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Tax Reform Effect on Business
OC ELDER LAW EXPRESSES THE DETAILS ON CURRENT TAX REFORMS
The passing of the 2017 Tax Cuts and Jobs Act (TJCA) will present more significant impact on businesses, large and small than they have seen in over thirty years. The information below highlights just some of the anticipated changes. Your tax specialist should be consulted to best prepare for the impacts.
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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 35 percent, many companies have been able to reduce their effective tax rate by taking advantage of the tax credits available for research and development. Depending on the nature of the business, some businesses have been able to eliminate their effective tax through the use of this credit. Under TJCA, this credit 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.
179 DEDUCTIONS
The TJCA makes significant changes to the Section 179 deduction. The Section 179 deduction allows businesses to deduct 100 percent of the cost of qualified assets placed in service during a tax year, as opposed to depreciating the cost over several years. Previously, the 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-real property assets. TJCA limits 1031 Like-Kind Exchanges real estate transactions and removes its application for equipment. Loss of the 1031 option could have a significant effect on several industries that manufacture and/or use high-cost equipment, trucks, aircraft, printers etc.
INTEREST DEDUCTIONS
The bill caps the deduction for net interest expenses at 30% of income (excluding depreciation).
PASS-THROUGH BUSINESSES
Owners of partnerships, S corporations, and sole proprietorships, which are taxed as “pass-through” entities, have paid tax at the owner’s individual tax rate. Under the newly adopted bill, for tax years after 2017 and before 2026, individuals would be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorships, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. (Special rules would apply to specified agricultural or horticultural cooperatives.)
A limitation on the deduction would be phased in based on W-2 wages above a threshold amount of taxable income. The deduction would also be disallowed for specified service trades or businesses with income above a threshold.
ALTERNATIVE MINIMUM TAX (AMT)
The final GOP bill gets rid of the corporate alternative minimum tax, a big relief to the business community.
IMPORTANCE OF PLANNING
One thing that is certain, as the new legislation goes into effect it will be increasingly important for taxpayers to work early in the year with their advisors in order to plan for tax advantages within the new provisions and avoid potential minefields.
Marty Burbank, J.D., LL.M., is the founding Attorney at Law at OC Elder Law. He currently serves as the Board Chair for the North Orange County Chamber.
