Accounting On Us
Tax reform update
New rules, clarifications + more
Ryan D. Gorman, CPA
The topic of taxation has been discussed by just about everyone during the last twelve months – from dinner tables to board rooms, everybody has an opinion on the Tax Cuts and Jobs Act (TCJA) that was signed into law on December 22, 2017. The TCJA provided some of the most significant changes to our income tax code in over 30 years. With the 2018 filing season in full swing, this article is intended to provide talking points for you and your advisors to help determine how the tax reform changes apply to your business.
100% Bonus depreciation
The original bonus depreciation rules were implemented in 2001 and have been modified several times over the years. Under pre-TCJA law, businesses could claim a first-year bonus deprecation deduction equal to 50% of the basis of qualifying new (not used) assets placed in service. The deduction was generally available for the cost of qualifying new assets including computers, purchased software, furniture, fixtures and machinery and equipment.
TCJA allows 100% first-year bonus depreciation in the year of acquisition for all qualifying assets placed in service after September 27, 2017 and before December 31, 2022. The bonus depreciation percentages will begin to phase out in 2023. Qualifying assets purchased used now qualify for 100% bonus depreciation.
Choice of entity considerations
We all heard a lot about this change on the evening news. Under tax reform, C Corporations are now taxed at a flat 21% federal income tax rate. However, with any new entity formation, or change in entity, careful planning and discussions need to take place with your advisors. The reduction in income tax rate should not be the only consideration. The drawback to C Corps is that they are subject to two levels of taxation – one at the corporate level on earnings and one at the shareholder level on dividends. Dividends are generally taxed at the qualified dividend rate of 20% and may be subject to the 3.8% net investment income tax. In some situations, a C “Corporation” may make sense for your business. Both the short-term and long-term objectives of your business plan need to be evaluated before any changes are made.
Opportunity Zone tax incentives
Opportunity Zones were designed to stimulate investment in distressed communities throughout the country through tax benefits. Investors may defer tax on almost any capital gain up to December 31, 2026 by making an appropriate investment in a zone, making an election after December 21, 2017 and meeting other requirements.
In the case of a capital gain experienced by a partnership, the rules allow either a partnership or its partners to elect deferral. Similar rules apply to other pass-through entities, such as S Corporations and their shareholders, and estates and trusts and their beneficiaries.
In general, to qualify for tax deferral, the amount of the capital gain to be deferred must be invested in a Qualified Opportunity Fund (QOF). The QOF must hold at least 90% of its assets in qualified Opportunity Zone property. If you hold your QOF investment for at least 10 years, you may qualify to increase your basis to the fair market value of the investment on the date it is sold. These rules are complex and should be discussed with your Henry+Horne tax advisor.
Section 45S employer credit for paid family and medical leave
Internal Revenue Code Section 45S provides a tax credit for employers who provide paid family and medical leave to their employees. Eligible employers may claim the credit, which is equal to a percentage of wages they pay to qualifying employees while on family and medical leave. The credit is generally effective for wages paid in taxable years of the employer beginning after December 31, 2017 and is not available for wages paid in taxable years of the employer beginning after December 31, 2019. The minimum percentage is 12.5% and is increased by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages, with a maximum of 25%.
You must have a written policy in place that meets certain requirements. The policy must establish at least two weeks of paid family and medical leave (annually) to all qualifying employees who work full-time (prorated for employees who work part time), and the paid leave must not be less than 50% of the wages normally paid to the employee.
Meals and entertainment
Under the old law, businesses could generally deduct 50% of meals and entertainment expenses. Under TCJA, the modifications to this general rule specifically deny deductions for expenses for entertainment, amusement or recreation. TCJA continues to allow the deduction for 50% of a business meal expense, if the expense is ordinary and necessary when carrying on any trade or business. The expense must not be lavish or extravagant and the taxpayer, or an employee of the taxpayer, must be present when the food or beverages are furnished. The food and beverages must be provided to a current or potential business customer and purchased separately from any entertainment activities. Lastly, the cost of food and beverages must be stated separately from the cost of the entertainment on the invoice.
TCJA continues to allow a 100% deduction for office holiday parties. For meals provided for the convenience of the employer, or snacks provided to employees, the deduction has been reduced to 50%. It is important as a business owner, you understand these new rules and take adequate steps internally to account for these changes on your internal general ledger in advance of your annual income tax return filings.
Evaluating and understanding your tax accounting methods should be reviewed and discussed with your tax advisors on an annual basis. TCJA provided changes to multiple accounting methods. The ability for taxpayers to use the cash method of accounting increased from $5 million to $25 million in annual gross receipts and the exemption from the application of the UNICAP rules increased from $10 million to $25 million.
Other changes impacting accounting for inventories and long-term contracts were also made and should be evaluated. Talk to your Henry+Horne tax advisor to help determine if a change should be made and the required forms needed to properly adopt the change.
It’s an exciting time to be navigating through the tax reform changes for your business under TCJA. Stay tuned for upcoming articles on Section 199A, international tax reform and more. You can also subscribe to our Tax Insights blog for weekly tax updates.