Dear DLHC clients and friends,
This is the second of a series of E-Blasts that we hope are more meaningful than what you may have heard on TV or read in the newspapers or on the internet. We have tried our best to boil down the material and state it in a way that is more applicable and understandable to the DLHC clients and friends.
As you all know by now, the Tax Cuts and Jobs Act (TCJA) was signed into law by President Trump on December 22, 2017. You have probably seen or heard countless reports on the impact it will have on the American people and businesses. The problem with what you have heard, it may have been “slanted” by whoever wrote the article, or the TV show may have generalized the impact for all of American taxpayers, not DLHC clients.
There are also a number of changes in the tax law, most favorable to businesses. We will try and highlight just a few of those that apply to DLHC clients.
- Expensing rules have been liberalized. For 2018 and future years, taxpayers can expense up to $1 million under IRC Section 179 and the phase out of income has been increased to $2.5 million.
- The type of property that can be expensed under Section 179 has also expanded to now include improvements to nonresidential real property if the improvements were incurred after the property was placed in service. This would include roofs, heating, ventilation and air-conditioning, fire protection, alarms and security systems.
- The “bonus” depreciation deduction has been increased to 100% for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. This special deduction is allowed for qualified new and certain used property.
- Luxury automobile depreciation amounts have been increased.
- Depreciable lives for some farm equipment has been decreased from seven to five years to further accelerate the depreciation.
- For C-corporations (those that file and pay their own tax) the highest corporate rate has dropped to a flat 21%. Also for C-corporations, the dividends received deduction percent has decreased from 80% to 65% and the alternative minimum tax for corporations repealed.
There are some additional limitations or restrictions that apply to businesses.
- Business interest expense now has a limitation. This limitation will not allow taxpayers to write off their full business interest expense if it is more than 30% of their adjusted taxable income, determined at the taxpayer level. Special rules will apply to partnerships.
- Net operating losses of corporations can now only be carried forward. In the past, taxpayers could carry back losses 2 years.
- The domestic production activities deduction has been repealed. Our clients generally see this deduction flowing through limited partnerships.
- Like-kind exchange rules have been modified to allow the deferral only for real property that is not primarily held for resale.
- A number of changes have been made in the employer deduction for fringe benefits, payments made for sexual harassment charges and employee achievement awards.
Meals and Entertainment Changes
One area that affects almost all of our business clients is the new rule for meals and entertainment. Under the old law, taxpayers could deduct 50% of expenses for business related meals and entertainment. Meals provided for employees on the employer’s premises were 100% deductible and tax free to the employees.
Under the new law, amounts paid after 2017 for business entertainment are disallowed. Meals incurred while traveling are still 50% deductible but the 50% limitation also applies to meals provided by employers on the employer’s premises. So travel business meals and meals furnished on employer’s premises (not entertainment) are deductible but now at at 50%. The good news is that office holiday parties are still deductible at 100%!
20% Deduction for Flow-through Entities
There has been much said (some correct, some not) about the 20% deduction for flow-through entities. This special deduction, available to non-corporate taxpayers, applies generally to qualified business income (essentially trade or business income - not capital gains, dividends, interest income, etc.) earned from flow-through entities (partnerships, limited liability companies, s-corporations, and sole proprietorships). This provision applies to tax years beginning after 2017 and before 2026.
This special deduction does not apply to service related entities such as health care professionals, law, accounting, actuarial science, performing artists, consulting, athletics, and financial services if the taxpayer’s taxable income exceeds $157,500 ($315,000 in the case of a joint return).
For partnerships, LLCs and S-corporations, the deduction is taken at the partner or shareholder level. Trusts and estates are eligible for the deduction, subject to apportionment between the trust, estate and beneficiary.
The deduction is not allowed in computing adjusted gross income but rather is allowed as a deduction reducing taxable income. The deduction cannot exceed the greater of 50% of the W-2 wages with respect to the trade or business OR the sum of 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property (tangible, depreciable property held in the trade or business).
So, as you can see, this computation will keep accountants busy. Although it is intended to put small businesses on the same plane as the publicly held companies, this deduction will not likely provide the same tax relief as reducing the C-corporation tax rate to 21%.
Please call us if you have any questions or we can help you in any way – (205) 871-9973.