WILMINGTON — This is Part 2 of a two-part series on the Tax Cuts and Jobs Act (“the new tax law”). Because the law is so extensive an adequate summary can’t be shared in one article. In this article, I will attempt to share the highlights of key provisions for businesses.
Deduction for Qualified Business Income: Perhaps one of the most exciting provisions is that, within certain limitations, 20 percent of “Qualified Business Income” is now deducted before the tax is calculated for “Pass through entities” such as sole proprietorship, S corporations, and partnerships. This is like a state of Ohio tax provision that has been in place for a few years now.
It should be emphasized this does not apply to traditional “C Corporations”. Traditional corporations, which we will see later, instead received a tax reduction. Each business owner should evaluate their business structure to optimize the benefits of the new law.
Tax Rates: All income from C corporation is now taxed at a flat 21 percent. This replaces the prior law “rate bubble” of 15%, 25%, 34%, 39%, 34%, 35%, 38%, and 35%. Furthermore, there is no longer a separate 35 percent flat rate for “Personal Services Corporations”. They are now taxed at the new 21 percent rate.
Business Interest Deduction: Special rules and limitations apply for business interest deductions with businesses of gross receipts more than $25 million.
IRC Section 179 and “bonus depreciation”: The amount a business can expense through the 179 deduction has been expanded for equipment up to $1 million, up from $510,000 and includes certain items for lodging and rental facilities. The amount of bonus depreciation has also been expanded to 100 percent, up from 50 percent.
However, it starts phasing out in 2023 and phases out to zero in 2028. It should be noted that the bonus depreciation was created as a “temporary” economic stimulus emergency after the 9/11 attacks. The bonus depreciation provisions were to have expired many times over, but Congress keeps renewing them.
Farm Property Depreciation: The new law allows shorter recovery periods from 7 to 5 years for any machinery other than grain bin, cotton ginning asset, fence, or other land improvement used in farming. This recovery period only applies to new equipment, not to used equipment.
The new law also repeals the required use of the 150 percent declining balance method used in farming for 3, 5, 7, and 10-year property.
Autos and “Listed Property” Depreciation: The amounts allowed under depreciation for autos under IRC 280F have been increased. Furthermore, computers and peripheral equipment are no longer considered “listed property” for special reporting purposes.
Entertainment Expense Deduction: One of the more controversial provisions is the elimination for “entertainment and/or recreation” deduction incurred in the conduct of business. This includes any activities “in connection or closely associated with business activities”.
However, taxpayers may still deduct 50 percent of food and beverage expenses associated with a trade or business. In other words, food and beverage consumed for overnight travel for business or consumed on employer’s premises for employer convenience.
Final Remarks: It should be noted once again, that this summary is a very high-level overview of certain provisions. You should consult your tax professional for how the new law applies directly to your situation.
If you are a taxpayer in the community with an AGI of $54,000 or below our students at Wilmington College through the VITA program are here to assist you this coming tax year. Feel free to contact me at the college at firstname.lastname@example.org or 937-481-2390.