Dallas, Texas, December 2017– With the passage of the “Tax Cuts and Jobs Act”, there are significant changes for corporations and businesses in the way tax is calculated, expenses/deductions are allowed, and tax credits are available. Below are the main items we believe will impact our clients.
- Corporations will have a flat 21% tax rate for tax years after December 31, 2017 instead of the graduated rates under the old law.
- Corporations receiving dividends from other corporation have in the past received a dividends-received deduction. For years beginning after December 31, 2017, the 80% deduction is reduced to 65% and the 70% deduction is reduced to 50%.
- Corporate AMT is repealed for tax years beginning after December 31, 2017. For tax years after 2017 and before 2022, some of the AMT credit may be refundable.
- There have been many changes made for depreciation and expensing of depreciable assets. To learn more, please review our “Howard Insights: Tax Reform Could Provide Year End Opportunities” update.
Deductions & Exclusions:
- For years after December 31, 2017, every business will have their interest expense limited to 30% of the business’s adjusted taxable income.
- Net operating loss carrybacks are repealed for all businesses, with the exception of certain farming businesses. Net operating losses are limited to 80% of taxable income beginning after December 31, 2017. Most NOLs can be carried forward indefinitely.
Tax Credits & Deductions:
- The domestic production activities deduction is repealed for non-corporate entities after December 31, 2017, then repealed for corporations after December 31, 2018.
- Only like-kind exchanges with real property not held primarily for sale will be allowed for transfers after December 31, 2017.
- The research and expenditure expense deduction changes for tax years after December 31, 2021. These costs will need to be capitalized and amortized over 5 years.
- Effective after December 31, 2017, the deduction for entertainment expenses will be disallowed.
Change to a C Corporation:
- One of the many questions we have heard regarding the proposed law change is “Should I change to a C corporation?”. The answer is – it depends. One of the drawbacks to C corporations has always been the potential for double taxation. The income of a C corporation will now be taxed at 21%. In addition to the corporate tax, if dividends are paid to shareholders, they will also be taxed on this income. If the shareholders are taxed at the highest tax rates, they will pay 23.8% tax on the dividend income which will result in a total tax rate of 39.8%. This is still higher than the highest individual rate of 37%. A couple of examples where you may want to be a C corporation is if you intend to take your company public, or if your exit strategy would give you a better tax result by selling the stock of the company rather than the assets.
If you have questions about how provisions of the new law will affect you, please consult the Howard team and we will be happy to walk through your specific situation. Howard aims to share valuable insight that can help you prepare for the months ahead on your personal returns, as well as in businesses so we encourage you to visit the news section of our website where we will continue to post updates and announcements.