2017 Federal Tax Act - Business Tax Provisions
The most salient provisions of the 2017 Federal Tax Act relating to the taxation of domestic business activities are as follows:
- The current corporate graduated income tax rates are eliminated and replaced with a flat tax rate of 21%, although personal service corporations continue to be taxed at a 35% rate. The current 70% dividend received deduction is reduced to 50% and the current 80% dividend received deduction is reduced to 65%, resulting in an effective tax rate on dividends of 10% and 7%, respectively. The changes are effective for taxable years beginning after December 31, 2017.
- The corporate alternative minimum tax (AMT) is repealed for taxable years beginning after December 31, 2017. Existing AMT credits can offset a corporation’s regular tax liability.
- The deduction for interest is subject to new limitations for taxable years beginning after December 31, 2017. Except for taxpayers who meet the $25 million gross receipts test (described below), the deduction for interest is limited to the sum of investment interest income, 30% of adjusted taxable income, and floor plan financing interest. The disallowed interest deduction can be carried forward indefinitely. For taxable years beginning after December 31, 2017 and before January 1, 2022, adjusted taxable income is computed without regard to deductions for depreciation, amortization or depletion. Special rules apply for interest paid by pass-through entities.
- Net operating losses (NOLs) are now subject to new limitations for taxable years beginning after December 31, 2017. NOLs can generally be deducted to the extent of 80% of taxable income. As a general rule, NOLs can no longer be carried back two years and must be carried forward, but such NOL carryforwards can be used indefinitely (instead of being limited to a 20-year carryover period).
- Bonus first-year depreciation has been increased from 50% of the adjusted basis of qualified property to 100% for property placed in service after September 27, 2017 and before January 1, 2023. For the 2023, 2024, 2025 and 2026 taxable years, the bonus first-year depreciation rate is 80%, 60%, 40% and 20%, respectively. Longer production period property and certain aircraft have more favorable rates for the 2023 through 2027 taxable years.
- Bonus first-year depreciation now applies to used property (previously it only applied to new property) and the current law phase-down of bonus depreciation will continue to apply to property acquired before September 28, 2017 and placed in service after September 27, 2017. Corporations can elect 50% (instead of 100%) bonus first-year depreciation for the first taxable year ending after September 27, 2017.
- The depreciation periods for non-residential and residential real property remain unchanged at 39 years and 27.5 years, respectively, but qualified improvement property is now depreciated over 15 years for property placed in service after December 31, 2017.
- The ability under Code Section 179 to expense the cost of qualifying property, instead of depreciating same, is now subject to higher limits. The current $500,000 limit was increased to $1 million for property placed in service for taxable years beginning after December 31, 2017. The phase out threshold, i.e., the amount where the cost of qualifying property is reduced, was increased from $2 million to $2.5 million. The $1 million and the $2.5 million amounts are indexed for inflation starting after 2018. The scope of qualified real property eligible for Code Section 179 expensing was expanded for certain improvements to non-residential real property, such as roofs, HVAC property, fire protection and alarm systems and security systems.
- The depreciation limitations for luxury automobiles and personal use property were relaxed. For passenger automobiles that are placed in service after December 31, 2017 (and for which the new bonus first-year depreciation is not claimed), the first-year depreciation is increased from $3,160 to $10,000. Depreciation amounts for the second, third, fourth and later tax years were also increased. Computers and peripheral equipment are no longer subject to the personal use property limitations.
- The ability to use the cash method of accounting was expanded for small businesses for taxable years beginning after December 31, 2017. Under current law, a C corporation, a partnership that has a C corporation as a partner, or a tax-exempt trust or corporation with unrelated business income cannot generally use the cash method of accounting unless their average gross receipts do not exceed $5 million for all prior years. The $5 million limit will be increased to $25 million and the testing period is now the three prior taxable years. The current law rule that permits the use of the cash method of accounting for qualified personal service corporations, partnerships without a C corporation as a partner, S corporations and other pass-through entities continues to apply irrespective of whether the entity meets the $25 million gross receipts test. The $25 million is indexed for inflation for taxable years beginning after 2018.
- Taxpayers who meet the $25 million gross receipts test are not required to account for inventories, but can instead use a method of accounting for inventories based on the non-incidental materials and supplies approach or that conforms to the financial accounting treatment of inventories. This change is effective for taxable years beginning after December 31, 2017.
- Taxpayers who meet the $25 million gross receipts test are also not subject to the UNICAP rules of Code Section 263A. This change is effective for taxable years beginning after December 31, 2017.
- The like-kind exchange rules will now apply only to real property that is not held primarily for sale. The new rules apply to exchanges completed after December 31, 2017.
- The present-law exception that permitted in certain cases the deduction of entertainment expenses associated with an active trade or business, including the 50% limitation on the deductibility of food and beverage costs, is repealed for amounts paid or incurred after December 31, 2017. The disallowance rule also applies to membership dues with respect to a club organized for business, pleasure, recreation or other social purposes or a facility used in connection with such items.
- The research and development credit is preserved.
- Specified research or experimental expenditures are now required to be capitalized and amortized ratably over a five-year period (15-year period for research conducted outside of the US). The change is effective for amounts paid or incurred in taxable years beginning after December 31, 2021.
- The ability to roll over tax-free capital gain realized on the sale of publicly traded securities is repealed for sales after December 31, 2017.
- Effective for payments made or incurred after the date of enactment, no deduction is allowed for a settlement or payment, including attorney fees, related to a sexual harassment or a sexual abuse if the payment is subject to a nondisclosure agreement. This change applies to amounts paid or incurred after the date of enactment.
- New limits apply, with limited exceptions, on the deduction of amounts paid or incurred to or at the direction of a government or a specified nongovernmental entity in relation to the violation of any law or the investigation into the potential violation of any law where the government is a complainant or investigator with respect to the violation or potential violation of law.
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