In a follow up to our “Tax Reform Reminders for Individuals in 2019” article from May, this article addresses some provisions of the Tax Cuts and Jobs Acts (TCJA) that are important for small and medium-sized businesses. Corporations, S Corporations, partnerships (including limited liability companies) and sole proprietorships all have some impactful implications from the TCJA. Here are a few reminders of changes affecting businesses for the 2019 tax year.
Corporate Tax Provisions
Change in Tax Rate
First and foremost, the TCJA lowers the corporate tax rate to a flat 21% of taxable income for tax years beginning after December 31, 2017.
Repeal of Alternative Minimum Tax
We also see the repeal of the corporate Alternative Minimum Tax (AMT). For some corporations a tax credit will be available for AMT that was paid in years prior to 2018. A refundable credit will be allowed to offset tax liability for tax years beginning after 2017 and before 2022. Taxpayers can take 50 percent of the minimum tax credit against their tax liability. They are entitled to the remainder of the full corporation minimum tax credit (100%) in tax years beginning in 2021.
Qualified Business Income Deduction
A new deduction will be available to many sole proprietors, partners in partnerships, beneficial owners of trusts, and shareholders in S corporations. This was enacted to provide tax relief to businesses that do not operate as C corporations. The Qualified Business Income Deduction (QBID), allows those eligible up to a 20 percent deduction of qualified business income, with a few thresholds in place, for tax years beginning after December 31, 2017. The QBID replaced the IRC Section 199 domestic production activities deduction with the anticipation of being available to a broader base of taxpayers.
Another big item is the increase in Bonus Depreciation from 50% to 100% for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. This means fully expensing certain assets. While this does allow used property to take advantage of bonus depreciation for the first time (assuming it was not acquired from a related party or component member of a controlled group of corporations), it is limited to not include qualified improvement property.
Taxpayers may still elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The TCJA increased the maximum deduction from $500,000 to $1 million and it increased the amount at which the deduction begins to phase out from $2 million to $2.5 million. These numbers will be further adjusted for inflation for taxable years after 2018.
Section 179 expensing is further modified by allowing taxpayers to include certain improvements to nonresidential real property. This includes most improvements to a building’s interior, roofs, and systems for heating, air conditioning, security, and fire protection.
Net Operating Loss Deduction
If a business incurs a net operating loss (NOL) during the year they no longer must worry about the carryforward of the loss expiring after 20 years. However, two new stipulations arise. No longer is the two-year carryback an option and for those years that a carryforward is used, the NOL deduction is limited to 80% of taxable income. Previously the NOL deduction could offset 100% of taxable income. An exception to the carryback rule applies for farms and certain insurance companies.
The TCJA now limits like-kind exchange treatment only to certain exchanges of real property. To qualify, the taxpayer must hold the real property for productive use in a trade or business or investment. All other tangible and intangible property is now ineligible for like-kind exchange treatment. Keep this in mind when you exchange vehicles, equipment, or other items as they may trigger taxable gains or losses. Real property held primarily for sale continues to be ineligible for like-kind exchange treatment.
Meals and Entertainment Deduction
Maybe we should just start calling this one the meals deduction. The TCJA generally eliminated the deduction for expenses related to entertainment, amusement, or recreation. The taxpayer can still deduct 50% of the cost of business meals with current or potential business customers, clients, consultants or similar business contacts.
Be careful with meals provided during entertainment events. For the food and beverage portion to be considered deductible, they must be purchased separately from the entertainment. Make sure to get separate receipts, invoices or bills when incurring these costs.
Designed to encourage tax-favored investments in distressed communities throughout the US and its territories, opportunity zones are a unique economic development tool. Investments in these zones through the use of Qualified Opportunity Funds (QOF) provides certain investment benefits. The QOF must be either a corporation or partnership that is organized for the purpose of investing in eligible property in designated Qualified Opportunity Zones. Capital gains raised through a QOF will realize such benefits as: 1) Deferred recognition of gains invested in a QOF until the date the investment is sold or exchanged, or December 31, 2026, 2) Through basis step-up, a 10% exclusion of deferred gain after five years, which grows to 15% after seven years. 3) Elimination of tax on gain from the sale of the investment if held for ten years.
Certain recordkeeping requirements must be met to provide proof of basis and eligibility for both the corporation or partnership that sets up the QOF and the investors. See Notice 2018-48 for a list of designated Qualified Opportunity Zones.
Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your situation. The professionals at Gilliam Coble and Moser, LLP have the tools and experience necessary to guide you through the myriad of tax law changes, so contact us today!