declining balance depreciation method for property used in a farming business is repealed.
Other Business Changes
S Corporation Conversion to C Corporation: Any S corporation that elects to convert to a C corporation within the two-year period following enactment of the law and have the same shareholders on the date of enactment and the date of revocation will be given a six-year period with which to report any Section 481(a) adjustments resulting from the revocation. Additionally, distributions made during the post-termination transition period (day of the S termination until the later of filing due date or one year anniversary from termination) will be considered proportionately from accumulated adjustments and accumulated earnings and profits.
Business Interest Expense: For tax years beginning after December 31, 2017, every business is generally subject to a disallowance for net interest expense in excess of 30% of the adjusted taxable income plus floor plan financing interest. For tax years beginning after December 31, 2017 and before January 1, 2022, adjusted taxable income does not include depreciation, amortization or depletion.
Disallowance is determined at the tax filer level, and the Act allows disallowed business interest to be carried forward indefinitely for tax years beginning after 2017.
Taxpayers with three-year-taxable period average gross receipts not exceeding $25 million are exempt. Certain farming businesses and real property businesses can opt out of the limitation.
Business Deductions and Exclusions
- The following business deductions have been repealed:
- Domestic production activities deduction
- Deduction for local lobbying expenses with respect to legislation before local government
- Qualified transportation and parking fringe benefits deduction
- Deductions for entertainment, amusement and trade recreation when directly related to a taxpayer’s trade or business
- Food and Beverage Expenses: The 50% meals deduction associated with a trade or business will remain. The Act applies the 50% limitation to certain meals (i.e., convenience of employer) provided by an employer that are currently 100% (these will be nondeductible after 2025).
- Like-Kind Exchanges: The Act limits like-kind exchanges to that of real property that is not held primarily for sale for exchanges completed after December 31, 2017.
- Specified research or experimentation expenditures including software developmental expenditures, for tax years beginning after December 31, 2021, will have to be capitalized and amortized ratably over a five-year period beginning with the mid-point of the tax year in which the expenditure was paid or incurred. If conducted outside of the United States, it would be a 15-year period.
- Certain self-created property, gain or loss from the disposition of a self-created patent, invention, model or design or secret formula or process, will no longer be treated as the sale of a capital asset.
- Sexual Harassment or Sexual Abuse Settlements: Effective for amounts paid or incurred after December 22, 2017, the Act disallows a deduction for any settlement, payout or attorney fees related to sexual harassment or sexual abuse if the payments are subject to a nondisclosure agreement.
- Dividends-Received Deductions: The dividends-received deduction available to corporations that receive dividends from other corporations has been reduced for tax years beginning after 2017. For corporations owning 20% or more of the dividend-paying company, the dividends-received deduction has been reduced from 80% to 65% of the dividends. For corporations owning less than 20%, the deduction is reduced from 70% to 50%.
- Employer Credit for Paid Family and Medical Leave: Eligible employers are allowed to claim a credit equal to 12.5% of the amount of wages paid to qualifying employees on FMLA if the rate of payment under the program is 50% of the wages normally paid to an employee. Wages over 50% could get additional credit (25% max). The maximum leave period that qualifies for the credit is 12 weeks. The credit is effective for wages paid under a qualifying program in 2018 and 2019.
- Qualified Rehabilitation Credit: The 10% credit for qualified rehabilitation expenditures for a building that was placed in service before 1936 is repealed. The 20% credit for qualified rehabilitation expenditures for a certified historic structure remains, but must be claimed over a five-year period. There are transition rules that apply to this credit.
- Orphan Drug Credit: The Act reduced and modified the credit for clinical testing expenses for certain drugs for rare diseases or conditions from 50% to 25% of qualified clinical testing expenses for tax years beginning after 2017.
Employee Achievement Awards Clarification: An employer can deduct the cost of an employee award, generally limited to $400 for one employee not classified as qualified plan awards or $1,600 for a qualified plan award. The award is an item of tangible personal property given to an employee in recognition of length of service or a safety achievement and presented as part of a meaningful presentation. The new law defines “tangible personal property” to exclude cash, cash equivalents, gift cards, gift coupons, gift certificates, vacations, meals, lodging, theater or sports tickets, stocks, bonds or similar property and other non-tangible personal property.
Accounting Method Changes
Cash Method of Accounting: Effective for tax years beginning after December 31, 2017, taxpayers with average annual gross receipts for the three tax years preceding the current tax year of $25 million or less are permitted to use the cash method of accounting.
Accounting for Inventories: For tax years beginning after December 31, 2017, taxpayers with average annual gross receipts for the three tax years preceding the current tax year of $25 million or less are exempt from the requirement to account for inventories.
UNICAP: Taxpayers with average annual gross receipts for the three tax years preceding the current tax year of $25 million or less are exempt from the UNICAP rules, which is effective for tax years beginning after December 31, 2017.
Accounting for Long-Term Contracts: For contracts that meet the two-year threshold and are entered into after December 31, 2017, taxpayers with average annual gross receipts for the three tax years preceding the current tax year of $25 million or less are exempt from the requirement to use the percentage-of-completion accounting method for long-term contracts.