Federal Tax Reform Highlights – Provisions for Business
C Corporations – the new law imposes a flat rate of 21%and fully repeals corporate AMT.
Pass through entities get a new deduction. The Qualified Business Income Deduction (QBI Deduction)is created. The deduction is 20% of Qualified Business Income. The deduction is subject to the “specified service business” limitation or wages paid limitation. This replaces the Domestic Production Deduction, which is eliminated at the end of 2017
Excess Business Losses
New law limits business loss deductions to $500,000 (MFJ) and $250,000 for other taxpayers. Excess losses are carried over to the next taxable year. For flow through entities, the provision is measured at the individual level.
Limitation of deduction for Interest paid
Deduction for interest paid limited to 30% of earnings before interest, taxes, depreciation, depletion and amortization between 2018 and 2021. Starting in 2022 the earnings limit considers depreciation, depletion and amortization. Businesses earning under $25 million are exempt from this limit.
Entertainment deductions are eliminated (was 50% deductible in 2017). Meals are still 50% deductible
Section 179 Expensing.
The Section 179 deduction increased to $1 million (was $500,000), phases out at $2.5 million and is expanded in 2018 to include non-residential real property (i.e. roofs, heating, fire protection and security systems)
Bonus depreciation is increased to 100% through 2022. Decreased 20% per year thereafter
Qualified improvement property asset class replaces leasehold improvement, qualified restaurant, and qualified retail improvement. The asset class allows for a 15-year recovery period and straight-line depreciation.
Luxury auto depreciation annual limits increased to $10k in year 1, $16k year 2, $9.6k year 3 and $5.76k thereafter. This is about 3 times greater than prior law. Bonus depreciation in year 1 increased to $18,000.
Like-kind exchange treatment only applied to real property. Like-kind exchanges for personal property (such as vehicles) is eliminated.
Cash method of accounting. Entities can use the cash method of accounting if its annual gross receipts for the prior three years don’t exceed $25 million. (current limit is $10 million).