Many provisions of the Tax Cuts and Jobs Act will reduce the amount of taxes businesses will owe, starting in 2018. 4 provisions in particular may shed extra light on the Tax Cuts and Jobs Act:
4 Provisions of the Tax Cuts and Jobs Act
Quicker Depreciation for Qualified Improvement Property
There were three separate definitions for “qualified leasehold improvement property,” “qualified restaurant property” and “qualified retail improvement property.” Now there is one umbrella term – “qualified improvement property” – for property placed in service after December 31, 2017. These properties can be depreciated over 15 years.
Quicker Depreciation for New Farming Machinery and Equipment
The Tax Cuts and Jobs Act shortens the depreciation period for new machinery and equipment that is pressed into duty after December 31, 2017, from seven years to five years. This machinery and equipment – other than cotton ginning assets, fences, grain bins, or other land improvements – must be used in a farming business. As an extra incentive, the faster double-declining balance method can be used to calculate annual depreciation deductions.
Paid Family and Medical Leave
The Tax Cuts and Jobs Act allows employers to claim a general business tax credit equal to 12.5 percent of wages paid to qualifying employees while they are on family or medical leave, while wages are paid after December 31, 2017 and before January 1, 2020. Employees must receive at least 50 percent of their normal wage while on leave. In addition, the credit rate increases by 0.25 percent for each percentage point that the wage rate paid while on leave exceeds 50 percent of the normal rate. However, the maximum credit rate is 25 percent. An employer must provide qualifying full-time employees with at least two weeks of annual paid family and medical leave to be eligible for the credit. Part-time employees must be afforded a proportionate amount of leave time.
Accounting Change for Construction Contracts
In the past, construction companies were usually required to compute annual taxable income from long-term contracts for the construction or improvement of real property by using the percentage-of-completion method. Exempt from this requirement were construction companies with average annual gross receipts of $10 million or less – at least in the preceding three tax years. The Tax Cuts and Jobs Act expands this exemption to cover contracts for the construction or improvement of real property if they are:
- Expected to be completed within two years
- Performed by a taxpayer with average annual gross receipts of $25 million or less for the preceding three tax years
The tax breaks provided by the act will come at no small expense to the federal government; they will cost a huge amount of money. The government fully intends to recoup through:
Less Favorable Treatment of Carried Interests
Historically, hedge funds and private equity funds have been structured as limited partnerships. Under previous law, carried interest arrangements allowed private equity fund and hedge fund managers to waive their right to receive fees so that they could derive an interest in future profits from the private equity/hedge fund partnership. Such arrangements are called “carried interests”. To make them even more attractive, the private equity/hedge fund manager isn’t taxed on the receipt of the carried interest. This is because it is not deemed a taxable event.
After tax year 2017, carried interest arrangements will face a vexing challenge in the form of a three-year holding period. During this time, profits from certain partnership interests received in exchange for the performance of services will be treated as long-term, low-taxed capital gains.
Some Assets No Longer Treated as Capital Assets
The Tax Cuts and Jobs Act states that certain intangible assets can no longer be treated as capital gain assets for dispositions in 2018 and beyond. This change affects:
- Models and designs (both patented and not)
- Secret formulas
The change will cover the types of intangibles that are:
- Created by the taxpayer
- Acquired from the creating taxpayer with the new owner’s basis in the intangible determined by the creating taxpayer’s basis
The latter situation could occur if a taxpayer:
- Gifts an intangible to another individual
- Contributes an intangible to another taxable entity, such as a partnership or corporation.