Small Business Accounting - The new
tax year is a true game-changer for taxpayers and their advisers, as many
fundamental, decades-old tax rules have been repealed or suspended, with many
new ones going into effect. This article highlights the tax changes that apply
in 2018 to businesses. All changes relate to the Tax Cuts and Jobs Act unless
otherwise indicated. Changes related to pass-throughs will be covered in a
future article.
For
more details on tax changes affecting individuals in effect in 2018, see Weekly
Alert ¶ 13 1/11/2018 (tax rates, deductions, and credits) and Weekly Alert ¶ 45
1/11/2018 (deferred compensation, tax-preferred accounts, retirement plans,
estate and gift taxes, capital assets and investments, and disaster losses).
For more details on the Tax Cuts and Jobs Act, see Thomson Reuters Checkpoint
Special Study: Highlights of the Tax Cuts and Jobs Act, which can be accessed
on Checkpoint by clicking on the Table of Contents tab on the tool bar, and
then following the link for "2017 Tax Reform".
Corporate tax rate reduced. For tax years
beginning after Dec. 31, 2017, the corporate tax rate is a flat 21% rate. (Code
Sec. 11(b))
Dividends received deduction percentages reduced. For
tax years beginning after Dec. 31, 2017, the 80% dividends received deduction
is reduced to 65%, and the 70% dividends received deduction is reduced to 50%.
(Code Sec. 243)
AMT repealed. For tax years beginning
after Dec. 31, 2017, the corporate AMT is repealed. (Code Sec. 55) For tax
years beginning after 2017 and before 2022, the AMT credit is refundable in an
amount equal to 50% (100% for tax years beginning in 2021) of the excess of the
minimum tax credit for the tax year over the amount of the credit allowable for
the year against regular tax liability.
Expensing rules liberalized. For property placed
in service in tax years beginning after Dec. 31, 2017, the maximum amount a
taxpayer may expense under Code Sec. 179 is increased to $1 million, and the
phase-out threshold amount is increased to $2.5 million.
Property eligible for expensing is expanded. For
property placed in service in tax years beginning after Dec. 31, 2017, the
definition of Code Sec. 179 property is expanded to include certain depreciable
tangible personal property used predominantly to furnish lodging or in
connection with furnishing lodging. The definition of qualified real property
eligible for Code Sec. 179 expensing also is expanded to include the following
improvements to nonresidential real property after the date such property was
first placed in service: roofs; heating, ventilation, and air-conditioning
property; fire protection and alarm systems; and security systems. (Code Sec.
179)
Increased luxury auto dollar limits. For
passenger automobiles placed in service after Dec. 31, 2017, in tax years
ending after that date, for which the additional first-year depreciation
deduction under Code Sec. 168(k) is not claimed,
the maximum amount of annual allowable depreciation/expensing deduction is
increased to: $10,000 for the year in which the vehicle is placed in service,
$16,000 for the second year, $9,600 for the third year, and $5,760 for the
fourth and later years in the recovery period. For passengers autos eligible
for bonus first-year depreciation, the maximum first-year depreciation
allowance remains at $8,000. (Code Sec. 280F) In addition, computer or
peripheral equipment is removed from the definition of listed property and so
isn't subject to the heightened substantiation requirements that apply to
listed property. (Code Sec. 280F)
15-year writeoff for qualified improvement property. For
property placed in service after Dec. 31, 2017, the separate definitions of
qualified leasehold improvement, qualified restaurant, and qualified retail
improvement property eligible for a 15-year writeoff, are replaced with new category
called qualified improvement property, which is depreciated over 15-years via
straight line (or 20 years via the Alternative Depreciation System (ADS)).
Qualified improvement property is any improvement to an interior portion of a
building that is nonresidential real property if the improvement is placed in
service after the date the building was first placed in service, except for any
improvement for which the expenditure is attributable to
- Enlargement
of the building,
- Any
elevator or escalator, or
- The
internal structural framework of the building. (Code Sec. 168(e)(6))
Shortened ADS recovery period for residential realty. For
property placed in service after Dec. 31, 2017, the ADS recovery period for
residential rental property is shortened from 40 years to 30 years. (Code Sec.
168)
Shortened recovery period for farming equipment. For
property placed in service after Dec. 31, 2017, in tax years ending after that
date, the cost recovery period is shortened from seven to five years for any
machinery or equipment (other than any grain bin, cotton ginning asset, fence,
or other land improvement) used in a farming business, the original use of
which commences with the taxpayer. (Code Sec. 168(e))
In
addition, the required use of 150% declining balance depreciation for property
used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property) is
repealed. The 150% declining balance method continues to apply to any 15-year
or 20-year property used in the farming business to which the straight-line method
does not apply, and to property for which the taxpayer elects the use of the
150% declining balance method. (Code Sec. 168(b))
ADS use for certain farm assets. For
tax years beginning after Dec. 31, 2017, an electing farming business—i.e., a
farming business electing out of the new Code Sec. 163(j) limitation on the
deduction for interest (discussed below)—must use ADS to depreciate any
property with a recovery period of 10 years or more (e.g., a single purpose
agricultural or horticultural structure, trees or vines bearing fruit or nuts,
farm buildings, and certain land improvements). (Code Sec. 168)
More taxpayers eligible to deduct costs of replanting citrus
plants lost due to casualty. The uniform capitalization
rules of Code Sec. 263A don't apply to certain agricultural producers and
co-owners; instead, they can deduct costs incurred in replanting edible crops
for human consumption following loss or damage due to freezing temperatures,
disease, drought, pests, or casualty. For replanting costs paid or incurred
after Dec. 22, 2017, but not after Dec. 22, 2027,
for citrus plants lost or damaged due to casualty, the definition of taxpayers
eligible to deduct such costs is expanded to include a person other than the
taxpayer if
- The
taxpayer has an equity interest of not less than 50% in the replanted
citrus plants at all times during the tax year in which the replanting
costs are paid or incurred and such other person holds any part of the
remaining equity interest, or
- Such
other person acquires all of the taxpayer's equity interest in the land on
which the lost or damaged citrus plants were located at the time of such
loss or damage, and the replanting is on such land. (Code Sec. 263A(d))
Tax on medical devices goes into effect. For
sales after Dec. 31, 2017, a tax equal to 2.3% of the sale price is imposed on
the sale of any taxable medical device by the manufacturer, producer, or
importer of such device. (Code Sec. 4191(a), Code Sec. 4191(c)) A taxable
medical device is any device defined in §201(h) of the Federal Food, Drug, and
Cosmetic Act (FFDCA) that's intended for humans. A "device" is an
instrument, apparatus, implement, machine, contrivance, implant, in vitro
reagent, or other similar or related article. There's a retail exemption for
items such as eyeglasses, contact lenses and hearing aids. The tax was to have
gone into effect after 2015, but the "Protecting Americans From Tax
Hikes" Act (PATH Act, PL 114-113, 12/18/2015) provided for a 2-year
moratorium on the tax.
Limits on deduction for business interest. For
tax years beginning after Dec. 31, 2017, every business, regardless of its
form, is generally subject to a disallowance of a deduction for net interest
expense in excess of 30% of the business's adjusted taxable income. The net
interest expense disallowance is determined at the tax filer level. However, a
special rule applies to pass-through entitles, which requires the determination
to be made at the entity level (e.g., at the partnership level instead of the partner
level). (Code Sec. 163(j))
For
tax years beginning after Dec. 31, 2017 and before Jan. 1, 2022, adjusted taxable income of
a business is computed without regard to various deductions, including the
deductions for depreciation, amortization, or depletion and without the former
Code Sec. 199 deduction (which is repealed effective Dec. 31, 2017).
The
amount of any business interest not allowed as a deduction for any taxable year
is treated as business interest paid or accrued in the succeeding tax year.
Business interest may be carried forward indefinitely, subject to certain
restrictions applicable to partnerships. (Code Sec. 163(j))
An
exemption from these rules applies for taxpayers (other than tax shelters) with
average annual gross receipts for the three-tax year period ending with the
prior tax year that do not exceed $25 million. The business-interest-limit
provision does not apply to certain regulated public utilities and electric
cooperatives. Real property trades or businesses can elect out of the provision
if they use ADS to depreciate applicable real property used in a trade or
business. Farming businesses can also elect out if they use ADS to depreciate
any property used in the farming business with a recovery period of ten years
or more. An exception from the limitation on the business interest deduction is
also provided for floor plan financing (i.e., financing for the acquisition of
motor vehicles, boats or farm machinery for sale or lease and secured by such
inventory).
Special
rules apply to partnerships and to the carryforward of disallowed partnership
interest.
NOL deduction modified. For NOLs arising in tax
years ending after Dec. 31, 2017, the two-year carryback and the special
carryback provisions generally are repealed.
For
losses arising in tax years beginning after Dec. 31, 2017, the NOL deduction is
limited to 80% of taxable income (determined without regard to the NOL
deduction, itself). Carryovers to other years are adjusted to take account of
this limitation, and, except as provided below, NOLs can be carried forward
indefinitely.
A
two-year carryback applies in the case of certain losses incurred in the trade
or business of farming. Additionally, NOLs of property and casualty insurance
companies can be carried back two years and carried over 20 years to offset
100% of taxable income in such years. (Code Sec. 172)
DPAD repealed. For tax years beginning
after Dec. 31, 2017, the domestic production activities deduction (DPAD) is
repealed. (Former IRC Sec. 199)
Five-year writeoff of specified R&E expenses. For
amounts paid or incurred in tax years beginning after Dec. 31, 2021, "specified R&E
expenses" must be capitalized and amortized ratably over a 5-year period
(15 years if conducted outside of the U.S.), beginning with the midpoint of the
tax year in which the specified R&E expenses were paid or incurred.
Specified
R&E expenses subject to capitalization include expenses for software
development, but not expenses for land or for depreciable or depletable
property used in connection with the research or experimentation (but do
include the depreciation and depletion allowances of such property). Also
excluded are exploration expenses incurred for ore or other minerals (including
oil and gas). In the case of retired, abandoned, or disposed property with
respect to which specified R&E expenses are paid or incurred, any remaining
basis may not be recovered in the year of retirement, abandonment, or disposal,
but instead must continue to be amortized over the remaining amortization
period. (Code Sec. 174)
Broadened denial of deduction for fines, penalties, etc. For
amounts generally paid or incurred on or after Dec. 22, 2017, no deduction is
allowed for any otherwise deductible amount paid or incurred (whether by suit,
agreement, or otherwise) to, or at the direction of, a government or specified
nongovernmental entity in relation to the violation of any law or the
investigation or inquiry by such government or entity into the potential
violation of any law. Certain exceptions apply. (Code Sec. 162(f))
The
above provisions don't apply to amounts paid or incurred under any binding
order or agreement entered into before Dec. 22, 2017. But this exception does
not apply to an order or agreement requiring court approval unless the approval
was obtained before Dec. 22, 2017.
No deduction for amount paid for sexual harassment subject to
nondisclosure agreement. Effective for amounts paid or incurred
after Dec. 22, 2017, no deduction is allowed for any settlement, payout, or
attorney fees related to sexual harassment or sexual abuse if such payments are
subject to a nondisclosure agreement. (Code Sec. 162)
Deduction for local lobbying expenses repealed. For
amounts paid or incurred on or after Dec. 22, 2017, the Code Sec. 162(e)
deduction for lobbying expenses with respect to legislation before local
government bodies (including Indian tribal governments) is eliminated. (Code
Sec. 162(e))
Exclusions from contributions to capital. Effective
for contributions made after Dec. 22, 2017 (except as otherwise provided
below), the term "contributions to capital" for purposes of Code Sec.
118 (contributions to the capital of a corporation) does not include: any
contribution in aid of construction or any other contribution as a customer or potential
customer, and any contribution by any governmental entity or civic group (other
than a contribution made by a shareholder as such). (Code Sec. 118)
The
new rule does not apply to any contribution made after Dec. 22, 2017, by a
governmental entity pursuant to a master development plan that had been
approved before Dec. 22, 2017, by a governmental entity.
Orphan drug credit modified. For amounts paid or
incurred after Dec. 31, 2017, the Code Sec. 45C orphan drug credit is limited
to 25% (instead of prior law's 50%) of so much of qualified clinical testing
expenses for the tax year. Taxpayers can elect a reduced credit in lieu of
reducing otherwise allowable deductions in a manner similar to the research
credit under Code Sec. 280C. (Code Sec. 45C)
Rehab credit modified. For amounts paid or
incurred after Dec. 31, 2017, the 10% credit for qualified rehabilitation
expenditures with respect to a pre-'36 building is repealed, and a 20% credit
is provided for qualified rehabilitation expenditures with respect to a certified
historic structure; the credit can be claimed ratably over a 5-year period
beginning in the tax year in which a qualified rehabilitated structure is
placed in service. (Code Sec. 47)
New credit for employer paid family and medical leave. For
wages paid in tax years beginning after Dec. 31, 2017, but not beginning after Dec. 31, 2019, businesses may claim a
general business credit equal to 12.5% of the amount of wages paid to
qualifying employees during any period in which such employees are on family
and medical leave (FMLA) if the rate of payment is 50% of the wages normally
paid to an employee. The credit is increased by 0.25 percentage points (but not
above 25%) for each percentage point by which the rate of payment exceeds 50%.
To qualify for the credit, all qualifying full-time employees must be given at
least two weeks of annual paid family and medical leave (and all
less-than-full-time qualifying employees have to be given a commensurate amount
of leave on a pro rata basis). (Code Sec. 45S)
Limit on employee compensation deduction. A
deduction for compensation paid or accrued with respect to a covered employee
of a publicly traded corporation is limited to no more than $1 million per
year. However, under prior law, exceptions applied for:
- Commissions;
- Performance-based
remuneration, including stock options;
- Payments
to a tax-qualified retirement plan; and
- Amounts
that are excludable from the executive's gross income.
For tax years beginning after Dec. 31, 2017,
the exceptions to the $1 million deduction limit for commissions and
performance-based compensation are repealed. The definition of "covered
employee" is revised to include the principal executive officer, the principal
financial officer, and the three other highest paid officers. If an individual
is a covered employee with respect to a corporation for a tax year beginning
after Dec. 31, 2016, the individual remains a covered employee for all future
years. Transition rules apply to a written binding contract which was in effect
on Nov. 2, 2017 (Code Sec. 162(m))
Meal, entertainment and fringe benefit changes. There
are five changes to note in this area, all effective for amounts incurred or
paid after Dec. 31, 2017:
- Deductions
for business-related entertainment expenses are disallowed.
- The
50% limit on the deductibility of business meals is expanded to meals
provided through an in-house cafeteria or otherwise on the premises of the
employer.
- Deductions
for employee transportation fringe benefits (e.g., parking and mass
transit) are denied, but the exclusion from income for such benefits
received by an employee is retained (except in the case of qualified
bicycle commuting reimbursements).
- No
deduction is allowed for transportation expenses that are the equivalent
of commuting for employees (e.g., between the employee's home and the
workplace), except as provided for the safety of the employee. However,
this bar on deducting transportation expenses doesn't apply to any
qualified bicycle commuting reimbursement, for amounts paid or incurred
after Dec. 31, 2017, and before Jan. 1, 2026.
- For
purposes of the employee achievement award rules, "tangible personal
property" does not include cash, cash equivalents, gifts cards, gift
coupons, gift certificates (other than where the employer pre-selected or
pre-approved a limited selection) vacations, meals, lodging, tickets for
theatre or sporting events, stock, bonds or similar items. and other
non-tangible personal property. (Code Sec. 274)
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