The Tax Cuts and Jobs Act became law on December 22, 2017, with most provisions taking effect on January 1, 2018. While much of the discussion regarding the new tax law has focused on changes that impact individuals, there are many changes coming for businesses as well. Some of these changes will be seen at the entity level, while others will be reflected on the personal returns of owners of pass through entities.
Tax Due Dates
Remember, with the passage of the “Surface Transportation and Veteran’s Health Care Choice Improvement Act of 2015,” tax return due dates have changed for certain types of entities:
- Due March 15, 2018
o Partnerships – filing calendar year Form 1065
o S-Corporations – filing calendar year Form 1120S
- Due April 17, 2018
o C-Corporations – filing calendar year Form 1120
The Tax Cuts and Jobs Act eliminated the graduated corporate rate structure and decreased the income tax rate for businesses significantly from 35% to 21%. Under the new tax legislation, corporate taxable income will be taxed at a flat rate of 21% for tax years beginning after December 31, 2017.
Section 179 allows for the full expensing of new and used equipment, as well as purchased “off-the-shelf” software. The deduction was previously aimed at small to mid-sized businesses as the deduction was capped at $500,000 (and phased out as total purchases exceed $2.0 million). The Tax Cuts and Jobs Act increases the limit significantly to $1 million and raises the phase out threshold from $2 million to $2.5 million, making this deduction available to more businesses. Businesses who exclusively used bonus depreciation in the past might now be eligible to expense under Section 179 and should consider this moving forward.
Bonus depreciation is a valuable tax-saving tool for businesses as it allows for an immediate first-year deduction on the purchase of new equipment with no phase out restrictions. Bonus depreciation was at 50% in 2017. The Tax Cuts and Jobs Act increases bonus depreciation to 100% for property acquired and placed in service after September 27, 2017 and before 2023 and will be gradually phased out to zero. Bonus depreciation was also expanded to include purchases of used equipment.
Pass Through Income Deduction
Under prior law, pass through income from a trade or business was generally taxed at the owner’s ordinary income tax rate. While the Tax Cuts and Jobs Act did not create a preferential rate for pass through income, it does provide for up to a 20% deduction of qualified business income from pass through entities (partnership, S corporation, or sole proprietorship).
Net Operating Losses (NOLs)
Under prior law, NOLs could be carried back two years and carried forward 20 years. Under the new law, NOLs can no longer be carried back. However, NOLs will now have an indefinite carry forward period. The NOL deduction in any year will be limited to 80% of taxable income.
Deduction for Net Interest Expense
There had not previously been a limit to the amount of interest expense that a business could deduct. The Tax Cuts and Jobs Act limits the deduction for interest expense to 30% of adjusted taxable income, with an indefinite carryover of disallowed amounts. Small businesses with average gross receipts of $25 million or less are not subject to this restriction.
Prior law allowed a 50% deduction for most entertainment expenses. The Tax Cuts and Jobs Act eliminates this deduction.
There are significant changes coming in 2018 with the passing of the Tax Cuts and Jobs Act. If you need assistance interpreting these changes and analyzing how they will impact your business, please contact your L&B Professional at (858) 558-9200.