The Tax Cuts & Jobs Act of 2017 (TCJA) is providing many business owners with a potential treasure trove of tax savings but also potential surprises. In this short article, we’ll be discussing some of the changes to depreciation, interest expense deductions, plus other changes that may significantly impact your business for the next few years.
Beginning after Sept. 27, 2017 , a business may be eligible to utilize “bonus depreciation” to depreciate 100% of qualifying assets, new or used, in the year purchased. Previously, only new assets were eligible for bonus depreciation. There is of course a caveat: vehicles whose gross vehicle weight is less than 6,000 pounds are not eligible for 100% depreciation and the vehicles have set depreciation limits for each year.
However, if your business purchases such a vehicle, it’s still eligible for full expensing under Section 179. Before you rush out to purchase that SUV for your business, you will want to make sure your vehicle purchase meets the ordinary and necessary business requirements of Internal Revenue Code Section 162.
The TCJA also introduced a new limitation on the deduction of interest expense. Previously, interest could be deducted in the year it was paid or accrued, with some limitations. Moving forward, the Act limits interest expense to 30% of adjusted taxable income plus any floor plan financing interest. Businesses with average annual gross receipts of less than $25 million, are exempt from this limitation. Fortunately, any disallowed interest is carried forward indefinitely, but the carryover is now subject to limitations under IRC Section 382.
C-corporations received a major windfall with the lowering of the corporate tax rate to a flat 21%. However, the dividends received deduction has been reduced for corporate shareholders owning less than 100% of a related corporation. Post TCJA, if a corporation owns less than 20% of another corporation, the corporate shareholder can only deduct 50% of the dividends received. Corporations owning more than 20% of another corporation but less than 80% will have their deduction limited to 65%, down from 80% pre-TCJA.
In an effort to provide noncorporate owners of passthrough entities a similar rate reduction, the TCJA introduced the IRC Section 199A deduction. This deduction is not as straight forward as the 21% corporate tax rate and is subject to several limitations and phaseouts.
The 199A deduction is generally equal to 20% of Qualified Business Income (QBI) from a passthrough entity. However, if a married filing jointly taxpayer’s income exceeds $315,000, a wage limitation is slowly phased in. The wage limitation is 50% of a business’s W-2 wages or the sum of 2.5% of the unadjusted basis of qualified property plus 25% of W-2 wages.
Once a taxpayer has taxable income over $415,000, the wage limitation is fully phased in. Unfortunately for businesses known as “specified service trades or businesses” (e.g. accounting, actuarial services, attorney, healthcare services, performing arts…), once the upper taxable income threshold is reached, the 199A deduction is eliminated completely.
The change in accelerated depreciation, the new interest expense limitation rules, the lowering of the corporate tax rate, and the addition of the 199A deduction provide unique planning opportunities for many business owners to sit down with their CPA to understand all the effects the TCJA has on the business and their personal taxes as well.
Consult your tax advisor to better understand your business tax options.
This article originally published in the Houston Business Journal.