TAX REFORM EFFECT ON
BUSINESS OC ELDER LAW EXPRESSES THE DETAILS ON CURRENT TAX REFORMS
T
he passing of the 2017 Tax Cuts and Jobs Act (TJCA)
179 DEDUCTIONS
will present more significant impact on businesses, large
The TJCA makes significant changes to the Section 179 deduction.
and small than they have seen in over thirty years. The
The Section 179 deduction allows businesses to deduct 100 percent
information below highlights just some of the anticipated changes.
of the cost of qualified assets placed in service during a tax year, as
Your tax specialist should be consulted to best prepare for the impacts.
opposed to depreciating the cost over several years. Previously, the
CORPORATE TAX RATE The most significant change that we can expect in the TJCA is a reduced corporate tax rate. The highest corporate tax rate for business has been 35 percent. The TJCA lowers the maximum rate to 21 percent corporate rate. The reduced tax rate is a big win for pension funds such as CalSTRS and CalPERS, which have a significant holding in public equities. As the bottom line for public corporations improves, so will the retirement plans of teachers, police, fire, and other public employees. This may help lessen the burden of underfunded retirement obligations faced by municipalities and state governments.
RESEARCH AND EXPERIMENTAL TAX CREDITS Although historically while the corporate tax rate has been
Section 179 deduction was limited to $500,000. Under the new bill, the maximum amount that can be deducted in the year of acquisition will be increased to $5 million with an increased phase-out threshold. This will make it much easier for businesses to invest in new equipment because they will be able to deduct even large expenses in the year of acquisition. The bill also allows for capital investment, except for structures, to be fully and immediately deductible for five years.
1031 LIKE-KIND EXCHANGES 1031 Like-Kind Exchanges are a valuable way to defer capital gains taxes on fully depreciated assets. Historically, a 1031 Exchange allowed the owner to sell an asset with a gain and defer the tax on that gain by buying a new “Like-Kind� property. Under the old law, this can be done with real property or non-
35 percent, many companies have been able to reduce their
real property assets. TJCA limits 1031 Like-Kind Exchanges real
effective tax rate by taking advantage of the tax credits available
estate transactions and removes its application for equipment.
for research and development. Depending on the nature of the
Loss of the 1031 option could have a significant effect on several
business, some businesses have been able to eliminate their
industries that manufacture and/or use high-cost equipment,
effective tax through the use of this credit. Under TJCA, this credit
trucks, aircraft, printers etc.
will still be available, however, it will require a five-year amortization of research and development expenditures. The five-year amortization could lead to a significant corporate tax increase for industries that are heavy in research and development.
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INTEREST DEDUCTIONS The bill caps the deduction for net interest expenses at 30% of income (excluding depreciation).
