The Tax Cuts and Jobs Act was signed into law by President Trump on Dec. 22, 2017. It is the largest tax act in over 30 years (and notice it was not called the tax simplification act and you will see why)! The bill made sweeping modifications to the Internal Revenue Code, including a much lower corporate tax rate, increasing depreciation limits, and changes to credits and deductions. Individual tax changes that occurred include, but are not limited to, almost doubling of the standard deduction, multiple changes to itemized deductions, elimination of personal exemptions, and doubling of the child tax credit. It’s very important you visit with a tax professional in order to understand how these apply to you and your business, and make sure you are taking full advantage of the benefits.
Here are some of the act’s provisions that affect businesses. These all took effect Jan. 1, 2018 other than the change to bonus depreciation:
- Immediate expensing and depreciation:
- 100% immediate expensing (bonus depreciation) is available for certain business expenses including machinery and equipment and qualified improvement property acquired and placed in service after 9/27/17. The provision applies to both new and used property.
- Section 179 deduction has been increased from $500,000 to $1 million with the phase-out limitation increasing from $2 million to $2.5 million. These amounts are indexed for inflation for years beginning after 2018. The Section 179 deduction applies to tangible personal property such as machinery and equipment which is purchased for use in a trade or business. The new law increases the scope of qualified property to include “qualified real property” which includes the following improvements to nonresidential real property after the date the property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
- Changes to asset lives and depreciation methods for certain agricultural equipment.
- Qualified business income deduction:
- Applies to sole proprietorships (Schedule’s C, F, and possibly even E), S Corporations, partnerships, and LLCs.
- The deduction is equal to 20% of business income and is limited to 50% of W2 wages, among other limitations. The wage limitations don’t apply to certain small businesses.
- Most entities in the business of providing “professional services” are excluded from the deduction. However, there are exceptions to the rule as well as phase-out limitations to consider.
- This is by far the most complicated legislation affecting South Dakotans.
- Corporate tax rate:
- A flat 21%, which is a considerable drop from the 35% highest rate under the previous law.
- The 21% would apply to Personal Service Corporations and Built-In Gains Tax.
- Net Operating Loss (NOL):
- Two year carryback rule is repealed except for certain farmers and ranchers.
- NOLs are now limited to 80% of taxable income. Carryovers take this limitation into account and are now carried forward indefinitely.
- Domestic Production Activities Deduction (DPAD):
- Repealed for non-corporate taxpayers.
- C Corporations will be repealed after 12/31/2018.
- Interest Expense Deductions:
- Limited to 30% of taxable income except for businesses with average annual gross receipts of less than $25 million.
- 1031 Like Kind Exchanges:
- Available for real property transactions.
- No longer available for tangible personal property transactions.
- Meals and Entertainment:
- Entertainment expenses paid after 12/31/17, will need to be classified separately and are disallowed.
- Qualified business meals are still limited to being 50% deductible.
- Change in Estate Tax Exemption Limits:
- Individual exemption limits went from $5.49 million in 2017 to $11.2 million in 2018-2025, with the limit set to go back to the 2017 levels in 2026.
There are many other items in the tax bill. One resource to learn more about the changes, watch the Ketel Thorstenson Tax Reform Seminar on You Tube athttps://www.youtube.com/watch?v=miSWgzNAb2c. Consult your KTLLP tax professional to understand the affects to your business for 2018 and beyond.
Latest posts by Ketel Thorstenson, LLP (see all)
- Tax Tips: Health Care - Feb 14, 2018
- Bipartisan Budget Act of 2018 - Feb 9, 2018
- Tax Tip: Individual Tax Rates, Deductions and Exemptions - Feb 7, 2018