Thanks to new tax laws going into effect in 2018, most businesses in the U.S. will enjoy tax cuts in the new year. In most cases, these changes will take effect for tax years beginning January 1, 2018, and will be permanent. Here’s a look at some of the most common changes that businesses can expect from these tax cuts:
Changes from Tax Cuts in the New Year
Corporate Tax Rates
Previously, C-corporations paid a graduated tax rate between 15% and 35% and personal service corporations (PSCs) paid a 35% flat rate, but these percentages are falling with the tax cuts in the new year. Under the new law, a flat rate of 21% will apply to all corporations—including PSCs. The Corporate Alternative Minimum Tax (AMT) has also been eliminated.
Assets and Depreciation Provisions
Most businesses will be able to deduct more for capital expenditures in the first year they’re placed in service. In some cases, businesses can depreciate any remaining amounts over shorter time periods. Two key tax cuts in the new year allow for accelerated expensing:
Expanded Section 179 Deductions
For qualifying property placed in service in tax years beginning in 2018, the maximum deduction nearly doubles to $1 million and the deduction phase-out threshold increases from $2.03 million to $2.5 million. The definition of eligible property has also been expanded to include certain depreciable tangible personal property used predominantly to furnish lodging. The definition of qualified real property eligible for the deduction is also expanded to include qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property.
Larger First-Year Bonus Depreciation
For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage is increased to 100% and will be allowed for both new and used qualifying property. In subsequent years, the first-year bonus depreciation deduction is scheduled to be reduced to 80% for property placed in service in the calendar year 2023; 60% for 2024; 40% for 2025; and 20% for 2026. For certain property with longer production periods, the cutbacks will be delayed by one year (i.e., the 80% deduction rate will apply to property with long production periods that are placed in service in 2024).
Deductions for Passenger Vehicles Used for Business
These deductions apply to new and used passenger vehicles that are used more than 50% for business, and have been placed in service in 2018 or later. The changes are as follows (slightly higher limits will apply to light vans and trucks), and will result in tax cuts in the new year for businesses:
- Year One: $10,000 is deductible (previously, $11,160 was deductible for a new car and $3,160 for a used car).
- Year Two: $16,000 is deductible (previously $5,100).
- Year Three: $9,600 is deductible (previously $3,050).
- Year Four and Beyond: $5,760 per year until the vehicle is fully depreciated (previously $1,875).
Limits on Business Interest Deductions
With some restrictions, the previous law allowed full deductions for interest paid or accrued by businesses. Beginning with tax years in 2018, businesses will generally not be able to deduct interest of more than 30% of adjusted taxable income. The definition of “adjusted taxable income” will be calculated with deductions for depreciation, amortization and depletion added back until 2021. After this year, businesses will not have to add these figures when calculating adjusted taxable income.
For S corporations, partnerships and LLCs that are treated as partnerships for tax purposes, this limit will apply at the entity level, rather than at the owner level. Business interest expense that is not allowed under this limitation will be treated as business interest for the following taxable year. Amounts that are not deductible in the current year can generally be carried forward indefinitely.
Additionally, some taxpayers will be exempt from this limitation, including:
- Taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the 3 previous tax years
- Real property businesses that choose a slower depreciation method for real property
- Farming businesses that choose a slower depreciation method for farming property with a normal depreciation period of 10 years or longer.
Another exemption applies to interest expense from dealer floor plan financing. For example, this exemption applies to dealers that finance purchases or leases of motor vehicles, boats or farm machinery.
Deductions for Business Entertainment and Certain Employee Fringe Benefits
Previously, 50% of business-related meals and entertainment were deductible. Also, meals provided to an employee by their employer on the business premises were 100% deductible by the employer and tax-free for the employee. Several other employer-provided benefits were also deductible and tax-free to the employee.
Under the new law, entertainment deductions incurred after December 31, 2017, have been eliminated. Meals purchased during business-related travel will still be 50% deductible. For meals provided via an on-site cafeteria or brought onto the employer’s premises will be 50% deductible until 2025, after which they will no longer be deductible. Additionally, the new law will not allow employers to deduct for commuting transportation costs unless the costs are necessary for employee safety. Additional transportation expenses such as parking allowances and mass transit passes will no longer be deductible, but will remain tax-free for the employee.