2017 Important Changes in Jobs Act
The Tax Cuts and Jobs Act was signed into law in December 2017, which makes it one of the most crucial revisions to the Internal Revenue Code in over 30 years. A tax reform of this magnitude will have broad implications for companies, so we’ve summarized 19 Important changes impacting them under the new law:
Tax Rate Reduction for Non-Corporate Firms: Businesses will usually be granted a special deduction associated with their Qualified Business Income (QBI), which can be based on a pass-through entity or sole proprietorship. There’s a precedent both affirming and denying classification of rental activities as a business or trade; consequently, it’s presently unclear as to what extent the QBI deduction will exclude leasing actions.
The commission limit is 50 percent of this Form W-2 wage expense associated with the organization. Taxpayers then unite the deductible QBI from every company and apply an overall limit equal to 20 percent of taxable income computed without net capital gains (and other less common adjustments). The wage limitation doesn’t apply to taxpayers with taxable incomes under $315,000 (MFJ) and is phased-out for incomes between $315,000 and $415,000.
An alternative wage limit is available for capital-intensive companies, which is 25 percent of salary plus 2.5 percentage of the cost basis of depreciable assets. Again, this restriction applies separately to each activity to ascertain the deductible QBI.
If a loss results from combining the QBI of every action, then there is no enabled deduction. What’s more, the combined loss is included as an activity in the QBI deduction computation for the subsequent year (again clarification is necessary, but it seems that the combined loss is treated as a separate action in the subsequent year).
The effects of this “wage” component within this computation seem to make a disparity between sole proprietorships, S corporations, and partnerships. By way of instance, guaranteed payments to partners decrease both the QBI amount in addition to the 50 percent of wage limit; a payment of salary to an S Corporation shareholder reduces QBI but is contained in the wage limit. This disparity could be adjusted in future technical corrections made to the Tax Act.
The above rules are actually more complex than presented above, but these complications should be applicable to taxpayers.
2. Tax Rate Reduction for Business Businesses: The new company tax rate was decreased to 21 percent, also Alternative Minimum Tax (AMT) has been removed. For all those years, corporations may also get a refund for 50 percent of the excess credit in each of these years. Any remaining credit will be reimbursed in 2021.
3. S Corporation Conversion: S companies that convert to C status throughout the period Dec. 22, 2016, through Dec. 22, 2018, have six years to disperse their accumulative S Corporation earnings tax free. This provides taxpayers with a chance to replace funds invested at different income tax rates with lower-taxed company equity by distributing prospective company earnings tax-free to the degree of the S corporation’s Accumulated Adjustments Account (AAA) balance.
5. However, they may be carried forward indefinitely.
6. Cash Method of Accounting: The cash method of accounting can now be utilized by both pass-through and C company taxpayers whose previous three-year gross receipts average is under $25 million. The new law reverses certain specific prohibitions and raises the prior general ceiling of $5 million. For companies with sales in excess of $25 million, pass-through entities which aren’t required to account for stocks (essentially, service entities), in addition to private service businesses, can continue to use the cash method of accounting. As C companies having sales in excess of the $25 million ceiling will continue to be banned from using the cash method, there is a benefit for bigger service providers to utilize a pass-through status. Businesses must apply for an accounting method change to embrace the cash process.
The accounting method change will permit the taxpayer to currently deduct the excess of its accrued earnings over accrued expenses and payables.
7. Inventory Accounting: Firms whose prior three-year gross receipts average under $25 million may now clarify stocks as supplies and materials. Capitalization rules for supplies and materials are included in Treasury Regulation Section 1.162-3 for which IRS Notice 2015-82 provides the de-minimis safe haven for capitalization is $2,500 (per item or statement). Materials and supplies not capitalized could be currently expensed. To use this provision to stock purchases, companies must apply for an accounting method change. The accounting method change will permit the taxpayer to currently deduct capitalized stock in excess of the Department 1.162-3 capitalization requirements.
8. Uniform Capitalization of Inventory: Section 263A provisions generally capitalize indirect costs associated with buying and carrying inventory not recorded by financial accounting. Firms whose prior three-year gross receipts average under $25 million are currently exempt from using IRC Section 263A. To use this provision to stock purchases, companies must apply for an accounting method change. The method change will permit the taxpayer to currently deduct its accumulative prior-year tax adjustments.
9. The law raises the prior general ceiling of $5 million and applies to both pass-through entities and corporations.
Taxpayers wanting to employ the completed contract method may do this using a cut-off way of contracts entered after 2017. To change to the completed contract method, companies must apply for an accounting method change nonetheless, there isn’t any benefit for contracts began before 2018. Please note there are principles which may provide for a beneficial determination as to when a contract started.
The new law changes that company assets are subject to the bonus depreciation deduction. But it made no change to the 2015 definition of qualified improvement land that included improvements to the insides of nonresidential buildings, provided that such improvements were made after the building was placed in service and didn’t expand the building, enhance its structural integrity, or include expenses for lifts and escalators.
Applying bonus depreciation provisions won’t demand an accounting method change, but these principles apply by default and an election to omit the advantage of a return must be made. Omitting bonus depreciation with no election risks losing this tax deduction.
Now that new bonus depreciation rules apply to used land and contains an effective date of Sept. 28, 2017, companies should apply extra diligence when preparing 2017 income tax returns.
11. Section 179 Expensing: Firms are now able to yearly expense up to $1 million of company property it puts in service after 2017.
However, Section 179 now applies to particular exterior improvements to the property for which bonus depreciation isn’t permitted (namely, roofs, A/C, heating, venting, alarms and security systems). Given that Section 179 could be phased out as a consequence of additional asset additions for which bonus depreciation can be obtained, companies should plan the timing of asset additions which include the aforementioned assets.
12. Depreciation of Automobiles: The auto depreciation deduction was increased for assets placed in service after 2017.
13. Meals and Entertainment: Starting in 2018, entertainment costs are no longer deductible. Deductions for meals furnished by the employer for its advantage (e.g., overtime, cafeteria, and training) is currently restricted to 50 percent of the cost until 2025, at which time no deduction will be allowed.
A complete deduction is still permitted for recreational and social events where workers are the principal beneficiary (e.g., holiday parties and employee excursions). A company’s best practice is to split out trial balance accounts and change cost reporting forms by:
Business Meals — Traveling
Business Meals — Outside of Office
Business Meals — In Office
Employee Social Occasions
14. Small companies (the recurring $25 million gross premiums) will be exempt from the limit. Real estate businesses may also elect from their interest expense limitation, but it is going to affect their recovery method on qualified improvement land.
For companies in real estate activities, the Act is much more lenient than suggestions which would have allowed either depreciation on the debt-financed property or an interest deduction on the debt-financed property.
15. Qualified Improvement Home: After technical amendments, the Tax Act is expected to permit improvements to the inside of a building to be retrieved over a 10-year lifetime unless the business has chosen from applying interest expense limitations utilizing the real estate business exclusion. The recovery period for electing property business taxpayers will be 20 years.
The new qualified improvement property that normally covers improvements to the inside of a commercial construction replaces the classes for qualified leasehold property, qualified restaurant property and qualified retail enhancement property.
16. Domestic Production Deduction: The 9 percent special deduction for manufacturing activities has been removed beginning in 2018.
17. Carried and Profits Interests: Partnership interests granted to employees for services stay capital assets, but they need to now be held for three years to get beneficial long-term capital gains rates from the sale of their interest or the partnerships underlying assets. The new three-year requirement applies to investment partnerships (commodities, derivatives, investment property, etc.), as well as the rules won’t impact partnerships with business operations.
18. Self-Created Assets: Profits from self-created patents, inventions, designs or models, or key formulae or procedures is known as ordinary income under the Tax Act, but it doesn’t include customer lists and goodwill as stated assets. However, the addition of models, designs, and procedures provides the service the chance to allocate some of the profits from a company sale to items which will generate ordinary gains.
Taxpayers selling a company should record the allocation of purchase price between intangible assets beginning in 2018. Intangibles associated with goodwill, clients, trademarks, workforce and providers should still acquire capital gain treatment.
19. Research Expenditures: Starting in 2022, companies will have to amortize research expenditures over a five-year interval. Please note the Tax Act refers to IRC Section 174 expenditures, which has a wider application than the expenses included in an R&D charge computation. Section 174 includes software development tasks in addition to some applications implementation expenditures. Given the reference to Section 174, promising study credits shouldn’t impact using the capitalization requirement.
Boyer Ginori CPAs & Associates Is a West Palm Beach CPA is more than happy to answer any of your questions in these matters.