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December 18, 2017

Journal of Accountancy
Updated:  December 20, 2017

How tax overhaul would change business taxes
By Alistair M. Nevius
December 20, 2017

The tax reform bill that Congress voted to approve Dec. 20 contains numerous changes that will affect businesses large and small. H.R. 1, known as the Tax Cuts
and Jobs Act, would make sweeping modifications to the Internal Revenue Code, including a much lower corporate tax rate, changes to credits and deductions, and
a move to a territorial system for corporations that have overseas earnings.

Here are many of the bill’s business provisions.

• Corporate tax rate

The act replaced the prior-law graduated corporate tax rate, which taxed income over $10 million at 35%, with a flat rate of 21%. The House version of the bill had
provided for a special 25% rate on personal service corporations, but that special rate did not appear in the final act. The new rate took effect Jan. 1, 2018.

• Corporate AMT

The act repealed the corporate AMT.

• Depreciation

Bonus depreciation: The act extended and modified bonus depreciation under Sec. 168(k), allowing businesses to immediately deduct 100% of the cost of eligible
property in the year it is placed in service, through 2022. The amount of allowable bonus depreciation will then be phased down over four years: 80% will be allowed
for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. (For certain property with long production periods, the above dates will be
pushed out a year.)

The act also removed the rule that made bonus depreciation available only for new property.

Luxury automobile depreciation limits: The act increased the depreciation limits under Sec. 280F that apply to listed property. For passenger automobiles placed
in service after 2017 and for which bonus depreciation is not claimed, the maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is
placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years.

Sec. 179 expensing: The act increased the maximum amount a taxpayer may expense under Sec. 179 to $1 million and increased the phaseout threshold to $2.5
million. These amounts will be indexed for inflation after 2018.
The act also expanded the definition of Sec. 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in
connection with furnishing lodging. It also expanded the definition of qualified real property eligible for Sec. 179 expensing to include any of the following
improvements to nonresidential real property: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
Accounting methods
Cash method of accounting: The act expanded the list of taxpayers that are eligible to use the cash method of accounting by allowing taxpayers that have
average annual gross receipts of $25 million or less in the three prior tax years to use the cash method. The $25 million gross-receipts threshold will be indexed for
inflation after 2018. Under the provision, the cash method of accounting may be used by taxpayers, other than tax shelters, that satisfy the gross-receipts test,
regardless of whether the purchase, production, or sale of merchandise is an income-producing factor.
Farming C corporations (or farming partnerships with a C corporation partner) will be allowed to use the cash method if they meet the $25 million gross-receipts test.
The current-law exceptions from the use of the accrual method otherwise remain the same, so qualified personal service corporations, partnerships without C
corporation partners, S corporations, and other passthrough entities continue to be allowed to use the cash method without regard to whether they meet the $25
million gross-receipts test, so long as the use of that method clearly reflects income.
Inventories: Taxpayers that meet the cash-method $25 million gross-receipts test will also not be required to account for inventories under Sec. 471. Instead, they
will be allowed to use an accounting method that either treats inventories as nonincidental materials and supplies or conforms to their financial accounting treatment
of inventories.
UNICAP: Taxpayers that meet the cash-method $25 million gross-receipts test are exempted from the uniform capitalization rules of Sec. 263A. (The exemptions
from the UNICAP rules that are not based on gross receipts are retained in the law.)
Expenses and deductions
Interest deduction limitation: Under the act, the deduction for business interest is limited to the sum of (1) business interest income; (2) 30% of the taxpayer’s
adjusted taxable income for the tax year; and (3) the taxpayer’s floor plan financing interest for the tax year. Any disallowed business interest deduction can be
carried forward indefinitely (with certain restrictions for partnerships).

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