tax reform changes affecting businesses
Corporate Tax Rates Reduced - the maximum tax rates on c-corporations (including personal service corporations) have been reduced from 35% to 21%.
New 20% Deduction for Qualified Business Income - also known as Section 199A, this new rule allows an individual, trust or estate a deduction of up to 20% of qualified business income. There are however limitations based on income and certain types of service businesses are specifically excluded.
Limitations on Carried Interest - new law extends the holding period requirement for certain carried interest to three years. Carried Interest are ownership interests in a partnership that are usually issued to investment managers. Upon meeting certain thresholds these investment managers receive an allocation of the underlying income, which is usually capital gain income subject to lower tax rates.
Like-Kind Exchanges (Section 1031) - like-kind exchanges now only apply to exchanges of real property and not to exchanges of personal or intangible property. Real property held primarily for sale still does not qualify for 1031 exchanges.
Net Operating Loss (NOL) Rules - most taxpayers can no longer carry-back a NOL. NOLs generated after tax years ending December 31, 2017 can only be carried forward. Additionally, for losses incurred in taxable years beginning after December 31, 2017, the NOL deduction is limited to 80% of taxable income (without regard to the NOL deduction). NOLs incurred prior to this date are not affected by this limitation.
Business Interest Expense - Section 163(j) was amended and the limitation is now only imposed on large businesses (taxpayers with average annual receipts in excess of $25 million. For large businesses, business interest expense is limited to business interest income plus 30% of the businesses’ adjusted taxable income. Prior to TCJA, IRC Section 163(j) provided limitations on interest paid to foreign persons, these have since been removed and may provide additional benefit to foreign companies that leverage their investment into the US with debt.
Entertainment Expenses Eliminated - new law now disallows deductions by employers related to (1) entertainment, amusement or recreation; (2) membership dues for clubs organized for business, pleasure or other social purposes; or (3) a facility used in connection with the above.
Recovery Period for Residential Rental Property (ADS) - the recovery period for residential rental property under the alternative depreciation system was changed from 40 to 30 years. This may provide an additional benefit to those that have rental properties outside of the US since these can only be depreciated under ADS.
100% Bonus Depreciation - new tax reform temporarily allows a 100% deduction for business property acquired and placed in service after September 27, 2017 and before January 1, 2023.
Changes to Section 179 Depreciation - the maximum deduction was increased to $1,000,000 and increased the phase-out threshold to $2,500,000. The definition of Section 179 property was also modified to allow a taxpayer to elect to include certain improvements made to nonresidential real property.
Changes to Listed Property - computer and peripheral equipment were previously categorized as listed property. TCJA removes these from the definition of listed property.
Opportunity Zones - newly introduced with the TCJA, investors can elect to temporarily defer tax on capital gains that are reinvested in a Qualified Opportunity Fund (QOF). The tax on the gain can be deferred until the earlier of the date on which the QOF investment is sold or exchanged, or December 31, 2026. If the QOF investmnet is held for at least 10 years, the investor may be eligible for a permanent exclusion on the capital gain on the sale or exchange of the QOF. More information related to Opportuny Zone locations can be found here.
Please contact us to learn how these changes affect your business and your 2018 tax filings.