By now, you’re probably sick and tired of hearing about the Tax Cuts and Jobs Act of 2017. I know I am.
Previous columns have dealt with the two biggest changes brought about by the law:
- The lowering of tax rates on regular or C corporations from up to 35 percent to a flat 21 percent.
- The creation of a 20 percent deduction on “pass through” income of (some) small business partnerships, limited liability companies and S corporations.
The new law has made other significant changes that, as a small-business owner, you will want to know about. Here they are:
- Section 179 deduction. For tax years beginning after Dec. 31, 2017, you can expense up to $1 million in equipment. The definition of eligible property has been expanded to include certain depreciable tangible personal property used predominantly to furnish lodging. The definition of qualified real property eligible for the deduction is also expanded to include qualified expenditures for roofs; heating, ventilation and air conditioning equipment; fire protection and alarm systems; and security systems for nonresidential real property.
- Depreciation deductions. You can now deduct 100 percent of the cost of depreciable tangible personal property that has a depreciable life for tax purposes of 20 years or less (such as machinery, equipment, furniture, fixtures, sidewalks, roads, landscaping, computers, computer software, farm buildings and qualified motor-fuels facilities), as long as you place it in service after Sept. 27, 2017, and before Jan. 1, 2023. After that, the deduction phases out over five years to zero.
For new or used passenger vehicles that are placed in service after Dec. 31, 2017, and used over 50 percent for business, the maximum annual deductions allowed are $10,000 for year one, $16,000 for year two, $3,050 for year three, and $1,875 for year four and thereafter. Slightly higher limits apply to light trucks and light vans.
- Cash basis of accounting. Under prior law, regular or C corporations were required to use the accrual basis of accounting if the corporation’s average gross receipts for the three previous years totaled more than $5 million. The new law raises that limit to $25 million.
- Business interest deductions. Prior law generally allowed full deductions for interest paid or accrued by a business. Under the new law, affected corporate and noncorporate businesses generally cannot deduct interest expense in excess of 30 percent of “adjusted taxable income,” starting with tax years beginning after Dec. 31, 2017. For S corporations, partnerships and LLCs, this limitation is applied at the entity level rather than the owner level.
- The net-operating-loss deduction. Under prior law, “net operating losses,” or NOLs, could be carried back for up to five years and carried forward for up to 25 years. The new law provides that for tax years beginning after Dec. 31, 2017, NOLs can be carried forward indefinitely but may no longer be carried back (except for farm businesses, which can still carry back NOLs for two years). Also, NOLs arising in taxable years beginning after Dec. 31, 2017, and carried to future years cannot offset more than 80 percent of taxable income before the NOL deduction.
- “Excess business losses.” For taxable years beginning after Dec. 31, 2017, the “excess business losses” of a taxpayer other than a C corporation are not allowed for the taxable year. Such losses are carried forward and treated as part of the taxpayer’s NOL carryforward in subsequent taxable years. An excess business loss for the taxable year is the excess of a taxpayer’s aggregate business deductions (determined without regard to the limit) over the sum of aggregate gross income or gain of the taxpayer plus $500,000 on a joint return ($250,000 on other returns), indexed for inflation.
For partnerships, LLCs and S corporations, the limit applies at the partner or shareholder level.
Reduced or Eliminated Deduction for Business Entertainment. Under prior law, small businesses could deduct 100 percent of business travel costs and 50 percent of meal and entertainment costs while traveling. The 100 percent deduction for travel costs and the 50 percent deduction for meals both remain unchanged in the new law (whew!), but for tax years beginning after Dec. 31, 2017, no deductions are allowed with respect to (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, leisure, recreation or other social purposes, or (3) a facility or portion of a facility used in connection with any of the above, (SET ITAL) even if (END ITAL) the entertainment, amusement or recreation is directly related to the active conduct of the taxpayer’s trade or business.
- No deduction for sexual-harassment case defense. And now for my favorite provision in the new law: No deduction is allowed for any settlement, payout or attorney fees related to sexual-harassment or sexual-abuse claims involving you or your employees if the payments are subject to a nondisclosure agreement. To take the deduction, you must make the settlement terms public.
If you needed any further incentive to police hanky-panky in your workplace, there it is.•
Cliff Ennico (firstname.lastname@example.org) is a syndicated columnist, author, and former host of the PBS television series “Money Hunt.” The opinions expressed in this column are those of the author.
© 2018 Clifford R. Ennico
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