One is naturally inclined to know more about “always expected tax reforms” that have been debated for ages by American public. Yes, I am talking about Tax cuts and Jobs Act, 2017 which altered the knowledge of all connected to American taxation since time immemorial. Ultimately, popularly known as TCJA or 2017 tax reform, legislation was signed into law on December 22, 2017. It covers deductions, depreciation, expensing, credits, fringe benefits and other items which affects tax liability and the bottom line of business of America.
American business to watch for these monumental changes include corporations, S Corporations, partnerships like LLCs and sole proprietorships. I gleefully agree that as a business owner or self-employed individual one may like to review tax reform sections that may affect the bottom line of the business.
I have intentionally followed the pattern shown by Internal Revenue Service, American Government publication 5318 while discussing the tax provisions.
Corporate Tax Rate
Just believe it.” TCJA lowers the corporate tax rate to a flat 21% of taxable income for tax years beginning after December 31, 2017” IRS publication pronounces the statement.
The much-dreaded Corporate Alternate Minimum Tax for years beginning after December 31, 2017 stands repealed.
What about prior year minimum tax?
The credit for prior year minimum tax liability of corporations allows a refundable credit to offset a taxpayer’s tax liability for tax years beginning after 2017 and before 2022. 50% of minimum tax credit can be taken against regular tax liability while full corporation minimum tax credit of 100% may be availed in tax years beginning in 2021.
Deduction for qualified business income
Under the new provisions, sole proprietors, self- employed individuals, partners in partnership firms, shareholders of S Corporations etc. are eligible for a new deduction under section 199A for 20% deduction for qualified business income which may be available by eligible tax payers on the 2018 federal income tax return filed in 2019. A couple of my clients availed this deduction which simplifies the tax return.
This deduction is generally available for eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other tax- payers. It is generally equal to the lesser of:
The deduction is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers.
It’s generally equal to the lesser of:
20 percent of their qualified business income plus 20 percent of their qualified real estate investment trust dividends and qualified publicly traded partnership income, or 20 percent of taxable income minus net capital gains.
Deductions for taxpayers above the taxable income thresholds may be limited.
As an active practicing CPA for the past nearly one and half decade, I would advise you to leave it to your CPA and his software to handle minutely this issue.
Depreciation: Section 179 Modifications
With TCJA increasing maximum deduction from $500,000 to $ 1 million, and also increasing the phase out amount to $2.5 million, businesses can elect to act under section 179 property. This has to be done in the year in which the property is placed in service.
Depreciation Limitations on Luxury Automobiles and Personal Use Property
If the taxpayer opts to claim 100% bonus depreciation, the greatest allowable depreciation deduction works out to be:
- $ 18,000 for the first year
- $ 16,000 for the second year
- $ 9,600 for the third year
- $ 5,760 for each later taxable year in the recovery period
Computer or peripheral equipment has been removed from the listed property.
What about the applicable recovery period for real property?
The general depreciation system recovery periods are at 39 years for non- residential real property while 27.5 years for residential rental property.
TCJA however changed the alternative depreciation system recovery period for residential property from 40 years to 30 years only. Obviously, the changes are effective after December 31, 2017.
Now let us talk about business related losses.
Net operating loss deduction in business has been limited up to 80% of taxable income but may carry forward indefinitely unlike 20 years prescribed earlier.
In case of individual tax payers business losses could be deducted equal to business gains plus $250,000 in a tax year – or @500,000 in case of joint tax payers. Excess NOL could be deducted next year after carrying forward it next year.
Business related exclusions and deductions
Business Interest (quoting directly from publication 5318 from irs.gov website)
“Expense TCJA applies a limit on business interest expense. The limit does not apply if a business’s average annual gross receipts are $25 million or less for the 3 prior tax years. If it does apply, the change is effective for taxable years beginning after December 31, 2017. The business interest deduction limit for the taxable year is the sum of:
Business interest income,
30 percent of the adjusted taxable income, and
Floor plan financing interest expense, if applicable.
The amount of any business interest expense that is not allowed as a deduction for the taxable year is carried forward to the following year as a disallowed business interest expense carry forward. A partnership that is subject to the business interest limit applies that limit at the partnership level. The partnership does not carry forward any disallowed business interest expense but allocates the disallowed amount to its partners. A partner may be able to deduct the disallowed carry forward business interest expense in a subsequent year if the partner meets the relevant requirements in the subsequent year.”
A tax-payer engaged in real property trade, business, or a farming is allowed not to limit business interest expense which will turn out to be an irrevocable decision. Alternate depreciation system may be the answer for usage in such cases.
What about real-kind exchanges of Real property?
Unlike the past, the current rules under TCJA do not permit all like kind exchanges of business or investment property but only certain exchanges of real property to be held for productive use in business or trade.
Meals and entertainment deduction
TCJA generally eliminated the deduction for any expenses related to entertainment, amusement or recreation.
Taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are considered normal. The meals may be provided to a current or potential business customer.
Employer Credit for Paid Family and Medical Leave
TCJA introduced a new employer credit for paid family and medical leave. The employer is entitled to claim it if it will be paid for employees on family and medical leave.
Employer is expected to have a clear written policy that allowed two weeks claim for employee’s family and medical leave and the amount is not less than 50% of employee’s wages and falls under $72,000 or less.
Some one raised the query whether conversion of S Corporation into a C Corporation would enable more tax friendly atmosphere.
The said publication under reference under page 10 para 2 gives the impression that it is beneficial to convert as a C Corporation a S Corporation since new flat 21% flat rate for C Corporation would tilt the scale. The obvious condition is that it should have been a S corporation on Dec 21, 2017 and revokes its status after that date but before December 22, 2019. The same owners maintain same proportion of stocks.
Now time to deal with farm provisions.
Farm provisions
Sad but true that TCJA shortens the depreciable recovery period of new machinery or equipment that is placed in service after December 31, 2017 and the current period would be 5 years instead of 7 years as earlier.
Farming businesses opting out of the interest deduction limit must use the alternate depreciation system to depreciate any property with a recovery period of 10 years or more.
Miscellaneous provisions
Opportunity zones
Opportunity Zones are an economic development tool to provide tax-favored investments throughout the country(USA) and in U.S. territories. Recently enacted provision (Section 1400Z-2) provides certain economic benefits for investment in these opportunity zones through proper investment in qualified opportunity funds. Qualified Opportunity Funds must be either a partnership or corporation organized for the purpose of investing in eligible property located in a designated Qualified Opportunity Zone.
By properly investing in a qualified opportunity fund, certain provisions of deferment of capital gains over a period of 5/7 years exist. Complete elimination of tax exists on a gain of sale of investment if held for at least 10 years.
Conclusion
The expected changes in tax, called as Tax Cuts and Jobs Act has ushered in a splendid motion of attracting the best investments in USA with the most competitive rate of taxation. Simplification much beyond expectations may take sufficient time to attract lost out capital of American businesses what to speak of others. Enormous job opportunities created recently enabling the lowest unemployment rates would make USA one of the fastest growing economies. I will utter that India would definitely be swept away by these historic reforms to make it more competitive and yes, I dare say again that the day is not far when India too would offer a flat 21% or less tax rate for its corporates and virtually no income tax for its citizen.
————————————–Reference:
Tax reform – What’s New for Your Business
Publication 5318 for tax year 2018
https://www.irs.gov/pub/irs-pdf/p5318.pdf
A thorough study of above publication with its vast quoted reference is recommended. Also hand over your tax issues and preparation of tax returns to CPA like myself or others for expert handling. More cases are being handed over for investigation in USA by tax authorities if any improper treatment of tax rules have resorted to by American of Indian origin to avoid total taxation.
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