Look for future blog posts where we will take a deeper dive into the more complex tax changes. In some cases, guidance by from the IRS will be needed to gain additional clarity. As you review the following high-level bullet point summary please keep in mind that there are many other changes within the law that are not mentioned below.
The intention of this blog is to highlight the changes that have the broadest impact on a small business owner.
C Corporations and Personal Service Corporations
The graduated rate for these types of entities has been eliminated permanently. All c corporation and personal service corporations no matter how big or small will pay a flat rate of 21% starting in tax year 2018. This new rate applies to all corporations, including personal service corporations
Pass Thru Businesses (including sole proprietorships, LLC’ s corporations and partnerships)
Establishes a 20% deduction of qualified business income from certain pass-thru business. Specific service industries, such as health, law and professional services (financial services) are subject to a phase-out of the reduction. Joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries. This provision expires December 31, 2025. (This new deduction is found in new code section 199A and is very complex. More to come on this in a future blog).
Corporate Alternative Minimum Tax (AMT)
The AMT for corporations, including personal service corporations has been eliminated and any unused minimum tax may be used to offset regular tax liability for any year.
Corporation Received Dividends
For tax years beginning after December 31, 2017, the 70% dividends-received deductions reduced to 50% and the 80% dividends-received deduction is reduced to 65%.
Allows full (100 percent) expensing of short-lived capital investment, such as machinery and equipment, for five years, then phases out the provision over the subsequent five, and raises Section 179 small business expensing cap to $1 million with a phase-out starting at $2.5 million. Allows immediate write-off of qualified property placed in service after 9/27/17 and before 2023. The increased expensing would phase-down starting in 2023 by 20 percentage points for each of the five following years. Eliminates original use requirement. Qualified property excludes certain public utility property and floor plan financing property. Taxpayers may elect to apply 50% expensing for the first tax year ending after 9/27/17
Expands “qualified property” to include certain depreciable personal property used to furnish lodging, and improvements to nonresidential real property (such as roofs, heating, and property protection systems)
Business Interest Deductibility
The new legislation limits the deductibility of net interest expense to 30% of earnings before interest, taxes, depreciation and amortization (EBITA) for four years, and 30% of earnings before interest and taxes (EBIT) thereafter.
Net Operating Losses
Eliminates net operating loss carrybacks while providing indefinite net operating loss carryforwards, limited to 80 percent of taxable income. Limits NOLs to 80% of taxable income for losses arising in tax years beginning after 2017. Repeals carryback provisions, except for certain farm and property and casualty losses; allows NOLs to be carried forward
The act disallows a deduction for (1) an activity generally considered to be entertainment, amusement, or recreation; (2) membership dues for any club organized for business, pleasure, recreation, or other social purposes; or (3) a facility or portion thereof used in connection with any of the above items. Deductions for meals and travel have not changed.
Change is not easy, but with change comes opportunity. We anticipate that business owners will be seeking advice as to these changes and how they impact their business. As always, they should speak with their legal and tax advisors to get more detailed information as to their individual situation.
The companies of National Life Group® and their representatives do not offer tax or legal advice. Please encourage your clients to seek tax or legal advice from their appropriate professional advisor.