New 2018 Tax Law’s Business Tax Changes
President Donald Trump signed the new 2018 tax law “Tax Cuts & Jobs Act” (TCJA) last week. The new TCJA law is a sweeping overhaul of the tax code. Generally, the provisions in the TCJA take effect on January 1, 2018. The majority of business provisions are permanent. The reform affects taxes for the 2018 year and beyond, starting with tax returns that must be filed by April 2019.
This article describes key business tax changes that are made under the Act, including a reduction in the corporate tax rate to a flat 21% rate; an increase in expensing to $1 million; a temporary 100% first year qualifying business asset deduction; a 5-year write-off period for R&D expenses; a limitation on the deduction for business interest, and elimination of the domestic production activities deduction.
The following is a summary on some of the Business Tax changes:
- Corporate tax rates: The corporate tax rate structure, which features a top rate of 35%, is replaced with a flat 21% rate.
- Pass-through entities: Under the new law, pass-through entities — such as partnerships, S corporations, limited liability companies (LLCs) and sole proprietors — can claim a 20% deduction on earnings, subject to special rules restrictions. The deduction is not available to higher-income personal service providers.
- Section 179 deduction: The new law doubles the maximum Section 179 “expensing” allowance from $500,000 to $1 million. It also increases the phaseout threshold for Section 179 deductions from $2 million to $2.5 million.
- Bonus depreciation: Similarly, the new law doubles the first-year “bonus depreciation deduction” from 50% to 100%, but phases it out after five years. The deduction generally won’t be available after 2026.
- Luxury car rules: The new law raises the caps on depreciation deductions allowed under the “luxury car” rules for passenger vehicles for which bonus depreciation is not claimed.
- Section 199 deductions: The new law repeals the deduction for qualified domestic production activities previously allowed under Section 199 of the tax code.
- Corporate AMT: Unlike the individual AMT, the corporate version of the AMT is completely repealed.
- Entertainment deductions: The deduction for business-related entertainment is repealed. Businesses can still generally deduct 50% of the cost of qualified meals.
- Interest deductions: Deductions for business interest expenses are capped at 30% of AGI, subject to certain special rules. However, a small business with average gross receipts of $15 million or less for the past three years is exempt.
- Foreign taxes: A one-time repatriation tax of 15.5% for liquid assets and 8.0 percent for illiquid assets is imposed on earnings from overseas. Furthermore, a complex new system for international taxation is being implemented.