The Tax Cuts and Jobs Act included a number of changes affecting businesses. Most of these take effect in 2018 and will affect tax returns filed in 2019. Here are some of the key changes:
- TCJA imposes a flat rate of 21% and fully repeals corporate AMT for C Corporations..
- The Section 199A deduction, also known as the Qualified Business Income Deduction (QBI Deduction) has been created. The deduction is 20% of Qualified Business Income subject to the type of business if service based, wages paid by the business and taxable income of the taxpayer. The deduction will impact most taxpayers with business income and calculation of this deduction can be complex. This replaces the Domestic Production Deduction, which is eliminated at the end of 2017.
- The new law limits business loss deductions to $500,000 for married filing jointly 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.
- The deduction for interest paid is 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 (50% deductible in 2017). Meals are still 50% deductible.
- The Section 179 deduction is increased to $1 million from $500,000 in 2017. A maximum amount of $2.5 million can be spent on equipment before the Section 179 Deduction available begins to be reduced on a dollar for dollar basis. The deduction has been 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 – the annual limits increased to $10,000 in year 1, $16,000 year 2, $9,600 year 3 and $5,760 thereafter. Bonus depreciation in year 1 increased to $18,000.
- Like-kind exchange treatment may only applied to real property. Like-kind exchanges for personal property, such as vehicles, is eliminated..
- Entities can use the cash method of accounting if its annual gross receipts for the prior three years don’t exceed $25 million. The current limit is $10 million.
This fact sheet summarizes some of the changes for businesses and gives resources to help business owners find more details.
The Highlights of Tax Reform for Business FS-2018-17, October 2018