What Effect Did the Tax Cuts and Jobs Act Have on Business Taxes?
Congress passed the contentious Tax Cuts and Jobs Act in December 2017. The most recent taxes this spring are the first since the law went into effect, and represent the biggest tax reform overhaul in 30 years. Businesses have seen major changes in how they completed their tax returns this past spring.
While we’re well into 2019 and a year-and-a-half removed from the bill’s passing, we’re still learning what effects the bill is having on businesses.
Corporate tax rate and corporate alternative minimum tax
Under the TCJA, all C corporations have a single tax rate of 21 percent; previously, C corporations had a tax rate ranging from 18 to 35 percent. This brings the United States below the average for member countries of the Organisation for Economic Co-operation and Development.
TCJA repealed the corporate alternative minimum tax.
Tax base for corporations and other businesses
TCJA allows business to deduct the full cost of an investment in a long-term asset in the year the purchase was made, also called 100 percent bonus depreciation or full expensing. This benefit will eventually phase out, with decreasing by 20 percentage points in 2023 and will be eliminated in 2026. The bonus depreciation benefit incentivizes businesses to purchase capital assets.
Small business owners can now deduct up to $1 million of the cost of personal purchases used more than 50 percent of the time for businesses.
Businesses can now deduct up to 30 percent of business income before interest, depreciation and amortization. In 2022, the adjustment for depreciation and amortization will be eliminated. Businesses earning less than $25 million are exempt from the limitation.
Under TCJA losses can only be deducted in current and future years, and only up to 80 percent of taxable income. Previously, if a business had a net operating loss it could receive all or part of a tax refund for the past two years.
Pass-through business income deduction
S proprietorships, limited liability corporations, partnerships and S corporations are also known as “pass-through entities.” These businesses do not pay taxes as a corporation, so the tax is passed through to the owner and subject to individual tax rates. Under the TCJA, these rates could be as high as 37 percent; however, business owners now deduct up to 20 percent of their business income on their individual returns. They may also continue to claim deductions for other business expenses.
If you do business internationally, the TCJA also impacts your foreign source income and international financial flows. Under TCJA there is now a modified territorial tax system. U.S. corporations owe U.S. taxes on profits they earn in the U.S.; however, U.S. corporations are exempted from taxes on the dividends they receive from foreign corporations in which they own at least a 10 percent stake.
TCJA was designed to guard against incentivizing companies to move investment and income reporting to low-tax jurisdictions. Lawmakers included guardrails to deter this from happening.
If you’re looking for a tax professional to help your company at tax time or year-round, contact our team at Patin and Associates.