The Tax Cuts and Job Act (The TCJA) has brought about many changes for both individual and business taxes. While some revisions and additional legislation may be on the way, below are five changes that may affect your business taxable income for 2018:
1. Depreciation. For your 2018 filing, you can expect increased depreciation deductions for asset additions. The TCJA increased section 179 to $1million and increased the first year depreciation allowance (bonus) from 50% to 100%. In addition, qualified property requirements were expanded to include roofs, HVAC, fire protection and alarm systems. The act did not, however, provide a 15-year life for qualified improvement property (defined as any improvement to an interior portion of nonresidential real property). Until further legislation is passed, QIP is depreciated over 39 years.
2. Meals and Entertainment. The TCJA eliminated a deduction for certain expenses considered entertainment or recreation. Meals provided for the convenience of the employer, previously 100% deductible, are now only 50% deductible. Business meals (generally) remain 50% deductible, and entertainment and meals for company parties was unchanged, remaining fully deductible.
3. Deduction for 20% Qualified Business Income. The TCJA has added a 20% deduction for qualified business income. This deduction is limited and subject to additional thresholds (including W-2 wages and unadjusted basis of qualified property). Businesses in a number of fields do not qualify including those trading or dealing in securities, partnership interests, or commodities; and in the fields of health, accounting, actuarial science, consulting, performing arts, financial services, brokerage services, athletics and investment management the deduction can be limited based upon the income of the individual or couple filing jointly.
4. Limitation of Interest Expense. The ability of a business to deduct interest paid or accrued on business debt has been significantly limited by the TCJA. Interest expense is now limited (generally) to 30% of adjusted taxable income. This adjusted taxable income excludes depreciation, amortization, and interest expense. An exemption is made for non-common controlled businesses with average gross receipts less than $25million.
5. Expansion of Cash-Basis Accounting. Taxpayers, who for the past 3 years have average annual gross receipts of less than $25million, are now eligible to use the cash-basis method. This applies to taxpayers with inventories (such as manufacturers and producers) who were previously required to use the accrual method. The cash-basis method exempts taxpayers from capitalizing additional costs into inventory under the Uniform Capitalization (UNICAP) rules and allows for current expensing of prior UNICAP costs.
These are just some of the changes the TCJA has created. To learn more or have your questions answered; contact your Sweeney Conrad advisor at 425.629.1990 or info@sweeneyconrad.com