Now that the Tax Cuts and Jobs Act (TCJA) has passed Congress and signed by the President, many business owners are wondering what the sweeping overhaul of the tax code could mean for their business. The new tax bill represents the largest overhaul of the tax code in decades. In general, the news for businesses is good. From large corporations to small business owners, TCJA could significantly reduce taxes for all businesses. For a more comprehensive look at how the bill could affect your business in 2018, talk with an experienced taxation lawyer. In the meantime, here is a breakdown of the largest changes to the tax code as they affect businesses.
1. Large Reduction in Corporate Tax Rate
A long overdue reduction in the corporate tax rate will finally make America competitive with other countries. Currently at 35 percent, America has the highest corporate tax rate in the developed world. TCJA will drastically reduce the rate to 21 percent, a rate that will save businesses over $1 trillion over the next decade.
2. Corporate Alternative Minimum Tax
Currently, there is a so-called “alternative minimum tax” for corporations, which requires that all corporations pay a minimum rate of 20 percent. The TCJA will repeal this parallel tax system.
3. Taxation of Multinational Companies
America will radically change the way it taxes companies that operate in countries all over the world. First, the system will change from a complex system requiring companies to pay taxes on profits earned anywhere in the world, but then provides tax credits for taxes paid to foreign governments and allows those companies to defer paying tax on the rest of their income until it chooses to bring the money back to the United States.
Under the new “territorial” approach to taxing multinational corporations, corporations will only be required to pay taxes on income earned in America. According to Republican legislators, TCJA includes “anti-abuse” measures that prevent a company from unfairly taking advantage of the new system.
In an effort to address the inevitable problem the current tax code created by incentivizing corporations to stash their money outside of the country, the TCJA will allow multinational corporations to bring the money back into the United States at reduced rates. For cash assets, the corporation will be required to be a 15.5 percent tax. For non-cash assets, the rate will be 8 percent.
4. Business Interest Deduction
Under the current code, businesses can fully deduct the cost of interest charged on loans used to operate the business. With TCJA, deductions on business interest would be capped at 30 percent of income.
5. New Investment Purchases
New investment purchases will be treated very differently under TCJA. Currently, there is a complex set of rules that force investments to be deducted as it “depreciates” the investment’s lifespan. The rules depend on the exact nature of the investment – cars generally depreciate within five years; office furniture gets a full seven years. Of course, these rules change every year and vary by industries, which can receive special treatment.
TCJA simplifies this unnecessarily complex framework of taxes, all investment purchases can be “fully expensed” the year that they were purchased. Notably, TCJA sunsets this provision at the end of five years. For legislation proposed by either party, sunsetting an otherwise popular and sensible regulation is a common political maneuver meant to reduce the long-term cost projections.
6. Section 179 Expensing
Nicknamed after its location in the IRS Code, Section 179 allows small businesses to deduct many types of equipment purchases during the year that it was purchased, instead of deducting the cost over several years. Currently, Section 179 expensing for small businesses is limited to $500,000. TCJA doubles this amount to $1 million. Companies in the manufacturing, construction, and agriculture industries stand to benefit the most from this new provision.
7. Net Operating Losses
Unlike other provisions in TCJA, the new treatment of net operating losses will not benefit businesses. Described by Republicans as a way to increase tax revenue of the bill, the current tax provision allows a company with a “net operating loss” to carry that loss forward and use it to “offset” income for twenty years, or backwards and offset tax that has already been paid, generating a refund for a company. Under TCJA, companies will only be able to deduct up to 80 percent of their net operating losses.
8. Research and Development Expenditures
Similar to the treatment of net operating losses, TCJA alters the current code’s treatment of research and development expenditures to raise tax revenue. Thus, the current tax provision allowing companies to immediately deduct their research and development expenditures will now require companies to spread out these expenses over several years.
Overall, the TCJA is likely to benefit both large and small businesses. Except for businesses that heavily utilize the current code’s treatment of net operating losses and research and development expenditures, the tax burden for businesses is about to be significantly reduced. If you have questions about how this new law may affect your company, schedule a consult with taxation attorney Stephen Thienel today. Mr. Thienel has decades of experience assisting clients in business taxation and tax planning and preparation, IRS litigation, and tax compliance for individuals and businesses. Thienel Law, LLC serves clients in Maryland, Virginia, and the District of Columbia.
This Blog/Web Site is made available by Stephen Thienel and Thienel Law, LLC for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand that there is no attorney-client relationship between you and Stephen Thienel and Thienel Law, LLC. The Blog/Web Site should not be used as a substitute for competent legal advice from a licensed professional attorney in your state