The biggest changes in the new law are a permanent flat 21% corporate tax rate and a qualified business income credit for pass-through entities thru 2025.
In prior years, corporations paid a graduated 15-35% and personal service corporations, like my CPA firm, were taxed at a flat 35%.
Some of the other changes are:
- Eliminate the corporate Alternative Minimum Tax (AMT)
- Friendlier depreciation rules
- More restrictive interest deductions
- Reduced fringe benefits and entertainment expenses
- Restrictions on Net Operating Losses (NOLs)
- Allowance for cash-basis accounting for more entities
Changes for Pass-Through Entities
In the past, income from sole proprietorships, partnerships, limited liability companies, and S corporations were passed through to the owners and taxed at their applicable rates.
The new law established a deduction for individuals, trusts and estates of up to 20% reduction in Qualified Business Income (QBI.)
The reduction does not affect the owner’s AGI, but does reduce taxable income.
Certain service businesses are excluded or limited if their AGI exceeds $157,500 as a Single File or $315,000 MFJ. The deduction cannot exceed 20% of the owner’s table income after subtracting income from long term capital gains and qualified dividends.
The deduction cannot exceed (1) 50% of W-2 wages paid to employees during the year, OR (2) 25% of wages, plus 2.5% of the cost of tangible property owned in the business. The limitations do not apply until the owner’s taxable income is over $157,500 if Single or $315,000 MFJ.
Eliminate the AMT
The TCJA permantly repealed the corporate alternative minimum tax.
New Depreciation Rules
Section 179
For property placed in service starting in 2018, the maximum Section 179 deduction is now $1,000,000, and the phase-out will start at $2,500,000 and increase annually with inflation.
Eligible property has also been expanded for real property to include things like roofs, HVAC and appliances.
Bonus Depreciation
Through 2022, first year bonus depreciation has been increased to 100%. It also allows used property to qualify, as long as the asset is new to the taxpayer or business.
Bonus depreciation is scheduled to be cut back starting for property placed in service in 2023:
- 80% in 2023
- 60% in 2024
- 40% in 2025
- 20% in 2026
Vehicle Depreciation
With 100% bonus depreciation, if you purchase a heavy vehicle for your business (over 6,000 pounds), you most likely can depreciate 100% in the year of purchase through 2022. The asset must be used at least 50% for business. As stated above, used vehicles count.
Heavy SUVs are not considered luxury passenger vehicles and are eligible for the favorable bonus depreciation rules.
Having stated the above, Section 179 is still important, and starting in 2023, more so. The Section 179 deduction amount is now allows most businesses to expense up to 1,000,000 in new or used qualified property. The phase-out is $2,500,000 with the TCJA. For Heavy SUVs, the Section 179 deduction limit is $25,000.
If you are a C- or S-Corporation and more than a 5% shareholder, the 50% business use percentage is more difficult if the employee uses the vehicle outside of the corporations actual business. If you fail the test, you will need to depreciate using the straight-line method over six years.
For vehicles under 6,000 pounds, the Luxury Auto Depreciation limits still apply, but they have been expanded starting in 2018. The maximum (100% business use) is as follows:
- Year one – $10,000 ($18,000 if bonus depreciation is elected)
- Year two – $16,000
- Year three – $9,600
- Year four plus – $5,760
This will be adjusted for inflation and is a permanent change (does not expire after 2025.) As stated in the first bullet point, first year bonus depreciation is $8,000 for passenger vehicles.
If your business leases a vehicle, you can deduct all of the lease payment or allocate based on business use percent. However, depending on the fair market value (FMV) of the lease, you may have to apply income inclusion rules found here.
Business Interest Deductions
Under the TCJA, businesses cannot generally deduct interest expense that exceeds 30% of adjusted taxable income. Businesses can add back depreciation, amortization and depletion expenses to figure the adjustable taxable income through 2021, but not starting in 2022.
The amounts not deductible in the current year can be carried forward indefinitely. This change is permanent. There are a few exceptions for farming operations and real estate businesses.
Reduced Fringe Benefits and Entertainment Expenses
Meals outside the place of employment are still deductible by 50%, but entertainment is now disallowed. Meals provided by the employer at the place of work is now reduced to 50%. After 2025, the former laws are due to be back in place.
Most transportation benefits are now permantly disallowed deductions for employers now.
Restrictions on NOLs
Starting in 2019 (for 2018), the use of a NOL carryover cannot shelter more than 80% of taxable income in the year. Also, NOLs can only be carried forward starting in 2018, but indefinitely instead of 20 years.
This post highlights just the basics and does not dive into detail. If you would like more specific information to your business structure (S- or C-Corporation, LLC, etc) or type (ie. real estate) comment below. If you need a CPA to prepare your tax return next year, please let me know or go here.
