From Lucier CPA, Inc. the following is a summary of some of the more significant changes under the new tax law that may affect your business. Highlights of the TCJA include: (1) an increase in amounts that may be expensed under bonus deprecation and Section 179; (2) a 21 percent flat corporate tax rate; (3) a new business deduction for sole proprietorships and pass-through entities; and (4) the elimination of the corporate alternative minimum tax (AMT).
Reduction in Corporate Tax Rate and Dividends Received Deduction
TCJA eliminates the graduated corporate tax rate structure and instead taxes corporate taxable income at 21 percent. It also eliminates the special tax rate for personal service corporations and repeals the maximum corporate tax rate on net capital gain as obsolete.
A corresponding change reduces the 70 percent dividends received deduction available to corporations that receive a dividend from another taxable domestic corporation to 50%, and the 80 percent dividends received deduction for deividends received from a 20 percnet owned corporation to 65 percent.
Enhanced Bonus Depreciation deduction
TCJA extends and modifies the additional first year (bonus) depreciation deduction, which had generally been scheduled to end in 2019, through 2026. Under the new law, the 50 percent additional depreciation allowance is increased to 100 percent for property placed in service after September 27, 2017 and before January 1, 2023 as well as specified plants planted or grafted after September 27, 2017 and before January 1, 2023.
The 100 percent allowance is phased down to 20 percent per calendar year for property placed in service , and specified plants planted or grafted, in taxable years beginning after 2022.
TCJA also maintains the bonus depreciation increase amount of $ 8000 for luxury passenger automobiles placed in service after December 31, 2017, that had been scheduled to be phased down in 2018 and 2019.
TCJA also removes the requirement that, in order to qualify for bonus depreciation, the original use of qualified property must begin with the taxpayer. Thus the provision applies to purchases of used as well as new items.
Enhanced Section 179 Expensing
TCJA increases the maximum amount a taxpayer may expense under Code Sec. 179 to $ 1,000,000 and increase the pahse out threshold amount to $ 2,500,000. Thus, the maximum amount you may expense, for taxable years beginning after 2017, is $ 1,000,000 of the cost of qualifying property you place in service during the tax year. The $1,000,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $ 2,500,000.
Repeal of Domestic Activities Production Deduction
TCJA repeals the deduction for domestic production activities
New Deduction of Qualified Business Income
If you are a sole proprietor, a partner in a partnership, a member in an LLC taxed as a partnership, or a shareholder in an S corporation, TCJA provides a new deduction for qualified business income for taxable years beginning after December 31, 2017 and before January 1, 2026.
The amount of the deduction is generally 20 percent of the taxpayer’s qualifying business income from a qualified trade or business.
Example: in 2018, Joe received $ 100,000 in salary from his job at XYZ Corporation and $ 50,000 of qualified business income from a side business that he runs as a sole proprietorship. Joe’s deduction for qualified business income in 2018 is $ 10,000 (20 percent X $ 50,000).
The deduction for qualified business income is claimed by individual taxpayers on their personal tax returns. The deduction reduces taxable income.
The deduction is not used in computing adjusted gross income. Thus, it does not affect limitations based on adjusted gross income.
The deduction is subject to several restrictions and limitations, discussed below.
Qualified trade or Business.
A qualified trade or business means any trade or business other than (1) a specified service trade or business, or (2) the trade or business of being an employee. A “specified service trade or business “ is defined as any trade or business involving the performance of services in the fields of health , law, accounting, actuarial, science, performing arts, consulting, athletics, financial services, brokerage services , including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asses of such trade or business is the reputation or skill of one or more of its employees. Engineering and architecture services are specifically excluded from the definition of a specified service trade or business.
Special rule where Taxpayer’s income is Below a Specified Threshold .
The rule disqualifying specified service trades or businesses from being considered a qualified trade or business does not apply to individuals with taxable income of less than $ 157,500 ( $ 315,000 for joint filers ). After an individual reaches the threshold amount, the restriction is phased in over a range of $ 50,000 in taxable income ($ 100,000 for joint filers). If an individual’s income falls within the range, he or she is allowed a partial deduction. Once the end of the range is reached, the deduction is completely disallowed.
Relaxed Gross Receipts test for Various Accounting Methods
TCJA expands the universe of taxpayers who can use various accounting methods by increasing the gross receipts threshold under which those methods may be used. TCJA increases the limit for the gross receipts test to $ 25 million for using the cash method of accounting.
These are just some of the changes that are covered under the TCJA, as you can see the provisions are quite extensive and also quite complicated. If you wish to discuss the impact of the law on your particular situation, please give us a call.
Lucier CPA, Inc. 1308 Atwood Ave, Johnston, RI 02919 (401) 946-1900