The new tax bill – Tax Cuts and Jobs Act (H.R.1) – is the most significant overhaul of the tax code within the last 30 years. Arguably, the biggest winners of the new tax plan are American businesses. From a 14 percent reduction of the corporate tax rate to a rise in bonus depreciation deductions, businesses must develop new tax strategies in order to maximize the new tax benefits.
Read our quick summary of the most significant changes to the tax code that may affect your business.
The top corporate tax rate will be reduced from 35 percent to a flat 21 percent beginning in 2018.
Corporate Alternative Minimum Tax
H.R.1 repeals the corporate ATM.
Repatriation of Overseas Assets
Corporate earnings and assets that are repatriated from abroad will be taxed at a reduced rate – 15.5 percent for cash and 8 percent for illiquid assets.
Under H.R1, the deduction for client entertainment expenses is repealed. Previously, if a business took out a client to dinner or a nightclub after a meeting, then they could deduct 50 percent of the cost; however, those expenses will no longer be deductible after December 31, 2017.
The cap on depreciation allowances for business vehicles would rise from $3,160 to $10,000. The new limit would apply to vehicles placed into service January 1, 2018.
100 Percent Bonus Depreciation
H.R.1 increases bonus depreciation amounts from 50 percent to 100 percent. The increase takes effect for “long-term assets” that are placed into service after September 27, 2017. Additionally, bonus depreciation can now be used for the purchase of used/new property, so long as it is used 50 percent of the time for business. The 100 percent amount is set to last until January 1, 2023, when it will subsequently decrease by 20 percent.
Pass Through Businesses
Business such as S corporations, LLCs, partnerships, and sole proprietorships will be able to deduct 20 percent of their net business income, meaning only 80 percent of their income will be taxable at the individual rate. To meet eligibility requirements, please consider the following rules:
- Service businesses such as law firms and doctor’s offices can only claim the 20 percent deduction if their income is below $315,000 (MFJ) or $157,500 (S).
- If your income is above these thresholds, then the tax benefit is pro-rated for anything over the threshold; in other words, the deduction decreases as income increases.
- To see if your income exceeds the limit, you will need to calculate your Qualified Business Income (QBI). Basically, QBI is the net income of your business before the salary or payments made to the owner for services is deducted.
- For entities considered to be non-Specified Service Trade or Businesses, then wage and capital limits are phased in for income that exceeds the thresholds.
- This deduction is scheduled to end January 1, 2026.
The Work Opportunity Tax Credit (WOTC)
Despite a proposal to eliminate this tax credit for businesses that hire employees facing employment barriers, H.R.1 retains WOTC. However, it is only authorized through 2019.
Deductions for personal property that is purchased and used for business (over 50 percent of the time), increases the deduction from $510,000 to $1 million.
Other eliminated business tax credits/deductions
Businesses are no longer able to claim deductions or tax credits for:
- Expenses related to providing employees with meals.
- Employee parking, mass transit or commuting expenses.
- Domestic production activities.
- Local lobbying expenses.
This should not be considered legal advice. Some information contained herein is pertinent for many taxpayers; however, the advice of a tax professional should be consulted before acting. Our tax attorneys are available to examine individual cases. Please call 303-688-0944 to request a consultation.