The 2017 Tax Cuts and Jobs Act significantly reduced corporate tax rates, created a new business deduction for small businesses with the Qualified Business Income Deduction and modified a myriad of other deductions. The following is a high-level view of some of the more important changes currently placed into law.
1. Statutory Tax Rates
The statutory rate for a corporation, including personal service corporations, has been reduced from 35% to 21%. However, it is likely that corporations will pay less than the 21% statutory rate since the Tax Cuts and Jobs act failed to address and close many of the loopholes. The new law did eliminate some manufacturing deductions and business credits, however, that will increase corporation’s taxes.
2. Qualified Business Income (QBI) Deduction
Under Section 199A – Congress enacted a 20% deduction for qualified business income taxed on an individual taxpayer’s return. The 20% QBI deduction affects individual’s schedules C, E & F, partnerships, S corporations, trusts and estates engaged in a domestic trade or business. There are several limitations for high income earners. Additionally, no state has adopted the Section 199A deduction so it will be added back as income on the state returns.
3. Entertainment Deductions
Entertainment deductions generally considered entertainment, amusement or recreation, have been completely eliminated and are nondeductible effective January 1, 2018.
4. Depreciation Expense
The new tax law has expansively increased a corporations’ ability to depreciate business property:
- Bonus depreciation has been increased from 50% to 100%
- Items deemed Listed Property which
limitdepreciation deductions have been removed
- Section 179 which allows
propertyto be expensesin the year purchased versus being depreciated over time has been increased to $1,000,000
- Property eligible for the Section 179 deduction has been expanded.
5. Alternative Minimum Tax (AMT)
AMT was a second way to compute a corporation’s income taxes using a different formula with different deductions. The AMT for corporations has been repealed.
6. Net Operating Losses (NOLs)
The two-year carryback provision have been repealed except for farming losses. NOLS may still be carried forward indefinitely and are still limited to 80% of the entities’ taxable income.
7. Family Leave Credit
For 2018 and 2019, a new employer credit is available for wages paid under a formal written plan during medical or family leave if the employer pays for at least fifty (50%) percent of the regular wages. The family and medical leave cannot be vacation or personal time. The credit is 12.5% and can be increased up to 25%. The qualified employee cannot earn more than $72,000 annually. The credit is limited to 12 weeks.
8. S Corporation Rules for Late S Elections
The IRS has expanded and consolidated relief provisions under Revenue Procedure 2013-30 that provide simpler methods for taxpayers seeking relief for late S Corporation or entity classification elections. A reasonable cause statement must be attached detailing the cause for the failure to timely file the subchapter S election.
9. S Corporation Failure to File Penalty under Section 6699
The penalty for a late filed S corporation return is $200 per month per shareholder for a maximum of 12 months. This penalty is adjusted annually for inflation.
10. Streamlined Partnership Audits
Partnership audit rules were changed in 2015 subject to final regulations which were issued in 2018 effective January 1, 2018. The new partnership audit rules can be opted out of if a partnership has 100 or fewer partners. Opting out of the partnership audit rules requires the IRS to make audit adjustments at the partner level and not the partnership level. Partnership agreements will need to address partners leaving and entering the firm and how any tax, penalties and interest from an audit will be allocated. A Partnership Representative (no longer the tax matters partner) can make the opt-out decision.