Tax Update for Businesses

By Jennifer F. Flinchum, CPA, CFP®, Tax Partner | Ginny Graef, CPA, Tax Senior Manager

The Tax Cuts and Jobs Act was enacted in 2017 and introduces substantial changes to many taxpayers. We have highlighted the most notable business tax changes below.

Please note that each taxpayer’s situation is unique and you should speak with your tax advisor before making any decisions.  Most of the changes noted below will sunset after 12/31/25.

Business Income Tax Provisions

Note:  Changes are effective January 1, 2018, unless otherwise noted.

• Change in rates – flat C corporation rate of 21% compared to graduated rates ranging from 15% to 39%

PLANNING OPPORTUNITY for 2018

Depending on the type of business and planned holding period/ exit timing, possible shift of activities to C corporations

• Pass-throughs (Partnership, LLCs, SMLLCs, sole proprietorship and S corps) – 20% deduction of qualified domestic business income
  • Deduction generally not available to specified service businesses (including health, law, consulting, athletics, 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 or owners) unless below certain thresholds ($157,500 Single, $315,000 joint return) and meeting certain wage limits
  • This deduction will be after calculation of AGI and will apply whether or not a taxpayer claims itemized deductions
  • Calculations are complicated and seem to include areas of subjectivity

PLANNING OPPORTUNITY for 2018

Depending on the type of business and planned holding period/ exit timing, possible shift of activities to C corporations

• The cash-basis method of tax accounting is permitted for businesses with average annual gross receipts for the three prior tax years of $25 million or less, up from $5 million. The $25 million will be indexed for inflation.
• The alternative minimum tax is repealed for C corporations
  • C corporations with AMT credits after the 2017 tax year can apply them against future regular tax
• Big changes in depreciation
  • Bonus depreciation
    • Increased from 50% to 100%
    • Applies to eligible property placed in service after September 27, 2017, through December 31, 2022 (through December 31, 2023, for aircraft)
    • Phased out by 20% per year after 2022 (80% for 2023, 60% for 2024)
    • Used property is now eligible
  • Section 179
    • The maximum IRS Code Section 179 deduction is increased to $1 million from $510,000, with the related phase-out starting at $2.5 million compared to $2,010,000
    • Includes improvements made to nonresidential real property after initial acquisition
      • HVAC
      • Sprinkler systems
      • Roofing
      • Alarm systems
  • “Luxury” automobiles
    • Permissible annual depreciation limit for “luxury” automobiles is more than doubled
    • Applies to vehicles purchased after 2017
  • Depreciable lives of rental buildings are unchanged. There were expectations that the lives would be shortened.

PLANNING OPPORTUNITY for 2017

This provision is retroactive to purchases after September 27, 2017. Good news, likely more depreciation on assets purchased after September 27 than originally planned. Perhaps more deductions to be claimed for additional purchased in 2017? To claim the increased deduction, the property needs to be in service by 12/31/17.

• Interest expense is generally limited to 30% of adjusted taxable income
  • Adjusted taxable income is taxable income PLUS addbacks for depreciation, amortization, and interest (applicable to years after 12/31/17 and before 1/1/2022)
  • Pass-throughs apply the limitation at the entity level
  • Generally not applicable to businesses otherwise eligible for the cash method basis of accounting
  • Also not applicable to businesses using floor plan financing
  • Excess interest expense is carried forward indefinitely
• Net operating losses (NOLs) general can only be carried forward, not carried back and limited to 80% of taxable income (determined without regard to the NOL deduction)
  • Limited exceptions for carryback related to farming operations
• The domestic production activities deduction is repealed for non-C corporation taxpayers after 2017. After 2018 for C corporation taxpayers.
• Taxpayers with gross receipts of $25 million or less are exempt from the inventory UNICAP rules
• The exception from the requirement to use the percentage-of-completion method to account for long-term contracts is increased from $10 million to $25 million of total gross receipts

General Planning Opportunities for 2017

Delay Receipt of Income Until 2018

We expect income tax rates to go down for most taxpayers (whether C corporation or pass-through), so when possible, you should delay receipt of income until 2018 and accelerate deductions into 2017.

Questions on how the proposed changes may impact your individual tax situation? Contact your Keiter representative or Email | 804.747.0000. We are here to help.

Additional Tax Planning Resources

Tax Update for Individuals

As 2017 Draws to a Close – Year End Reminders and Tax Filing Deadlines

2017 Year End Tax Planning: Are You Prepared?