Tax reforms 2020
KEY HIGHLIGHTS OF THE TAX CUTS AND JOBS ACT (TRUMP TAX REFORM) FOR BUSINESSES AND HOW THEY MAY AFFECT YOUR BUSINESS
In December of 2017 the Tax Cuts and Jobs Act (TCJA) ushered in some significant tax changes for businesses. One of the key benefits of the TCJA for businesses was a lower tax rate for C-corporations that became effective in the 2018 tax year. The graduated “C-corporation” tax rates were reduced from a range of 15% – 35% to a flat 21%. Keep in mind that this is only applicable in connection with federal corporate income taxes; State corporate tax rates may still apply depending upon the state. Here are some additional changes:
- The corporate AMT (Alternative Minimum Tax) was fully repealed beginning in 2018.
- A new like-kind exchange rule limits exchanges to real estate not held primarily for sale.
- The amount that a businesses could deduct for the purchase of qualifying equipment and/or software purchased or financed during the tax year doubled to $1 million, subject to certain
phase-outs and thresholds.
- Bonus depreciation doubled to 100% and was expanded to include used property. The effective date is for assets acquired and placed in service after September 27, 2017 and before January
- Pass-through entities (e.g., partnerships, s-corporations, and sole proprietorships) are entitled to a 20% qualified business income deduction. The provision is applicable for business owners
with income under $157,500 ($315,000 for married filing jointly).
Other changes that took effect with the TCJA and that may affect your business:
NEW NET OPERATING LOSS (NOL) RULES FOR CORPORATIONS
- Under previous rules, Corporations could offset all of their taxable income with a net-operating loss (NOL). Under the current rules, a Corporation may only establish an NOL for a maximum of 80 percent of their taxable income. If the total NOL is less than 80 percent of the taxable income, then the corporation would only be able to claim the lesser amount.
- Carryforward and carryback allowances for NOLs have also changed. The TCJA eliminated the twoyear carryback provision* that was allowed under the previous rules, that allowed corporations to look back two years and use NOLs to reduce tax obligations in those years. Under the TCJA, taxpayers will carry forward the NOL indefinitely; no longer limited to a 20-year period. These changes may have a significant impact on your business if you have had net operating losses starting up your business in the US.
EMPLOYER PROVIDED MEALS & ENTERTAINMENT DEDUCTIONS
Prior to the passage and implementation of TCJA, 50% of business-related meals and entertainment expenses were deductible. Effective January 1, 2018, the 50 percent deduction on entertainment expenses is repealed, regardless of whether the entertainment is business-related unless the expense is incurred for the benefit of the taxpayer’s employees (this will remain 100% deductible).
Business meals occasionally provided to employees for the employers convenience and benefit are no longer fully deductible. The TCJA extended the 50 percent deduction to such meal expenses. These meal expenses must be excluded from an employee’s income in order to qualify under the de minimis fringe benefit rules.
The tax exclusions for employees for employer-provided meals are unchanged by the TCJA. The TCJA also does not impact the employer’s 50 percent deduction for meal expenses incurred by employees on work travel. However, because the TCJA eliminated the entertainment expense deduction, any expenses associated with an employer’s provision of an on-site gym for employee use are fully nondeductible.
Relevant provisions: IRC sections 119, 132(e), and 274(n); TCJA section 13304
Prior to the enactment of the TCJA, “qualified moving expenses” paid for or reimbursed by an employer were excluded from an employee’s income and deductible by the employer. Qualified moving expenses generally included the expenses incurred by moving personal belongings and persons from one’s former residence to one’s new residence.
Under the TCJA, employers must include all moving expenses in employees’ wages subject to income and employment taxes (except with respect to certain active duty members of the armed forces). This rule applies whether the employee incurs the moving company expense directly (i.e., the employee contracts with the moving company, pays the moving company, and seeks reimbursement from the employer) or indirectly (i.e., the employer contracts with the moving company and pays the moving company for the benefit of the employee). Though the TCJA suspended the deduction for qualified moving expenses, employers may continue to deduct amounts for employer-provided moving expenses as an ordinary and necessary business
expense if the employer includes the amounts in the employee’s taxable wages. The TCJA provisions take effect in 2018 and sunset at the end of 2025.
Employers are struggling to understand the impact that this provision may have on their relocation program budgets. To the extent an employer wants to make an employee “whole” for moving expenses, a gross-up may be considered so that the “net payment” amount equals the cost of the moving company expense. However, gross-ups can be costly. Alternatively, some employers are contemplating the use of one-time bonus payments (also taxable) to offset the relocation costs an employee may incur, while also controlling the program’s cost.
Relevant provisions: IRC sections 132(g) and 217; TCJA sections 11048–11049
More information about the limitation of deductible expenses can be found on the IRS website.
* The two-year carryback may still be applied to farming losses.