Scorecard For The Tax Cuts and Jobs Act

Who Are The Winners, Losers Of Today’s Tax Reform?

Over the last 40 plus years, I’ve seen many “tax reforms.” Some were fairly straightforward, others made only minor modifications to the tax law and a handful were complicated and needed a lot of time to digest. As for this recent tax reform initiative, it’s certainly more complex. Actually, it’s reminiscent of the tax reform of 1986.

The far-reaching effect of today’s tax reform, also known as the Tax Cuts and Jobs Act (TCJA), will impact all taxpayers  ̶  individuals, trusts, estates, businesses, nonprofits AND all industries. Signed into law on Dec. 22, 2017, interpretations, discussions and requests for clarification with regard to the TCJA have been ongoing.

This article will highlight the many business reforms in the TCJA and the impact these changes will have on small- and medium-sized business entities.

First, it’s important to note that most of these changes are effective for tax years beginning after Dec. 31, 2017. Direct communication with your tax advisor is important to determine the impact on you and your business.

With spring training on the horizon, get out your scorecard and see if you can identify the winners and losers under the TCJA.

Let’s Play

• C corporations now have a 21 percent flat tax rate. Under prior law, these corporations had increasing tax rates ranging from 15-35 percent with a higher flat tax rate for personal service corporations. This is a WIN for corporations that were in the 25 percent and higher tax brackets.
• The corporate alternative minimum tax is eliminated. Under prior law, the AMT rate was 20 percent imposed on certain corporations. Exceptions did apply. This is a WIN for corporations that were previously exposed to the AMT.
• There is a new 20 percent deduction for pass-through qualified business income from sole proprietorships, rental real estate, partnerships, limited liability companies and S corporations. The calculation is complicated since it is subject to exclusions and thresholds. Once calculated, this deduction will be valuable for owners of pass-through entities. This deduction reduces adjusted gross income and is available to individuals, estates and trusts. Previously, this income was taxed to the owners on their individual returns at their applicable tax rates. This is a WIN for individuals and their businesses.
• The law now limits the interest expense deduction to 30 percent of the adjusted taxable income of the business. This limit will not apply to businesses with average annual gross receipts of $25 million or less. Special rules apply to rental and farming activities. This is a LOSS for some businesses.
• The tax law expands the rules for writing off fixed assets which are clearly a WIN for business owners:
  • The expensing limit is increased to $1 million, up from $510,000 in 2017. The definition of eligible property has been expanded.
  • In addition, bonus depreciation for the first year of the asset is increased from 50 to 100 percent and applies to both new and used assets purchased and placed in service after Sept. 27, 2017. This percentage is subject to reduction after Dec. 31, 2022.
  • The depreciation limits on new or used passenger vehicles have been favorably increased. The first-year $8,000 bonus depreciation appears to be still available and is in addition to the amount for Year 1. The new depreciation limits are as follows:
    • Year 1: $10,000
    • Year 2: $16,000
    • Year 3: $9,600
    • Year 4 and following: $5,760
• The use of the cash method of accounting has been liberalized, which helps simplify the record keeping of small- and medium-sized businesses. The cash method is a little easier and does not require the keeping of inventory. Clearly a WIN for applicable businesses.
• Meals and entertainment deductions were curtailed. These changes clearly are added to the LOSS column!

  • 2017 Old Rules

    • Office Holiday Parties
      • 100% deductible
    • Entertaining Clients (meals)
      • 50% deductible
    • Entertaining Clients (entertainment)
      • Event tickets, 50% deductible for face value of ticket; anything above face value is non-deductible
      • Tickets to qualified charitable events are 100% deductible
    • Employee Travel Meals
      • 50% deductible
    • Meals provided for convenience of employer
      • 100% deductible provided they are excludible from employees’ gross income as de minimis fringe benefits; otherwise, 50% deductible

  • 2018 New Rules

    • Office Holiday Parties
      • 100% deductible
    • Entertaining Clients (meals)
      • 50% deductible
    • Entertaining Clients (entertainment)
      • no deduction for entertainment expenses
    • Employee Travel Meals
      • 50% deductible
    • Meals provided for convenience of employer
      • 50% deductible (non-deductible after 2025)

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Click here to view and download our Business Meal, Entertainment and Travel Deductibility Checklist.

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• The tax reform act now disallows a deduction for employers that provide parking, vanpooling and other types of transportation fringe benefits. However, these benefits remain nontaxable to the employee. This is definitely a LOSS for employers.
• Section 1031 like-kind exchanges are now only allowed with appreciated real estate (non-dealers). This is a WIN for real estate owners and investors.
• The Domestic Production Activities Deduction has provided a tax deduction for owners of technology development, construction and manufacturing businesses since 2004. This deduction is no longer allowed in 2018 (2019 for C corporations). Clearly, this is a LOSS for these entities.
• Net Operating Losses (NOLs) generated Post 2017 are no longer able to be carried back. Prior to the tax law, the carryback was two years. When they are utilized on a carry-forward basis, they are limited to 80 percent of taxable income. Some exceptions do apply. This is a LOSS (no pun intended) for individuals and businesses.
• The Chained Consumer Price Index is now the measure of inflation adjustment. This will impact items in the tax code that increase based on this index, such as tax brackets since this is a slower measure of inflation. This is a definite LOSS for taxpayers!

The Game’s Not Over Yet!

This is not an exhaustive list of the business changes under the TCJA – in other words, keep out your scorecard! As the TCJA is reviewed and clarified over the next few months, we will be identifying additional WINNERS and LOSERS!  Due to the complexity of this tax act, please consult your tax advisor to determine the direct impact on you and your business.

By Cindy Kula, CPA, PFS, CFP (Cleveland office)

Looking for additional tax reform insight? Check out these resources to learn more. 

Federal Tax Reform and the Possible State Tax Implications for your Business

Tax Cuts and Jobs Act Creates a Great Opportunity to Gift Your Business

Tax Cuts and Jobs Act: Implications for C Corps & Flow-Through Entities