On December 22, 2017, The President has signed the biggest tax reform law in over 30 years. This is officially called the “Tax Cut and Jobs Act” or TCJA.
Corporate Tax Rate
For tax years beginning after Dec 31, 2017, C-Corporation Tax rate is now a flat 21%. The graduated Corporate tax rates varying from 15% to 35% have been repealed.
For tax years beginning after Dec 31, 2017, the Corporate Alternative Minimum Tax (AMT) is permanently repealed. Prior to the new law, the AMT is calculated parallel to the regular tax calculation. The AMT typically uses a different method of depreciation on assets, disallows and adjusts certain deductions, and computes at a flat tax of 20%. This was created as a way to sort of preventing corporations from taking too many deductions, hence it was a minimum tax. The difference in tax calculated by the regular and AMT method can be taken as a tax credit against future income known as the AMT tax credit.
The new law allows corporations to use their AMT credit carryovers in their 2018–2021 tax years to offset regular tax liability with 50% of any remaining unused credits being refundable through 2020. In 2021, 100% of any remaining credits are refundable.
Bonus Depreciation & Section 179
For assets acquired after September 27, 2017, and before January 1, 2023, the TCJA provides for full and immediate depreciation expense of 100% of the cost of NEW and USED qualified property. Prior to September 27, 2017, Bonus depreciation only allows for 50% depreciation of the cost of acquiring only NEW qualified property.
Similar to 100% Bonus Depreciation is the Section 179 deduction, which also allows you to take a 100% depreciation deduction on the year the qualified asset is placed in service. Section 179 under the previous law allowed for 100% depreciation of tangible personal property, such as equipment, but after December 31, 2917, this will now include improvements to non-residential, HVAC, fire protection, roofs, and security system. This deduction limit will also go up from $500,000 to $1 million. Section 179 has a phase-out threshold of $2.5 million, which means the deduction is reduced dollar for dollar by the amount of section 179 qualified assets purchased during the year exceeding the phase-out.
De-Minimus Safe Harbor Capital Expenditures
Starting after Dec 31, 2016, you can expense capital expenditure up to $2,500 up from $500 per unit without capitalizing the asset.
Net Operating Loss
Net Operating Loss (NOL) carryback is repealed, NOL carryforward will still be allowed indefinitely with new limitations. The NOL carryforwards are now limited to 80% of the taxpayer’s taxable income for the year of the claimed deduction.
Business Interest Expense
Business interest deduction is now limited to 30% of business “adjusted taxable income” (EBITDA). Any business interest that is not deductible will be carried forward indefinitely.
Meals and Entertainment
Under TCJA, Meals is now only 50% deductible; Entertainment expenses are no longer deductible.
Prior to Dec 31, 2017 Meals and Entertainment were typically deductible under the 50% rule with an exception under the De-minimus Employee Fringe benefit rule, which allowed for a 100% deduction for Meals and Entertainment that were directly used to the benefit of the Employee, such as company picnics, corporate Christmas parties, warrior’s suite, etc.
Harvey Weinstein Tax
Deduction will be disallowed for Legal Fees related to settlements of sexual harassment or sexual abuse if there is a nondisclosure agreement in place.
Base Erosion Anti-Abuse tax (BEAT) provision
The BEAT applies to corporations (other than RICs, REITs, or S corporations) that are subject to US net income tax with average annual gross receipts of at least $500 million and that have made related-party deductible payments totaling 3% (2% for banks and certain security dealers) or more of the corporation’s total deductions for the year.
The anti-abuse tax serves as a 10 percent minimum tax (12.5 percent after 2025) on U.S. entities’ payments to foreign affiliates. It is calculated by disallowing some deductible amounts paid to related parties, but it does not include costs of goods sold in that dis-allowance.