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Last time, we posted about getting your business prepared for the new tax law known as the Tax Cuts and Jobs Act (TCJA) in order to avoid penalties. We know it was a lot of overwhelming information, which is often the case with sweeping changes to tax laws.
This time, we hope to simplify matters a wee bit by providing side-by-side comparisons to help businesses better understand the changes created by the TCJA. The TCJA changed deductions, depreciation, expensing, tax credits, and other tax items affecting businesses. The table compares the tax laws in 2017 compared to the changes created by the TCJA. We hope this comparison table helps you plan accordingly.
If you are looking for a particular tax topic related to your small business, just look for the topic in the left column and read across to learn about the changes.
As always the tax professionals at Tax Help Advisors, LLC are available to assist you in assuring you and your business are in compliance with the changes.
If you need further assistance, contact our office or call 704-912-4002 to schedule a consultation regarding changes created by the TCJA.
Changes to deductions, depreciation and expensing may affect a taxpayer’s business taxes.
|Deductions||2017 Law||What changed under TCJA|
|New deduction for qualified business income of pass-through entities||No previous law for comparison. This is a new provision.||This new provision, also known as Section 199A, allows a deduction of up to 20% of qualified business income for owners of some businesses. Limits apply based on income and type of business.|
|Limits on deduction for meals and entertainment expenses||A business can deduct up to 50% of entertainment expenses directly related to the active conduct of a trade or business or incurred immediately before or after a substantial and bona fide business discussion.||The TCJA generally eliminated the deduction for any expenses related to activities considered entertainment, amusement or recreation. However, under the new law, taxpayers can continue to deduct 50% of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact. If provided during or at an entertainment activity, the food and beverages must be purchased separately from the entertainment, or the cost of the food or beverages must be stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
|New limits on deduction for business interest expenses||The deduction for net interest is limited to 50% of adjusted taxable income for firms with a debt-equity ratio above 1.5. Interest above the limit can be carried forward indefinitely.||The change limits deductions for business interest incurred by certain businesses. Generally, for businesses with 25 million or less in average annual gross receipts, business interest expense is limited to business interest income plus 30% of the business’s adjusted taxable income and floor-plan financing interest
There are some exceptions to the limit, and some businesses can elect out of this limit. Disallowed interest above the limit may be carried forward indefinitely, with special rules for partnerships.
|Changes to rules for like-kind exchanges||Like-kind exchange treatment applies to certain exchanges of real, personal or intangible property.||Like-kind exchange treatment now applies only to certain exchanges of real property.
|Payments made in sexual harassment or sexual abuse cases||No previous law for comparison. This is a new provision.||No deduction is allowed for certain payments made in sexual harassment or sexual abuse cases.|
|Changes to deductions for local lobbying expenses||Although lobbying and political expenditures are generally not deductible, a taxpayer can deduct payments related to lobbying local councils or similar governing bodies.||TCJA repealed the exception for local lobbying expenses. The general disallowance rules for lobbying and political expenses now apply to payments related to local legislation as well.|
|Depreciation||2017 Law||What changed under TCJA|
|Temporary 100 percent expensing for certain business assets||Certain business assets, such as equipment and buildings, are depreciated over time.
Bonus depreciation for equipment, computer software, and certain improvements to nonresidential real property allows an immediate deduction of 50% for equipment placed in service in 2017, 40% in 2018, and 30% in 2019.
Long-lived property generally is not eligible. The phase down is delayed for certain property, including property with a long production period.
|TCJA temporarily allows 100% expensing for business property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023.
The 100% allowance generally decreases by 20% per year in taxable years beginning after 2022 and expires Jan. 1, 2027.
The law now allows expensing for certain film, television, and live theatrical productions, and used qualified property with certain restrictions.
|Changes to rules for expensing depreciable business assets (section 179 property)||A taxpayer can expense the cost of qualified assets and deduct a maximum of $500,000, with a phaseout threshold of $2 million.
Generally, qualified assets consist of machinery, equipment, off-the-shelf computer software and certain improvements to nonresidential real property.
|TCJA increased the maximum deduction to $1 million and increased the phase-out threshold to $2.5 million.
It also modifies the definition of section 179 property to allow the taxpayer to elect to include certain improvements made to nonresidential real property.
|Changes to depreciation of luxury automobiles||There are limits on depreciation deductions for owners of cars, trucks, and vans.||TCJA increased depreciation limits for passenger vehicles. If the taxpayer doesn’t claim bonus depreciation, the greatest allowable depreciation deduction is:
If a taxpayer claims 100% bonus depreciation, the greatest allowable depreciation deduction is $18,000 for the first year and the same as above for later years.
|Changes to listed property||Computers and peripheral equipment are categorized as listed property. Their deduction and depreciation are subject to strict substantiation requirements.||TCJA removes computer or peripheral equipment from the definition of listed property.|
|Changes to the applicable recovery period for real property||The General Depreciation System (GDS) and the Alternative Depreciation System (ADS) of the Modified Accelerated Cost Recovery System (MACRS) provide that the capitalized cost of tangible property is recovered over a specified life by annual deductions for depreciation.||The general depreciation system recovery periods are still 39 years for nonresidential real property and 27.5 years for residential rental property. The alternative depreciation system recovery period for nonresidential real property is still 40 years. However, TCJA changes the alternative depreciation system recovery period for residential rental property from 40 years to 30 years. Qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are no longer separately defined and given a special 15-year recovery period under the new law.|
For businesses that have employees, there are changes to fringe benefits and a new tax credit that can affect a business’s bottom line.
|Fringe benefit||2017 law||What changed under TCJA|
|Suspension of the exclusion for qualified bicycle commuting reimbursements||Up to $20 per month in employer reimbursement for bicycle commuting expense is not subject to income and employment taxes of the employee.||Under TCJA, employers can deduct qualified bicycle commuting reimbursements as a business expense.
Employers must now include 100% of these reimbursements in the employee’s wages, subject to income and employment taxes.
|Suspension of exclusion for qualified moving expense reimbursements||An employee’s moving expense reimbursements are not subject to income or employment taxes.||Under TCJA, employers must include moving expense reimbursements in employees’ wages, subject to income and employment taxes. Generally, members of the U.S. Armed Forces can still exclude qualified moving expense reimbursements from their income.|
|Prohibition on cash, gift cards, and other non-tangible personal property as employee achievement award||Employers can deduct the cost of certain employee achievement awards. Deductible awards are excludable from employee income.||Special rules allow an employee to exclude certain achievement awards from their wages if the awards are tangible personal property. An employer also may deduct awards that are tangible personal property, subject to certain deduction limits. TCJA clarifies that tangible personal property doesn’t include cash, cash equivalents, gift cards, gift coupons, certain gift certificates, tickets to theater or sporting events, vacations, meals, lodging, stocks, bonds, securities, and other similar items.|
|Tax Credit||2017 law||What changed under TCJA|
|New employer credit for paid family and medical leave||No previous law for comparison. This is a new provision.||The TCJA added a new tax credit for employers that offer paid family and medical leave to their employees.
The credit applies to wages paid in taxable years beginning after December 31, 2017, and before January 1, 2020.
The credit is a percentage of wages (as determined for Federal Unemployment Tax Act (FUTA) purposes and without regard to the $7,000 FUTA wage limitation) paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. The percentage can range from 12.5% to 25%, depending on the percentage of wages paid during the leave.
|Business structure topic||2017 law||What changed under TCJA|
|Changes to cash method of accounting for some businesses||Small business taxpayers with average annual gross receipts of $5 million or less in the prior three-year period may use the cash method of accounting.||The TCJA allows small business taxpayers with average annual gross receipts of $25 million or less in the prior three-year period to use the cash method of accounting. The law expands the number of small business taxpayers eligible to use the cash method of accounting and exempts these small businesses from certain accounting rules for inventories, cost capitalization, and long-term contracts. As a result, more small business taxpayers can change to cash method accounting starting after Dec. 31, 2017.|
|Changes regarding conversions from an S corporation to a C corporation||In the case of an S corporation that converts to a C corporation:
||The TCJA makes two modifications to existing law for a C corporation that (1) was an S corporation on Dec. 21, 2017 and revokes its S corporation election after Dec. 21, 2017, but before Dec. 22, 2019, and (2) has the same owners of stock in identical proportions on the date of revocation and on Dec. 22, 2017.
The following modifications apply to these entities:
|Topic||2017 law||What changed under TCJA|
|Changes to the rehabilitation tax credit||Owners of certified historic structures were eligible for a tax credit of 20% of qualified rehabilitation expenditures.
Owners of pre-1936 buildings were eligible for a tax credit of 10% of qualified rehabilitation expenditures.
|TCJA keeps the 20% credit for qualified rehabilitation expenditures for certified historic structures but requires that taxpayers take the 20% credit over five years instead of in the year they placed the building into service.
The 10% credit for pre-1936 buildings is repealed under TCJA.
|Topic||2017 law||What changed under TCJA|
|Opportunity Zones||No previous law for comparison. This is a new provision.||Investments in Opportunity Zones provide tax benefits to investors. Investors can elect to temporarily defer tax on capital gains that are reinvested in a Qualified Opportunity Fund (QOF). The tax on the gain can be deferred until the earlier of the date on which the QOF investment is sold or exchanged, or Dec. 31, 2026. If the investor holds the investment in the QOF for at least ten years, the investor may be eligible for a permanent exclusion of any capital gain realized by the sale or exchange of the QOF investment.|