The Tax Cuts and Jobs Act ("TCJA") changed deductions, depreciation, expensing, tax credits and other tax items that affect businesses. This side-by-side comparison can help businesses understand the changes and plan accordingly.
Some provisions of the TCJA that affect individual taxpayers can also affect business taxes. Businesses and self-employed individuals should review tax reform changes for individuals and determine how these provisions work with their business situation.
Visit IRS.gov/taxreform regularly for tax reform updates. Businesses can find details and the latest resources on the provisions below at Tax reform provisions that affect businesses.
Changes to deductions, depreciation and expensing may affect a taxpayer’s business taxes. Publication 535, Business Expenses, and Publication 946, How to Depreciate Property, explain many of these topics in detail.
The TCJA generally eliminated the deduction for any expenses related to activities considered entertainment, amusement or recreation. However, under the new law, taxpayers can continue to deduct 50% of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact. If provided during or at an entertainment activity, the food and beverages must be purchased separately from the entertainment, or the cost of the food or beverages must be stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
Notice 2018-76 provides additional information on these changes.
The change limits deductions for business interest incurred by certain businesses. Generally, for businesses with 25 million or less in average annual gross receipts, business interest expense is limited to business interest income plus 30% of the business’s adjusted taxable income and floor-plan financing interest
There are some exceptions to the limit, and some businesses can elect out of this limit. Disallowed interest above the limit may be carried forward indefinitely, with special rules for partnerships.
Like-kind exchange treatment now applies only to certain exchanges of real property.
$300,000 ($150,000 for a married person filing a separate return), or
Generally, if you have an NOL for a tax year ending in 2017, you must carry back the entire amount of the NOL to the 2 tax years before the NOL year (the carryback period), and then carry forward any remaining NOL. (2017 Pub 536 page 3, 2 nd column)
If your NOL is more than the taxable income of the year you carry it to (figured before deducting the NOL), you generally will have an NOL carryover to the next year. (2017 Pub 536 page 4, 3 rd column)
Certain business assets, such as equipment and buildings, are depreciated over time.
Bonus depreciation for equipment, computer software, and certain improvements to nonresidential real property allows an immediate deduction of 50% for equipment placed in service in 2017, 40% in 2018, and 30% in 2019.
Long-lived property generally is not eligible. The phase down is delayed for certain property, including property with a long production period.
TCJA temporarily allows 100% expensing for business property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023.
The 100% allowance generally decreases by 20% per year in taxable years beginning after 2022 and expires Jan. 1, 2027.
The law now allows expensing for certain film, television, and live theatrical productions, and used qualified property with certain restrictions.
A taxpayer can expense the cost of qualified assets and deduct a maximum of $500,000, with a phaseout threshold of $2 million.
Generally, qualified assets consist of machinery, equipment, off-the-shelf computer software and certain improvements to nonresidential real property.
TCJA increased the maximum deduction to $1 million and increased the phase-out threshold to $2.5 million.
It also modifies the definition of section 179 property to allow the taxpayer to elect to include certain improvements made to nonresidential real property.
For businesses that have employees, there are changes to fringe benefits and a new tax credit that can affect a business’s bottom line.
Under TCJA, employers can deduct qualified bicycle commuting reimbursements as a business expense.
Employers must now include 100% of these reimbursements in the employee’s wages, subject to income and employment taxes.
The TCJA added a new tax credit for employers that offer paid family and medical leave to their employees.
The credit applies to wages paid in taxable years beginning after December 31, 2017, and before January 1, 2026.
The credit is a percentage of wages (as determined for Federal Unemployment Tax Act (FUTA) purposes and without regard to the $7,000 FUTA wage limitation) paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. The percentage can range from 12.5% to 25%, depending on the percentage of wages paid during the leave.
An organization’s business structure is an important consideration when applying tax reform changes. The Tax Cuts and Jobs Act changed some things related to these topics.
The TCJA allows small business taxpayers with average annual gross receipts of $25 million or less in the prior three-year period to use the cash method of accounting. The law expands the number of small business taxpayers eligible to use the cash method of accounting and exempts these small businesses from certain accounting rules for inventories, cost capitalization and long-term contracts. As a result, more small business taxpayers can change to cash method accounting starting after Dec. 31, 2017.
Revenue Procedure 2018-40 provides further details on these changes.
In the case of an S corporation that converts to a C corporation:
The TCJA makes two modifications to existing law for a C corporation that (1) was an S corporation on Dec. 21, 2017 and revokes its S corporation election after Dec. 21, 2017, but before Dec. 22, 2019, and (2) has the same owners of stock in identical proportions on the date of revocation and on Dec. 22, 2017.
The following modifications apply to these entities:
Owners of certified historic structures were eligible for a tax credit of 20% of qualified rehabilitation expenditures.
Owners of pre-1936 buildings were eligible for a tax credit of 10% of qualified rehabilitation expenditures.
TCJA keeps the 20% credit for qualified rehabilitation expenditures for certified historic structures but requires that taxpayers take the 20% credit over five years instead of in the year they placed the building into service.
The 10% credit for pre-1936 buildings is repealed under TCJA.
Opportunity Zones are a tool designed to spur economic development and job creation in distressed communities. Businesses or individuals can participate.
Investments in Opportunity Zones provide tax benefits to investors. Investors can elect to temporarily defer tax on capital gains that are reinvested in a Qualified Opportunity Fund (QOF). The tax on the gain can be deferred until the earlier of the date on which the QOF investment is sold or exchanged, or Dec. 31, 2026. If the investor holds the investment in the QOF for at least ten years, the investor may be eligible for a permanent exclusion of any capital gain realized by the sale or exchange of the QOF investment.
For more information, see Notice 2018-48.