Tax Bill Changes for Corporations
The 2017 GOP tax bill just passed by congress and signed into law by the president, has many significant changes for corporations. The changes are effective January 1, 2018. Here are some of the aspects of the new law that will affect many corporate taxpayers.
Prior to January 1, 2018, the corporate tax rate is a graduated rate. The lowest rate is 15% for taxable income up to $50,000. The top corporate tax rate is 38% for income over $15 million.
Beginning January 1, 2018, the corporate tax rate is going to be a fixed rate of 21% for all income levels. This obviously presents large savings in federal income tax for corporations earning at the level of the prior highest brackets.
Corporate alternative minimum tax (AMT) is repealed.
In prior years, there has been a provision for bonus depreciation up to 50%. This was to be phased out. With the new tax bill, the allowable bonus depreciation will be 100% starting in 2018 and up to 2022. In 2023, it will be 80%, 2024 will have 60%, 2025, will have 40%, 2026 will have 20%.
Most importantly, bonus depreciation was available for only new property. Now, it will be available for used property also.
Section 179 maximum is increased to $1 million, up from $500,000. The phaseout threshold is increased to $2.5 million from
The act also expanded the definition of Sec. 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. It also expanded the definition of qualified real property eligible for Sec. 179 expensing to include any of the following improvements to nonresidential real property: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
Cash method of accounting
More corporate taxpayers are eligible to use the cash method of accounting now.
Farming C corporations (or farming partnerships with a C corporation partner) will be allowed to use the cash method if they meet the $25 million gross-receipts test.
The current-law exceptions from the use of the accrual method otherwise remain the same, so qualified personal service corporations, partnerships without C corporation partners, S corporations, and other passthrough entities continue to be allowed to use the cash method without regard to whether they meet the $25 million gross-receipts test, so long as the use of that method clearly reflects income.
Corporations that meet the cash-method $25 million gross-receipts test will not be required to account for inventories under Section 471 of the Internal Revenue Code (General rule for inventories). Instead, they will be allowed to use an accounting method that either treats inventories as non-incidental materials and supplies, or conforms to their financial accounting treatment of inventories.
Interest deduction limitation
The deduction for business interest is limited to the sum of business interest income (if any) plus 30% of the adjusted taxable income for the tax year; and (3) the taxpayer’s floor plan financing interest for the tax year. Any disallowed business interest deduction can be carried forward indefinitely (with certain restrictions for partnerships).
Any taxpayer that meets the $25 million gross-receipts test is exempt from the interest deduction limitation. The limitation will also not apply to any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.
Farming businesses are allowed to elect out of the limitation.
For these purposes, business interest means any interest paid or accrued on indebtedness properly allocable to a trade or business. Business interest income means the amount of interest includible in the taxpayer’s gross income for the tax year that is properly allocable to a trade or business. However, business interest does not include investment interest, and business interest income does not include investment income, within the meaning of Sec. 163(d).
Floor plan financing interest means interest paid or accrued on indebtedness used to finance the acquisition of motor vehicles held for sale or lease to retail customers and secured by the inventory so acquired.
Net operating losses:
The act limits the deduction for net operating losses (NOLs) to 80% of taxable income (determined without regard to the deduction) for losses. (Property and casualty insurance companies are exempt from this limitation.)
Taxpayers are allowed to carry NOLs forward indefinitely. The two-year carryback and special NOL carryback provisions were repealed. However, farming businesses are still allowed a two-year NOL carryback.
Under the act, like-kind exchanges under Sec. 1031 will be limited to exchanges of real property that is not primarily held for sale. This provision generally applies to exchanges completed after Dec. 31, 2017. However, an exception is provided for any exchange if the property disposed of by the taxpayer in the exchange was disposed of on or before Dec. 31, 2017, or the property received by the taxpayer in the exchange was received on or before that date.
Domestic production activities
The act repealed the Sec. 199 domestic production activities deduction.
The act disallows a deduction for (1) an activity generally considered to be entertainment, amusement, or recreation; (2) membership dues for any club organized for business, pleasure, recreation, or other social purposes; or (3) a facility or portion thereof used in connection with any of the above items.
Qualified transportation fringe benefits
The act disallows a deduction for expenses associated with providing any qualified transportation fringe to employees of the taxpayer and, except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment.
Under the act, taxpayers are still generally able to deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). For amounts incurred and paid after Dec. 31, 2017, and until Dec. 31, 2025, the act expands this 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer. Such amounts incurred and paid after Dec. 31, 2025, will not be deductible.
Amortization of research and experimental expenditures
Under the act, amounts defined as specified research or experimental expenditures must be capitalized and amortized ratably over a five-year period. Specified research or experimental expenditures that are attributable to research that is conducted outside of the United States must be capitalized and amortized ratably over a 15-year period.
Year of inclusion: The act requires accrual-method taxpayers subject to the all-events test to recognize items of gross income for tax purposes in the year in which they recognize the income on their applicable financial statement (or another financial statement under rules to be specified by the IRS). The act provides an exception for taxpayers without an applicable or other specified financial statement.
Modifications of Treatment of Certain Farm Property
The act shortens the recovery period from 7 to 5 years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which begins with the taxpayer and is placed in service after December 31, 2017.
The act also repeals the required use of the 150-percent declining balance method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property). The 150-percent declining balance method will continue to apply to any 15-year or 20-year property used in the farming business to which the straight line method does not apply, or to property for which the taxpayer elects the use of the 150-percent declining balance method.
The provision is effective for property placed in service after December 31, 2017.
There are many other provisions for businesses in the 500 pages of the act just signed into law. If you have questions about how the tax law will affect your business, please contact us and we will be happy to answer your questions.