Business Summary of Tax Cuts and Jobs Act
Below is a summary of some of the key Business Provisions of the Tax Cuts and Jobs Act that went into effect January 1, 2018. Some of the provisions are made permanent, while others apply to the next 10 years.
Tax Rates – “C” Corporations will have a flat tax rate of 21%.
Prior to the new law, corporations had graduated tax rates from 10% – 35%.
Pass-Through Income Deduction – Individuals that receive income from an S-Corporation, LLC, Partnership or sole-proprietorship, will be allowed a deduction of up to 20% of the qualified business income. The deduction will be taken at the individual level.
The deduction does not apply to high-income taxpayers receiving pass-through income from service businesses (doctors, dentists, attorneys, accountants, etc.) or other investment-type activities.
Prior to the change, all income from pass-through activities was taxed at the individual’s tax rate (10%-39.6%). The law effectively lowers the tax rate on pass-through income to that of corporations.
Domestic Production Activities Deduction (DPAD) – The domestic production activities deduction is repealed for tax years beginning after December 31, 2017.
The DPAD was a deduction of up to 9% of qualified income for domestic businesses that are involved in a wide range of production related industries.
Section 179 – For property placed into service after December 31, 2017, taxpayers may elect to expense up to $1 million. The election begins to phase-out once a taxpayer places $2.5 million of assets into service during the year. The election applies to both new and used qualifying property.
Prior to the new law, Section 179 expensing was limited to $500,000 & phase-out began at $2 million.
Bonus Depreciation – Bonus depreciation has been retroactively increased to 100% for assets placed into service between September 27, 2017 and January 1, 2023. Bonus depreciation applies to both new and used property and does not phase-out based on assets purchased during the year.
Prior to change, bonus depreciation was limited to 50% and applied only to new property.
Alternative Minimum Tax (AMT) – The AMT has been repealed for corporations for tax years starting after December 31, 2017.
Like-Kind Exchange – The ability to defer gains and losses on the exchange of similar property will be limited to exchanges of real property (real estate) that is not held for resale.
Prior to the new law, like-kind exchange treatment was applied to the exchange of real property and personal property (equipment, vehicles, etc.).
Meals and Entertainment – The deduction for meals will remain at 50%; while the deduction for entertainment has been eliminated.
Previously, both meals and entertainment were allowed as 50% deductions.
Cash Basis of Accounting – Taxpayers can use the cash basis of accounting if they satisfy the $25 million gross receipts test, regardless of industry.
Prior tax law required taxpayers with gross receipts over $10 million, or the need to account for inventory, were required to file their tax return using the accrual basis of accounting.