On December 20, 2017, Congress passed the largest piece of tax legislation in many years. It makes dramatic changes for individuals and businesses. But it does not change many of the tax rules that have long been in place.
A number of the changes are a great departure from what the House bill had originally proposed.
Here is a checklist of what has changed, and what hasn’t. Many of them are positive changes, while some may be disadvantageous to small business owners. Almost all are complicated (no simplification).
In future blogs I’ll cover many of these changes in greater detail, starting with the Tax Rate on Owners of Pass-through Entities, followed by New Rules for Writing Off Equipment and Vehicles.
Starting in 2018 (except where otherwise noted), the following rules are changed:
- Tax rates. The top tax rate on C corporations drops to a flat 21% (down from 35%); graduated rates are eliminated. Owners of pass-through entities pay tax at their individual tax rates, all of which have decreased slightly, but there is a 20% deduction of business income. There are numerous restrictions on this deduction that come into play when income exceeds set limits. The deduction does not reduce business income or adjusted gross income; it’s taken into account in figuring taxable income.
- Accounting method. Eligibility rules for using the cash method of accounting have been expanded so that businesses with average annual gross receipts in the 3 prior years not exceeding $25 million (indexed for inflation after 2018) do not have to use the accrual method; they do not have to keep inventories (i.e., they can treat inventories as non-incidental materials and supplies).
- Expensing and bonus depreciation. The Section 179 deduction (first-year expensing) can be claimed for eligible property up to $1 million. The phase-out of this limit begins when total annual purchases exceed $2.5 million. These dollar limits, as well as the $25,000 limit for buying a heavy SUV, will be indexed for inflation after 2018. Bonus depreciation, which is a first-year depreciation allowance for buying business equipment and machinery, is doubled to 100% for property placed in service after September 27, 2017, but only temporarily. The dollar limits on depreciating a so-called “luxury vehicle” have been favorably changed.
- Interest deduction. Generally, a deduction for interest is limited to 30% of a corporation’s income, with unused amounts carried forward. But this restriction does not apply to small businesses (average annual gross receipts of $25 million or less).
- Net operating loss. The NOL carryback is eliminated, except for a carryback for certain losses incurred in the trade or business of farming. The carryforward is capped at 80% of taxable income (90% after 2022) or the carryover amount if less.
- Like-kind exchanges. Tax-free treatment for exchanges is limited to exchanges of realty; it no longer applies to exchanges of tangible personal property.
- T&E expenses. The deduction for an entertainment activity is repealed, although the 50% deduction for business meals remains. Also the deduction for transportation fringe benefits has been eliminated, but employees can continue to exclude them from gross income if employers still offer them.
- Section 199 deduction. The qualified domestic production activities deduction is repealed.
- Credit for paid family leave. There is a new credit for employers that pay wages to employees on family or medical leave. This new credit only applies for 2018 and 2019.
- Opportunity zones. Special tax incentives apply for investments in designated “opportunity zones.” These designations will be made later.
- Technical terminations of partnerships. This rule is repealed. Of course, a termination continues to occur if no part of any business, financial operation, or venture of the partnership continues to be carried on.
What isn’t changed
Many tax rules remain the same. These include:
- Work opportunity credit (which the House bill had wanted to repeal)
- Rules for qualified retirement plans
- 100% exclusion on the sale of qualified small business stock
This list doesn’t contain all the provisions in the new law. In the coming days and months, there’s sure to be more clarification of the provisions listed here and others. One very important thing for employers to watch for: new withholding tables for 2018 that put the individual income tax cuts into effect. It’s not clear how quickly the IRS can get these out, so it may be February before you’re required to implement them.