Tax reform has many service organizations questioning how to plan in the new environment. Here are 10 implications to consider under the new law. (Unless otherwise stated, the provisions will be effective for tax years beginning after Dec. 31, 2017.)
Business-related meals and entertainment:
- Costs for business-related entertainment expenses are no longer deductible.
- Meal expenses incurred while traveling on business are still 50 percent deductible.
- Employers can deduct 50 percent of the cost of meals provided on the employer’s premises for the convenience of the employer. (These costs were previously fully deductible.)
- After 2025, the cost of meals provided on the employer’s premises for the convenience of the employer will no longer be deductible.
Employee fringe benefits:
- The cost of commuting benefits provided by an employer to an employee, such as a car service, are no longer deductible.
- Employer-provided transportation may be deducted if necessary for the employee’s safety.
- The cost of providing transportation fringe benefits such as parking allowances, mass transit passes, and van pools are no longer deductible, but those benefits are still tax-free to employees.
Fifty percent of the cost of most business meals will still be deductible, but the law eliminates any deduction for entertainment expenses.
Employer credit for paid family and medical leave:
Employers may claim a business credit for 12.5 percent of wages paid to a qualifying employee during a period of family and medical leave if the employee’s pay rate under the program is 50 percent of normal wages. The credit increases by 0.25 percentage points (but not above 25 percent) for each percentage point by which the rate of payment exceeds 50 percent.
To qualify, the employer’s family and medical leave program must:
- Allow all qualifying full-time employees at least two weeks annual paid family and medical leave.
- Allow part-time employees a commensurate amount of leave on a pro rata basis.
The credit will no longer be available for wages paid in tax years beginning after Dec. 31, 2019.
Pass-through tax treatment:
Taxpayers who have domestic “qualified business income” (QBI) from a partnership, S corporation, or sole proprietorship can deduct the lesser of QBI or 20 percent of taxable income from their taxable income.
Pass-through income from certain service businesses fields, including health , law, accounting, financial services, consulting, athletics and brokerage services, are not eligible for the deduction.
The deduction will no longer be available in tax years beginning after Jan. 1, 2026.
Corporate tax changes:
- The corporate tax rate is reduced to a flat 21 percent.
- There’s no special rate for personal service corporations.
- The corporate AMT is repealed.
- Existing prior year minimum tax credits may be carried forward to offset a taxpayer’s regular tax liability for any tax year.
- Until 2022, the prior year minimum tax credit is refundable in an amount equal to 50 percent (100 percent for tax years beginning in 2021) of the excess of the credit for the tax year over the amount of the credit allowable for the year against regular tax liability.
With the corporate tax rate now lowered to 21 percent and income from service fields excluded from the 20 percent qualified business income deduction for pass-throughs, professional service firms should examine their choice of entity to see if a corporate structure might be more beneficial to them.
- Property placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (Jan. 1, 2024, for longer production period property and certain aircraft) qualifies for an increased “bonus depreciation” allowance of 100 percent.
- The bonus percentage decreases by 20 percent each year after 2023, and the allowance disappears completely after Dec. 31, 2026.
- Taxpayers can now claim bonus depreciation on used property placed in service during the periods noted above.
With the corporate rate at 21 percent and professional service firms excluded from pass-through incentives, some businesses may want to reconsider their choice of entity.
- Section 179 expensing:
Taxpayers can now expense up to $1 million of Section 179 depreciable property annually, and the investment limitation phaseout amount has been increased to $2.5 million.
The deduction for net interest expense is now capped at 30 percent of adjusted taxable income, among other criteria. Exceptions exist for small businesses, including an exemption for businesses with average gross receipts of $25 million or less.
Net operating losses (NOLs):
Generally, NOLs are now limited to 80 percent of taxable income for losses arising in tax years beginning after Dec. 31, 2017. Carrybacks have been eliminated, and unused NOLs can now be carried forward indefinitely.
Affected businesses should consider service industry tax reform implications early in 2018, as many tax benefits are already available. Many provisions will also require additional guidance from the Treasury and the IRS in the form of regulations, revenue rulings, and revenue procedures. For more information on how these provisions may affect your business, please give us a call.