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Tax Cuts and Jobs Act: Impact on Corporations
Mar 29, 2018
For corporations, the recently-enacted Tax Cuts and Jobs Act packs a significant punch in terms of tax advantages. Most notably, the dramatic reduction in corporate tax rates and the elimination of the Alternative Minimum Tax will enable corporations to hold on to more of their revenue.
However, the TCJA is a mixed bag, and many companies will find that its advantages are counterbalanced by other provisions that may minimize any tax savings. Companies in certain industries will do better than others, and companies with a certain mix of expenses, deductions and credits also will do better than others.
Broadly, the TCJA benefits corporations more robustly than it does individuals, in that its reduction in tax rates is much larger, and the benefits for corporations that are built into the law are permanent.
Following is an overview of the most significant provisions of the TCJA on corporations. In the coming months, we will inform you further about specific impacts of the new law on certain types of businesses.
New corporate income tax rates
For tax years beginning January 1, 2018 or later, the corporate tax rate has been simplified to a flat corporate tax rate of 21%. This removes the former tiered corporate tax rate structure approach of 15% to 34% for corporations with up to $335,000 in revenue, and 34% to 35% above $335,000. Corporations with non-calendar fiscal years will have a blended tax rate for the first year. For example, companies with a March 31 year end will have nine months at the old rate and three months at the new 21% rate.
Alternative Minimum Tax (AMT) for corporations repealed
Prior to the TCJA, the corporate alternative minimum tax (AMT) was at a 20% rate, but corporations were exempt if they had average annual revenue under $7.5 million. Beginning in 2018, the new law repeals the corporate AMT. For corporations that paid the corporate AMT in earlier years, an AMT credit was allowed under prior law. The new law allows corporations to fully use their AMT credit carryovers, and the credit may be refundable.
Bonus depreciation rules enhanced
For qualified property acquired between September 28, 2017 and December 31, 2022, bonus depreciation of 100% is allowable; previously 50% was allowable. This will ratchet down by 20% each year through December 31, 2026, and will be eliminated in 2027. Bonus depreciation now applies to used qualified property, prior to September 28, 2017 property had to be new.
New limits on business interest deductions
With certain exceptions, interest paid or accrued by a business generally was fully deductible under previous law. Under the TCJA, affected corporate and non-corporate businesses generally can’t deduct interest expenses in excess of 30% of “adjusted taxable income,” starting with tax years in 2018. (For S Corporations, partnerships and LLCs that are treated as partnerships for tax purposes, this limit is applied at the entity level rather than at the owner level.)
For tax years beginning in 2018 through 2021, adjusted taxable income is calculated by adding back allowable deductions for depreciation, amortization and depletion. After that, these amounts aren’t added back in calculating adjusted taxable income.
Business interest expense that’s disallowed under this limitation is treated as business interest arising in the following taxable year. Amounts that cannot be deducted in the current year can generally be carried forward indefinitely.
Note: Corporations with average annual revenue less than $25 million are exempt from the interest deduction limitation.
Employer deductions for business meals and entertainment
Prior to the TCJA, corporations generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee. Various other employer-provided fringe benefits were also deductible by the employer and tax-free to the recipient employee.
Under the new law, starting in 2018, deductions for business-related entertainment expenses are disallowed. Meal expenses incurred while traveling on business are still 50% deductible, but the 50% disallowance rule will now also apply to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will be nondeductible. Meals in conjunction with entertainment are now nondeductible.
Research and development (R & D) expenses modified
In the past R & D expenditures were expensed as incurred and certain companies who qualified could take advantage of R & D tax credits. The R & D tax credits have remained intact, but some changes have been made to the R & D expenditure rules. Under the new tax bill, starting in 2023 R & D expenditures must be capitalized and amortized over five years, and certain R & D expenditures which are attributable to research conducted outside the U.S. are required to be capitalized and amortized over 15 years.
Domestic Production Activities Deduction (DPAD) eliminated
The DPAD deduction (under IRS code section 199) which reduced taxable income (or qualified domestic production activities income) by approximately 9% has been eliminated. The provision is effective for corporations for tax years beginning in 2018.
Net Operating Loss (NOL) rules modified
In the past NOL carrybacks were allowed for up to two years, and carryforwards were allowed for up to 20 years. Under the new tax law, for losses arising in 2018 or beyond, NOLs may no longer be carried back. NOL carryforwards are now carried forward indefinitely subject to an annual limitation of 80% of taxable income. Important note: There is no small business exemption for the C Corporation NOL limitation.
Like-kind exchanges are no longer allowed under the TCJA, except for real estate.
For more information about the new tax law, visit our Tax Cuts and Jobs Act resource page at www.GTReilly.com/news. If you would like a consultation to discuss how the TCJA may affect you and your business, please contact us. We are ready to help.
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