The following are the major changes that have been introduced in the Tax Cuts and Jobs Act signed by President Trump on December 22, 2017, effective for the 2018 tax year:
Corporation Tax Rate Reduced to 21%
The graduated tax rate schedule for corporations has been eliminated for tax years ending after December 31, 2017, and a flat rate of 21% tax applies to all corporations, including personal service corporations.
Dividend Received Deduction
For tax years beginning after December 31, 2017, the 70-percent dividends-received deduction is reduced to 50 percent and the 80-percent dividends-received deduction is reduced to 65 percent.
Corporation Alternative Minimum Tax (AMT)
The AMT for corporations has been eliminated, and any unused minimum tax may be used to offset regular tax liability for any year.
Passthrough Deduction for Qualified Business Income
A deduction of 20% of domestic qualified business income is available to individuals with passthrough income from a partnership, S corporation or sole proprietorship.
There is a new limitation based on wages paid plus a capital element with income above a threshold amount.
This deduction is not available to businesses which:
- provide services in the fields of accounting, actuarial science, athletics, brokerage services, consulting, financial services, health, law, or the performing arts; or
- that involves the performance of services consisting of investing and investment management, trading, or dealing in securities, partnership interests, or commodities; or
- whose principal asset is the reputation or skill of one or more of its employees or owner.
S Corporation Conversions to C Corporations
When an S corporation converts to a C corporation, any distributions for a one year period are treated as if they were S corporation distributions. The corporation's accumulated adjustment account determines the tax effect of distributions when the corporation has earnings and profits. Distributions from a terminated S corporation are treated as paid rom the accumulated adjustment account if made during the post termination transition period.
Section 179 Deduction
The section 179 deduction is increased to $1 Million, and the investment limitation has been increased to $2.5 million. Certain non residential real property improvements may be elected to be included.
For business property placed in service between September 27, 2017 and Jan 1, 2023, a 100% expense is allowed. This allowance will decrease by 20% per year for taxable years beginning in 2022 and expires January 1, 2017. The new law no allows expensing for certain film, television and live theatrical productions and used qualified property.
Luxury passenger vehicle depreciation limts, where bonus depreciation is not claimed are now:
- $10,000 in the first year;
- $16,000 in the second year;
- $9,600 in the third year; and
- $5,760 for each year thereafter.
If 100% bonus depreciation is claimed, the greatest first year depreciation is $18,000 with the same as above for later years.
Limits for Deduction of Meals & Entertainment Expenses
Deductions for meals and entertainment have been largely eliminated, with the exception that corporations can continue to deduct 50% of the cost of business meals if an employee of the business is present and the food and beverages are not considered extravagant. The food and beverages must be purchased separately from any entertainment, and must be provided to a current or potential business customer or contact.
Limits on Deduction for Business Interest Expenses
Business interest expense is limited to net interest income plus 30% of the business's adjusted taxable income and floor-plan financing income. Some businesses can elect out of this limit, and disallowed interest expenses may be carried forward indefinitely.
Like Kind Exchanges
Like kind exchange treatment is now limited to exchanges of business investment real property for other business investment real property. Personal property and other assets no longer qualify. A rental property or vacation rental may qualify if it was rented out for at least two weeks in each of the two years prior to the exchange, and the new property is also rented out for at least two weeks in each of the two years after the exchange.
Payments Made in Sexual Harassment or Abuse Cases
No deduction is allowed for payments made to settle sexual harassment or sexual abuse cases.
Payments for Local Lobbying Expenses
Payments for lobbying of any type are disallowed as deductions.
New Employer Credit for Family and Medical Leave
A new tax credit of 12.5% to 25% (depending on the percentage of wages paid during leave) is now available to employers who offer paid family and medical leave for their employees.
Cash Basis Method of Accounting Expanded
Taxpayers with average annual gross receipts of $25 million or less (up from $5 million under the former law) may now use the cash method of accounting for tax years beginning after December 31, 2017. This greatly increases the number of businesses which are eligible to use the cash method of accounting.
This is a summary of changes in the Tax Cuts and Jobs Act affecting corporations. For a summary of changes affecting individual returns, please click here.