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.