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2018 Tax Law Changes- Business Provisions

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Business Provisions

  • Lower the top corporate tax rate from 35% to a flat 21% (the same flat rate applies to personal service corporations).
  • Eliminates the corporate alternative minimum tax.
  • The dividend received deductions will be reduced to 50% from the current 70% and 65% from the current 80%. This change is to account for the reduced corporate rate.
  • Allows immediate expensing of 100% of the cost of new investments in depreciable assets acquired after September 27, 2017, and before January 1, 2023. (The placed-in-service date will be extended for one year for property with a longer production period).
    • Unlike the present bonus depreciation rules, the asset does not have to be new property; however, it must be the business taxpayer's first use of such property.
    • Qualified property does not include any property used in a real property trade or business.
  • Section 179 expensing is increased to $1 million for years 2018 to 2022. A phase-out of the Section 179 benefit will begin when the purchases exceed $2.5 million. (Qualified energy efficient heating and air conditioning property will be included as Section 179 property).
  • The Senate proposal to reduce the cost recovery periods of residential and non-residential property to 25 years was not adopted. These remain at 27.5 and 39 years, respectively. However, the recovery period for qualified improvement property is set at 15 years. The separate definitions of qualified leasehold improvement, qualified restaurant and qualified retail improvement property are eliminated.
  • Caps will be placed on write offs of business use vehicles. The new caps will be $10,000 for the first year a vehicle is placed into service, (presently, $3,160).
  • Every business, regardless of form, would be subject to disallowance of a deduction for net interest expense in excess of 30% of the business' adjusted taxable interest. Net interest expense is determined at the tax filer level (e.g., the partnership versus the partner). Adjusted taxable income is business taxable income without regard to business interest expense, business interest income, net operating losses, depreciation, amortization and depletion. Disallowed interest under this rule becomes an indefinite carryover as an attribute of the business (not its owners). Businesses with average gross receipts of $25 million or less would be exempt from the interest limitation rules. (There is also an election for real estate trade or businesses to elect out of this limitation, but the cost is that use of the Alternative Depreciation System is required).
  • Eliminate the deduction under Internal Revenue Code § 199 for domestic production (DPAD).
  • Net Operating Losses (NOLs) would generally not be eligible for a carryback. However, any carryover can be used only to the extent of 80% of taxable income. This rule will apply to losses arising in tax years beginning after December 31, 2017. Additionally, the carryforward period will be indefinite.
  • Research and Development (R&D) costs are subject to potential change. While the R&D credit is retained; for tax years 2022 and later, R&D expenses will not be subject to immediate write-off, but will be subject to mandatory five-year amortization (15 years for research outside of the US). On retirement, abandonment or disposition of property, the unamortized basis will continue to be written off over the balance of the amortization period.
  • After 2017, like-kind exchanges will apply only to real property, not held for sale, subject to a transition rule allowing for an exchange for personal property if there is a disposition of relinquished property or acquisition of replacement property by December 31, 2017.
  • No deduction will be allowed for entertainment, amusement or recreation activities facilities, or membership dues relating to such activities or other social purposes. However, the current deduction for business meals (subject to the 50% limitation) will be retained.
  • Section 162(m) related to limitations on deductions for compensation to executives has been modified. The exception to the $1 million compensation limit for executives of publicly traded companies for commission and performance-based compensation, will be repealed effective for years beginning after December 31, 2017.
  • Corporations and partnerships with corporate partners with average gross receipts of up to $25 million (indexed for inflation) are allowed to use the cash method of accounting. Existing corporation that meet this gross receipts threshold can automatically change their accounting method.

Observations

A key element of tax reform was to change the corporate tax rate so as to make U.S. corporations more competitive with those in foreign jurisdictions. This is accomplished by setting a flat 21% rate for regular corporations for tax years beginning after 2017. The law provides no special rate for personal service corporations, which will now be subject to the same 21% corporate rate.

The corporate AMT is repealed. Corporations will be allowed to use certain tax benefits to effectively pay below the new 21% rate.

Based on the above summary, many current business benefits will face repeal, but the framework specifically retains the R&D Credit, the Work Opportunity Tax Credit, the New Markets Tax credit, a revised Rehabilitation Tax Credit and the Low-Income Housing Tax Credit.

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