Although the Tax Cuts and Jobs Act of 2017 was signed into law by President Donald Trump a year ago, local businesses remain unsure of how the revisions will affect them.
The Rochester Hispanic Business Association, for example, conducted two well-attended informational meetings on the TCJA this year, with the most recent one offered in November, said Grace Tillinghast, chair of the organization. She said RHBA members will have a better sense of how the TCJA affects them once tax season arrives and thereafter.
“It is challenging to comment on the new tax law because the IRS has not yet finalized all of the particulars,” noted Peter Glennon from The Glennon Law Firm in Pittsford. “Some things remain unclear, such as deductions for business entertainment and business development. Initially, such deductions were done away with. Now, it appears that some are back. The other business challenge affects professionals, such as attorneys, who utilize S corporation treatment.”
Peter Buttrill, a certified public accountant with Nacca & Capizzi in Greece, said most of the firm’s business clients want to know if their current organization status is still optimal for them, given the changes under the TCJA. For example, he said, a partnership may wonder whether to convert to a corporation to take advantage of the new corporate tax rate of 21 percent.
Buttrill also said that clients who own businesses are asking about the qualified business deduction and how it is expected to affect them, since most of them are such “pass-through” entities as partnerships and S corporations whose income is taxed at the individual level.
According to Buttrill, businesses can expect to see some of the following changes:
A reduced 21 percent corporate tax rate is permanent beginning in 2018. The TCJA also repeals the alternative minimum tax on corporations.
The bonus depreciation rate has fluctuated wildly over the last 15 years, from as low as zero percent to as high as 100 percent. It is often seen as a means to incentivize business growth and job creation. The TCJA temporarily increases the 50 percent “bonus depreciation” allowance to 100 percent. It also removes the requirement that the original use of qualified property must commence with the taxpayer, thus allowing bonus depreciation on the purchase of used property.
Deductions and credits
Numerous business tax preferences are eliminated. These include the Code Sec. 199 domestic production activities deduction, non-real property like-kind exchanges, and more. Additionally, the rules for business meals are revised, as are the rules for the rehabilitation credit. However, the TCJA leaves the research and development credit in place, but requires five-year amortization of research and development expenditures. It also creates a temporary credit for employers paying employees who are on family and medical leave.
In an attempt to “level the playing field” between businesses that capitalize through equity and those that borrow, the TCJA caps the deduction for net interest expenses at 30 percent of adjusted taxable income, among other criteria. Exceptions exist for small businesses, including an exemption for businesses with average gross receipts of $25 million or less.
Currently, up to the end of 2017, owners of partnerships, S corporations and sole proprietorships — as “pass-through” entities — pay tax at the individual rates, with the highest rate at 39.6 percent. The TCJA allows a temporary deduction in an amount equal to 20 percent of qualified income of pass-through entities, subject to a number of limitations and qualifications. New rules will prevent “pass-through” owners — particularly such service providers as accountants, doctors and lawyers — from converting their compensation income taxed at higher rates into profits taxed at the lower rate.
Net operating losses
The TCJA modifies current rules for net operating losses (NOLs). Generally, NOLs will be limited to 80 percent of taxable income for losses arising in tax years beginning after December 31, 2017. It also denies the carry back for NOLs in most cases, while providing for an indefinite carry forward, subject to the percentage limitation.