IT is not every day I elect to write this blog before my CORE beliefs missive. But there are some provisions of the new tax act that have an impact to clients that I think has not received enough attention. The tax changes for corporations can be found in Subtitle C – Business Related Provisions.
Tax Rates
Most Corporations will be subject to tax at 21% of taxable income. It is a flat tax so every dollar of taxable income is taxed at the 21% rate. For those Corporations where income was managed to a lower bracket, like 15%, this is no longer effective. So, some Corporations will pay higher (although in the scheme of things, really small dollar truth be told) but overall Corporations will pay less.
Professional Service Companies
We have several clients who were structured as C Corporations which are also treated as Professional Service Corporations (PSC’s). These have always been subject to a flat rate of 35%. From what I read this has now been reduced to 25%.
Effective Date
Sadly, while this tax law will likely take effect 1/1/2018, it is for taxable years BEGINNING after 1/1/2018 so if you have a fiscal year that doesn’t end by 12/31/2017 you will not be able to see any advantages of this until the next fiscal year. So, June 30 clients you are not going to see the benefits of this tax law until the next fiscal year beginning 7/1/2018. There is a special provision for certain asset purchases, however, which takes effect as of 9/27/2017.
Qualified Real Property
An interesting change is adding specific real property to the defining of property subject to the new $1,000,000 section 179 limit.
(f) Qualified real property.—For purposes of this section, the term ‘qualified real property’ means—
“(1) any qualified improvement property described in section 168(e)(6), and
“(2) any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service:
“(A) Roofs.
“(B) Heating, ventilation, and air-conditioning property.
“(C) Fire protection and alarm systems.
“(D) Security systems.”.
The key term is nonresidential – so rental homes and apartments won’t qualify but if you own a commercial building in an LLC and lease it to your Company it will.
Use of Cash Method of Accounting
Raises the income limit to $25,000,000 so many very large “small” businesses will not have to do the mandatory switch-over to accrual. By the way, this limit also is for Unicap rules under 263(a) and the use of the percentage of completion method for construction.
Special Write-off of Fixed Assets subject to MACRS
All purchases between 9/27/2017 and 1/1/2023 are subject to 100% expensing. Notice that includes purchases in 2017 that occurred after 9/27.
Limitations on Interest Deductions
This doesn’t seem as straightforward as it sounds. Interest deductions on borrowed money will be limited to the interest income recorded PLUS 30% of adjusted taxable income (taxable income before accounting for interest) PLUS flooring interest. Although there appears to be an exception:
(3) EXEMPTION FOR CERTAIN SMALL BUSINESSES.—In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year, paragraph (1) shall not apply to such taxpayer for such taxable year. In the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if such taxpayer were a corporation or partnership.
So, if you are under the $25,000,000 ceiling discussed earlier, this doesn’t apply. So, small real estate developers, it doesn’t seem like you have to worry that the interest you pay will not be deductible.
Loss Carryback and Carryforward
There is no longer a carryback of losses. They are carried forward indefinitely.
Like-Kind Exchanges
1031 no longer applies to all property. It is now only applicable to real property. It is a big deal but not as big as it seems since 1031 was almost exclusively used for real estate. But I have had clients with large investments in equipment that we ran through the 1031 exchange because of the deferred nature of the activity, plus the equipment was sold to one party and purchased from another.
Fringe Benefit Deductions
This is potentially a bigger issue than reported. If you provide food as a working condition fringe, you no longer get to deduct the expense; this includes the operation of the cafeteria and kitchen. Same for transportation and commuting benefits you paid for employees. This includes parking.
Domestic Production Activities Credit
No surprise here that this is being eliminated since tax rates are going down.
Carried Interest Rule
This rule was modified to require that the investment be held 3 years before any payments received are treated as capital gain. This is a minor change since most investments of this nature are held over a year anyway before the arrearage of the performance fee is paid. This will change how some investor/developer deals are structured – maybe.
Using Gift Cards and Cash for Employee Awards
Beginning 1/1/2018 you will no longer be able to keep “safety bonuses, etc.” out of wages. If you give your employees anything with value it must be included in their W-2 and subject to appropriate taxes.
I still need to get through the various business tax credits but I think this gives you an idea of the major changes in store for businesses – especially those treated as a C Corporation. I should finish this sometime around Christmas.
Have a great weekend.
Accounting Clarity 