How the New Tax Plan Impacts Businesses (Corporate Tax Rates, Depreciation, Expenses, Exchanges)

This is the second in a series of posts aimed at analyzing the new tax laws that go into effect on January 1, 2018. There will still undoubtedly be numerous clarifications and corrections coming out over time as the IRS issues Regulations and Technical Corrections, so this is just a preliminary understanding. This one we’ll dive into some of the main areas impacting business taxpayers.

Corporate Tax Rates

Beginning in 2018, C corporations will see their tax rates drop from a highest tax bracket of 38% down to 21%. This 21% tax rate will apply to all corporations, including personal service corporations, regardless of income. Additionally, corporate alternative minimum tax (AMT) will no longer exist.

Bonus Depreciation

This is one of the few areas in the tax bill that goes into effect during 2017. Bonus depreciation will increase from 50% to 100% for all eligible assets acquired after September 27, 2017. Another big change is that used assets will now also be eligible for bonus depreciation. This will dramatically increase the number of assets that qualify.

Section 179 Expensing

Both the amount of §179 deduction allowed and the phase-out amount are increased. Allowable §179 expensing will now be $1 million for each year while the threshold for additions where §179 begins to be reduced will be $2.5 million of assets. Certain qualified real property such as roofs and property related to heating, ventilation and air-conditioning will now be eligible for §179 expensing.

Like-Kind Exchanges

Under the new tax plan, like-kind exchanges to be limited to only real property that is not held primarily for sale. This means that any gains will have to be recognized upon trade-in for personal property such as vehicles and equipment.

Interest Expense

In an effort to minimize double dipping with deductions, the new tax laws include limitations on the amount of interest expense companies can deduct. This is aimed at preventing companies from financing all of their equipment purchases and taking advantage of the 100% bonus depreciation while also deducting the interest expense involved. Interest expense in excess of 30% of the business’s adjusted taxable income will be disallowed.

Entertainment Expenses

All deductions that are related to entertainment, amusement, recreation, social or primarily personal in nature amenities will no longer be deductible at all. On top of this, all food and beverage expenses will now be subject to the 50% limitation. This 50% limitation includes meals provided through an eating facility and meals consumed by employees on work travel.

It is vital to stay up-to-date on how this new tax plan will impact your finances. At Malloy, Montague, Karnowski, Radosevich & Co., P.A. (MMKR), we strive to help all our clients create a solid strategy to protect their financial goals. If you are concerned about how this tax plan will affect your financial future, call our team today to schedule a consultation with one of our accountants.