In part one of this blog, I outlined the top 11 changes in Trump's Tax Cuts & Jobs Act that will impact individual taxpayers. In Part 2, I'm discussing the top 9 changes that may impact your business:
- Corporate tax rates have been reduced to a flat 21% rate. Previously, corporate rates ranged from 15% to 35%. This 21% tax rate is also applicable for personal services corporations, who have historically been subject to a flat 35% corporate tax rate.
- Corporate Alternative Minimum Tax has been repealed for tax years beginning after December 31, 2017.
- New deduction for certain owners of pass-through entities including partnerships, S corporations, and sole proprietors, including a trust or estate, who have qualified business income (QBI), to take a deduction of up to 20% of its domestic QBI. The deduction is applied at the individual level, and for individuals with taxable income below $315,000 (married filing jointly) and $157,000 (single), there are no limitations to this deduction, and 20% of your QBI will avoid income tax. For taxpayers above these income thresholds there are limitations in place based on the lesser of 20% of your QBI, and (1) 50% of W-2 wages paid, or (2) 25% of W-2 wages paid and 2.5% of the original cost of the depreciable assets used in the business. The deduction is not allowed for certain services trades or businesses, but this disallowance is phased in, taking into account certain income threshold requirements.
- Section 179 expensing limit has been raised to $1 million (previously $500,000), and the investment limitation has been raised to $2.5 million.
- The accelerated bonus depreciation allowance has been increased to 100% (previously 50%) for qualifying property placed in service after September 27, 2017 and before January 1, 2023. There is a 20% per year phase-down limitation between the years 2022 and 2027. The original use requirement no longer applies.
- Interest deductions will be capped at 30% of adjusted taxable income, including other criteria. Exceptions exist for small businesses, including an exception for businesses with average gross receipts of $25 million or less. Certain real property trades or businesses, and farming businesses, can opt out of this provision if they meet certain criteria.
- Net operating losses (NOLs) rules have been modified and will generally be limited to 80% of taxable income for losses arising in tax years beginning after December 31, 2017. The two-year carryback provisions have been repealed, with an exception for certain losses incurred in the trade or business of farming. NOLs can now be carried forward indefinitely and are no longer subject to the 20-year limitation.
- Various business tax deductions and preference items were eliminated, including the domestic production activities deduction (DPAD) and non-real property like-kind exchanges.
- Recovery period for new farming equipment has been shortened from 7 to 5 years, with some limitations.
These are just some of the changes included in the Tax Cuts & Jobs Act. If you have any questions about how these, or any other changes, will impact you, please feel free to contact me directly, or leave a comment below.