Part II: How the GOP Tax Bill Impacts Small Businesses: Who wins and who loses? How does this affect tax planning?
The Tax Cut and Jobs Act, introduced on November 1, 2017, by the U.S. House of Representatives Ways and Means Committee, contains sweeping changes for individual and business taxpayers. The new tax legislation could be the largest rewrite of the U.S. Tax Code in decades, and will no doubt bring a tremendous amount of debate and scrutiny before it becomes law. The purpose of this article is to summarize some of the key provisions that impact small businesses. We previously addressed how the Tax Cut and Jobs Act will impact individual taxpayers in our previous article. Click on the link to see how individuals will be affected: How the GOP Tax Bill Impacts Individual Taxpayers: Who wins and who loses?
Corporate tax rates: Under current law, federal tax rates on corporate taxable income vary from 15% to 25%. Under the GOP bill, the maximum corporate tax rate would be reduced to 20%, the corporate Alternative Minimum Tax (AMT) would be eliminated, and pass-through business income (i.e., S corporations and partnerships) would be subject to a maximum rate of 25%, subject to anti-abuse rules and limitations.
Section 179 expense: The Section 179 expensing limit would be increased to $5 million (compared to $500,000 under current tax law), with an increased phaseout threshold.
Net operating losses: The GOP bill restricts the deduction of net operating losses (NOLs) to 90% (100% under current tax law) of next taxable income and allows NOLs to be carried forward indefinitely (twenty years under current tax law), increased by a factor reflecting inflation and real return on investment, but eliminates NOL carrybacks (two years for most businesses, five years for farming NOLs, and ten years for certain other types of NOLs, under current tax law).
Domestic production activities deduction: The domestic production activities deduction will be eliminated (under current tax law, up to 9% of qualified production activities expenses are deductible).
Section 1031 like-kind exchanges: Section 1031 treatment for exchanges for personal property will be eliminated under the GOP bill, but will still be allowed for exchanges of real property.
Local lobbying expenses: The business deduction for local lobbying expenses will be eliminated under the GOP bill.
Entertainment expenses: The GOP bill eliminates the deduction for entertainment, amusement or recreation activities, facilities, or membership dues relating to such activities or other social purposes. In addition, no deduction would be allowed for transportation fringe benefits, benefits in the form of on-premises gyms and other athletic facilities, except to the extent that such benefits are treated as taxable compensation to an employee. The current 50% limitation to qualifying business meals would continue to apply.
Employer-provided benefits: The GOP bill would eliminate:
- Tax-free employer-paid dependent care assistance programs (currently up to $5,000 per year)
- Tax-free employer-provided adoption assistance programs (currently up to $13,840 per year)
- Tax-free employer-paid moving expense allowances
Rehabilitation credit for historic buildings: The 20% credit for qualified rehabilitation expenditures with respect to a certified historic structure would be repealed under the GOP bill.
Work Opportunity Tax credit: The GOP bill would also repeal the 40% credit for qualified first-year wages of employees belonging to certain targeted groups.
New Markets Tax credit: Under the bill, the 5% credit for the first three years, and the 6% credit for the next 4 years, in qualified community development entities would be discontinued for any new investments.
Expenditures to provide access to disabled individuals: The 50% credit for qualified expenditures made by a small business for providing access to disabled individuals would be repealed.
The Bottom Line: The business winners under the GOP bill include corporations in the 20% tax bracket or higher, businesses that purchase more than $500,000 annually in depreciable assets with a useful life of 20 years or less, businesses with gross income between $5million and $25 million who would prefer to use the cash method rather than the accrual method of accounting. The business losers include employer who employ certain targeted group of employees or provide child care reimbursements to employees, businesses who incur entertainment, amusement, or recreation activities for their employees or customers, and businesses who have more than $10 million in gross income who must capitalize part of its general and administrative expenses as inventory, or businesses with a net operating loss in the current year who had taxable income in at least one of the two previous tax years.
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