by Steve Grogan, Integrity Wealth Consultants
The legislation popularly known as the Tax Cuts & Jobs Act did not exactly “rewrite the book” of federal tax laws, but it almost seems that way. On January 1, a host of important, new tax provisions entered the Internal Revenue Code, and others were suddenly repealed. Due to these reforms, federal tax law has changed to a degree unseen since the 1980s. Just a reminder as you read this guide: you should consult with a qualified tax or financial professional before making short-term or long-term changes to your tax or financial strategy.
Key Tax Changes for Businesses
Some of these alterations to the Internal Revenue Code are permanent, unlike nearly all the changes affecting households.
1 The corporate tax rate is now a flat 21%.
Last year, the corporate tax rate was marginally structured and topped out at 35%. While corporations with taxable income of $75,000 or less looked at no more than a 25% marginal rate, more profitable corporations faced a rate of at least 34%. The new, permanent 21% flat rate brings U.S. corporate taxation in line with that in many other nations. Only corporations with annual profits of less than $50,000 will see their taxes go up this year, as their rate will move north from 15% to 21%.
2 Our corporate tax system is now territorial.
The 2018 federal tax reforms instruct the I.R.S. to treat foreign profits more gently. Before the reforms, the U.S. corporate tax system was a worldwide system, meaning that American corporations paid American taxes on profits earned outside America; that amounted to a double tax on those profits, and those profits could be subjected to a 35% corporate tax rate in the process.
Now repatriated earnings are being taxed differently to encourage U.S. companies to bring profits home rather than leave them overseas. A new, one-time repatriation rate of 15.5% on cash (and cash equivalents) and 8% on illiquid assets is in place, payable over a comfortable, 8-year term.
3 The corporate AMT has been eliminated.
The 2018 tax reforms permanently repealed this 20% supplemental tax.
4 Many pass-through businesses can claim a 20% deduction on earnings.
Some fine print accompanies this change. The basic benefit is that business owners whose firms are LLCs, partnerships, S corporations, or sole proprietorships can now deduct 20% of qualified business income, promoting reduced tax liability. (Trusts, estates, and cooperatives are also eligible for the 20% pass-through deduction.)
Not every pass-through business entity will qualify for this tax break in full, though. Doctors, lawyers, consultants, and owners of other types of professional services businesses meeting the definition of a specified service business may make enough to enter the phase-out range for the deduction; it starts above $157,500 for single filers and above $315,000 for joint filers. Above these business income thresholds, the deduction for a business other than a specified service business is capped at 50% of total wages paid or at 25% of total wages paid, plus 2.5% of the cost of tangible depreciable property, whichever amount is larger.
5 The Section 179 deduction doubles.
Business owners who want to deduct the whole cost of an asset during its first year of use will appreciate the new $1 million cap on the Section 179 deduction. In addition, the phaseout threshold rises by $500,000 this year to $2.5 million.
6 Bonus depreciation also doubles.
This is a near-term perk, one that, starting in 2027, will likely vanish for most pass-through firms and corporations. The first-year “bonus depreciation deduction” is now set at 100% with a 5-year limit, so a company can now write off 100% of qualified property costs through 2022 rather than through a longer period. Besides the jump from 50% to 100%, there is another eye-opener here: bonus depreciation now applies for used equipment as well as new equipment.
7 1031 exchanges are restricted to real estate.
Before 2018, 1031 exchanges of capital equipment, patents, domain names, private income contracts, ships, planes, and other miscellaneous forms of personal property were permitted under the Internal Revenue Code. Now, only like-kind exchanges of real property pass muster.
8 Deductions for business interest expenses are now limited to 30% of AGI for large firms.
This limit pertains to firms with over $25 million in gross receipts.
9 Carryover and deduction rules applying to net operating losses change.
Before 2018, most net operating losses incurred were eligible for a 2-year carryback and a 20-year carryforward, and both carryovers and carrybacks could offset as much as 100% of taxable income. While carrybacks are still permitted for two years, NOLs may now be carried forward indefinitely – but they can only offset up to 80% of income.
The legislation popularly known as the Tax Cuts & Jobs Act did not exactly “rewrite the book” of federal tax laws, but it almost seems that way. On January 1, a host of important, new tax provisions entered the Internal Revenue Code, and others were suddenly repealed. Due to these reforms, federal tax law has changed to a degree unseen since the 1980s. Just a reminder as you read this guide: you should consult with a qualified tax or financial professional before making short-term or long-term changes to your tax or financial strategy.
Key Tax Changes for Businesses
Some of these alterations to the Internal Revenue Code are permanent, unlike nearly all the changes affecting households.
1 The corporate tax rate is now a flat 21%.
Last year, the corporate tax rate was marginally structured and topped out at 35%. While corporations with taxable income of $75,000 or less looked at no more than a 25% marginal rate, more profitable corporations faced a rate of at least 34%. The new, permanent 21% flat rate brings U.S. corporate taxation in line with that in many other nations. Only corporations with annual profits of less than $50,000 will see their taxes go up this year, as their rate will move north from 15% to 21%.
2 Our corporate tax system is now territorial.
The 2018 federal tax reforms instruct the I.R.S. to treat foreign profits more gently. Before the reforms, the U.S. corporate tax system was a worldwide system, meaning that American corporations paid American taxes on profits earned outside America; that amounted to a double tax on those profits, and those profits could be subjected to a 35% corporate tax rate in the process.
Now repatriated earnings are being taxed differently to encourage U.S. companies to bring profits home rather than leave them overseas. A new, one-time repatriation rate of 15.5% on cash (and cash equivalents) and 8% on illiquid assets is in place, payable over a comfortable, 8-year term.
3 The corporate AMT has been eliminated.
The 2018 tax reforms permanently repealed this 20% supplemental tax.
4 Many pass-through businesses can claim a 20% deduction on earnings.
Some fine print accompanies this change. The basic benefit is that business owners whose firms are LLCs, partnerships, S corporations, or sole proprietorships can now deduct 20% of qualified business income, promoting reduced tax liability. (Trusts, estates, and cooperatives are also eligible for the 20% pass-through deduction.)
Not every pass-through business entity will qualify for this tax break in full, though. Doctors, lawyers, consultants, and owners of other types of professional services businesses meeting the definition of a specified service business may make enough to enter the phase-out range for the deduction; it starts above $157,500 for single filers and above $315,000 for joint filers. Above these business income thresholds, the deduction for a business other than a specified service business is capped at 50% of total wages paid or at 25% of total wages paid, plus 2.5% of the cost of tangible depreciable property, whichever amount is larger.
5 The Section 179 deduction doubles.
Business owners who want to deduct the whole cost of an asset during its first year of use will appreciate the new $1 million cap on the Section 179 deduction. In addition, the phaseout threshold rises by $500,000 this year to $2.5 million.
6 Bonus depreciation also doubles.
This is a near-term perk, one that, starting in 2027, will likely vanish for most pass-through firms and corporations. The first-year “bonus depreciation deduction” is now set at 100% with a 5-year limit, so a company can now write off 100% of qualified property costs through 2022 rather than through a longer period. Besides the jump from 50% to 100%, there is another eye-opener here: bonus depreciation now applies for used equipment as well as new equipment.
7 1031 exchanges are restricted to real estate.
Before 2018, 1031 exchanges of capital equipment, patents, domain names, private income contracts, ships, planes, and other miscellaneous forms of personal property were permitted under the Internal Revenue Code. Now, only like-kind exchanges of real property pass muster.
8 Deductions for business interest expenses are now limited to 30% of AGI for large firms.
This limit pertains to firms with over $25 million in gross receipts.
9 Carryover and deduction rules applying to net operating losses change.
Before 2018, most net operating losses incurred were eligible for a 2-year carryback and a 20-year carryforward, and both carryovers and carrybacks could offset as much as 100% of taxable income. While carrybacks are still permitted for two years, NOLs may now be carried forward indefinitely – but they can only offset up to 80% of income.
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