The impact of the 2017 Tax Cuts and Jobs Act (TCJA) will resonate well into 2018 as businesses continue to adjust to a vastly different playing field. For the manufacturing, distribution, and retail business sectors, TCJA changes present an array of challenges and opportunities to sort through and consider. The following are some of the changes to factor into short- and long-term planning.
Corporate – Prior law had a system of graduated rates from 11% to 35%; current law has a flat 21% tax rate.
Individual – Generally, individual tax rates were reduced, and the top marginal rate was decreased from 39.6% to 37%.
2. Deduction for qualified pass-through income: Net income from qualified businesses is eligible for a 20% deduction – with limitations. Effectively, the deduction excludes 20% of qualifying income and, therefore, drops the highest marginal individual tax rate from 37% to 29.6% (37% x 80%).
3. Elimination of corporate alternative minimum tax (AMT).
4. Repeal of the domestic production activities deduction: The TCJA eliminated the Section 199 deduction for tax years after December 31, 2017.
In the same way as reported for financial accounting purposes.
6. Reduction in the application of capitalization of indirect costs: Prior law required resellers with average annual gross receipts of $10,000,000 to apply the Section 263A uniform capitalization rules (UNICAP) to indirect cost for purposes of capitalizing certain costs in ending inventory. Current law increases the threshold to $25,000,000 and allows producers, as well as resellers, to use the small taxpayer exception.
7. Expansion of the use of cash method of accounting: The limitation on the use of the cash method has been expanded to allow taxpayers with less than $25,000,000 average annual gross receipts to file using this method, even when inventory is an income-producing factor.
8. Increase in Section 179 deduction limits: Prior law allowed up to $500,000 of deduction for purchases of $2,000,000 of certain property. Current law increased the deduction to $1,000,000 for purchases of $2,500,000 and expanded the definition of qualified property.
9. Increase in bonus depreciation: Prior law allowed for the expensing of 50% of certain purchased new property. New law allows a 100% write-off on qualifying property purchases for assets placed in service after September 27, 2017, and also includes used property purchases.
10. Limitation on business interest deductions: Generally, net interest expense is limited to 30% of adjusted taxable income. Through January 1, 2022, adjusted taxable income is computed without regard to depreciation, amortization, or depletion deductions. Excess interest will carry over to the succeeding tax year.
11. Limitation on Net Operating Loss (NOL) deductions: Prior law allowed taxpayers to carry back NOLs for two years and carry forward NOLs for 20 years. For NOLs incurred after December 31, 2017, the carryback period was repealed and the carryovers are limited to 80% of taxable income. Additionally, NOLs can be carried over indefinitely.
If you have questions as to how these changes relate to your business circumstances, please contact Hal Zemel at 212.331.7684 | hzemel@berdonllp.com.