One of the most significant revisions to the Internal Revenue Code (IRC) in more than 30 years was enacted when President Donald Trump signed the legislation known as the Tax Cuts and Jobs Act (TCJA) on December 22, 2017. Many provisions included in the TCJA took effect on January 1, 2018, and affect virtually all U.S. taxpayers, including individuals, businesses, exempt organizations and trusts and estates. Here’s a summary of relevant TCJA provisions that may impact businesses.
Reduced Corporate Tax Rates
Graduated tax rates with a top corporate tax rate of 35 percent were replaced with a significantly reduced flat corporate tax rate of 21 percent, effective January 1, 2018. In addition, the TCJA repealed the corporate alternative minimum tax for tax years beginning after December 31, 2017. Pre-TCJA minimum tax credits were made refundable from 2018 through 2021. For the 2018–2020 tax years, 50 percent of the excess of the credit over the amount of the credit allowable for the tax year against the regular tax liability will be refundable. Any remaining credit will be 100 percent refundable in 2021.
Qualified Business Income (QBI) Deduction
The QBI deduction created by new IRC Section 199A provides a deduction of 20 percent of domestic QBI from a partnership, S corporation or sole proprietorship. See this QBI deduction assessment to learn more about this deduction, including limitations that apply once your 2018 taxable income exceeds $157,500 for single filers ($315,000 married filing jointly).
Net Operating Loss (NOL)
Under prior tax law, NOLs generally were carried back two years and forward 20. Historic NOLs also could offset all taxable income, if not subject to specific limitations, which eliminated regular tax liability.
Losses generated after December 31, 2017, can’t be carried back but carry forward indefinitely. Losses arising in tax years beginning after December 31, 2017, also are subject to an 80 percent limitation on taxable income; pre-TCJA losses aren’t subject to this limitation. The American Institute of CPAs has requested a technical correction to have the effective date of NOL provisions be updated to read as “taxable years beginning after December 31, 2017,” to provide fairness to fiscal-year taxpayers.
Historical and amended NOLs should be tracked separately to verify proper treatment when offsetting taxable income. Further guidance also is needed related to offsetting taxable income with both historical and amended NOLs.
Business-Related Deductions & Other Provisions
Capital Recovery Provisions – Immediate expensing of fixed assets is achievable through both bonus depreciation and IRC §179. The eligible bonus percentage increased to 100 percent for qualifying property placed in service after September 27, 2017, through December 31, 2022. The TCJA also provides for $1 million of assets to be expensed under §179 (beginning in 2018) with a phase-out amount of $2.5 million. Learn more in our article “Cost Recovery & Luxury Automobile Rules.”
Meals & Entertainment – The TCJA repealed the deduction for entertainment, amusement or recreation activities; however, the deduction for qualified meal expenses remains, subject to the same 50 percent limitation. Meals provided for employees on employer premises also are subject to the 50 percent limitation. Read this article for details on these changes and best practices for tracking these amounts.
Net Business Interest Expense – The TCJA generally limited the deduction for net business interest expense—for all but certain small businesses and specified trades or businesses—to 30 percent of the entity’s adjusted taxable income. Adjusted taxable income excludes any of the following:
- Income, gain, deduction or loss that’s not properly allocable to a trade or business
- Any business interest expense or business interest income
- Any NOL deduction
- QBI deduction
- For tax years before January 1, 2022, any deduction allowable for depreciation, amortization or depletion
Additional planning related to the calculation of the limitation, floor planning interest and determining businesses excluded or eligible to elect out of the limitation should be discussed with your tax advisor.
The TCJA’s international provisions move the U.S. into a territorial tax system with base erosion provisions, a change from the previous worldwide tax system. To make this transition, the TCJA also provides for the deemed repatriation of deferred foreign profits at a rate of 15.5 percent for cash or cash equivalents (8 percent otherwise) that’s payable over eight years. Other key international tax provisions of the TCJA include global intangible low-taxed income, foreign-derived intangible income and the base erosion anti-abuse tax. See the International Tax article(s) and contact your trusted BKD tax advisor for more on the international tax provisions.
State conformity (or nonconformity) to these and other federal TCJA provisions varies by state and also will play a role in how the TCJA will affect your business. Find out more with our State Tax article(s).
Guidance from the U.S. Department of the Treasury and the IRS is needed to implement several aspects of the changes under the TCJA. Stay up to date and learn more about the TCJA with BKD’s Tax Reform Resource Center. Despite the need for guidance, now’s still a good time for tax planning. Contact Brittany or your trusted BKD tax advisor for more information as we close out 2018.