When the Tax Cuts and Jobs Act of 2017 (TCJA) introduced sweeping changes to the tax code, the new, flat, 21% rate for C corporations got all the buzz. While a reduction from a potential maximum of 35% to a flat 21% was indeed newsworthy, that particular provision of the TCJA didn’t affect the vast majority of American businesses.
According to the Tax Foundation, over 90% of U.S. businesses — including sole proprietorships, partnerships, LLCs and S corporations — are what is known as pass-through businesses. The income generated by these entities is reported on the business owner’s returns, so there is no flat 21% corporate tax rate for them.
There was big news for pass-through businesses, though, and it came on two fronts: the changes in personal income tax rates and the creation of Section 199A, providing for a deduction of up to 20% of Qualified Business Income (QBI).
[Read: Still Not Clear on the New Tax Laws? Here’s How They’ll Affect Your Business]
Section 199A and its 20% QBI deduction had implications so far reaching they sparked conversation regarding the most tax advantageous business structure. But the TCJA had other provisions, which have the potential to impact a business’s tax liabilities and inform its decisions.
The TCJA introduced two new entities. Qualified Opportunity Zones (QOZs) are areas identified as requiring assistance with economic development and job creation. Investment in these zones, which have been designated in all 50 states, the District of Columbia and five U.S. territories, is done through a Qualified Opportunity Fund (QOF) and affords tax benefits to investors. A list of QOZs is available from the IRS, and a map is available from the Department of the Treasury.
[Read: Getting Ready to Launch? How to Choose the Right Business Structure]
The TCJA introduced new rules for:
- Meals and entertainment expenses. Deduction is allowed for 50% of the cost of meals and entertainment if the taxpayer or its employee is present. The food and beverage cannot be considered “lavish or extravagant.” The recipient must be a current or potential customer, client, consultant or business contact.
- Business interest expense, which is now limited (with exceptions) to 130% of taxable income.
- Like-kind exchanges. Previously defined as exchanges of real, personal or intangible property, the new law limits them to real property only.
- Payments made in sexual abuse or harassment cases. Previously, there was no mention of such payments in the tax code. The TCJA calls out certain payments made in these cases as not tax deductible.
- Deduction for local lobbying. The general disallowance for lobbying and political expenses now extends to lobbying local boards and governments. This activity was previously an exception.
- Net operating loss. Net operating losses can no longer be carried backward for two years. Under the new rules, losses suffered in tax years after 2017 can only be carried forward. The deduction can not exceed 80% of taxable income.
The TCJA changed depreciation regulations for:
- Expensing business assets. The TCJA allows, temporarily, for 100% expensing of qualified property acquired between September 27, 2017, and January 1, 2023. The allowance decreases 20% each year, starting in 2022. The new law also redefines certain items as qualified property, including some used items.
- Deduction for depreciable assets. The TCJA raises the maximum deduction to $1 million and modifies the definition of qualified assets.
- Luxury automobiles. The allowable first-year depreciation was increased from $10,000 to $18,000.
- Computers and peripherals. The TCJA removes them from the definition of listed property.
In addition to the above, the TCJA changed regulations regarding fringe benefits:
- Bicycle commuting expenses must now be reimbursed in the employee’s paycheck. The reimbursement is a qualified business expense for the employer.
- Moving expense reimbursements must also be included in the employee’s paycheck, subject to taxes.
- A new tax credit for employers who provide paid family leave is also included in the law.
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