On January 1, 2018, the Tax Cuts and Jobs Act went into effect. This federal law affected both personal taxes and business taxes. (You can read more here about the impact on personal taxes.) Perhaps the most notable feature of the Act is the reduced rate of taxation for C corporations, which are the standard type of corporation. C corporations pay taxes directly rather than passing taxes through to their shareholders. A single flat rate of 21 percent now applies to all C corporations, replacing the previous range of rates that varied from 15 percent to 35 percent.
The other major change to business taxes under the Tax Cuts and Jobs Act affects all other types of businesses. These are known as pass-through businesses because the profits (and the resulting tax obligations) pass through the business to its owners, who pay individual taxes. Common forms of pass-through businesses include sole proprietorships, partnerships, and limited liability partnerships and companies, as well as S corporations. These can be taxed at a rate of up to 37 percent, but the Act also added a pass-through tax deduction that covers up to 20 percent of net business profits, above and beyond other business tax deductions. In other words, a business owner might be taxed on no more than 80 percent of their qualifying business income. The rules for the pass-through deduction are extremely complicated, and you should read more here about them if you want to explore whether you may qualify.
Section 179 and Bonus Depreciation
Under Section 179 of the tax law, business owners can deduct a certain amount of tangible personal property that they purchase and use for their business at least 51 percent of the time. The Tax Cuts and Jobs Act raised the limit on this deduction to $1 million, although the limit decreases if a business owner purchases and puts to business use property that is worth more than $2.5 million in a year.
The law also increases the first-year bonus depreciation amount that business owners can claim for long-term assets. This is the amount of the cost that they can deduct in the first year after purchasing the asset. The remaining amount must be spread over multiple years in a process known as depreciation or amortization. Under The Tax Cuts and Jobs Act, the first-year bonus depreciation amount is set at 100 percent until the end of 2022. Between January 1, 2023 and December 31, 2026, lesser amounts will apply. Read more here about Section 179 and bonus depreciation under the Tax Cuts and Jobs Act.
Limits on depreciation for passenger vehicles used for business purposes also have increased under the Tax Cuts and Jobs Act. This was a relatively modest change in the law.
Deductions Limited or Eliminated
Not all of the provisions of the Tax Cuts and Jobs Act were good news for business owners. The Act wiped out certain tax deductions and credits. The most significant deduction that was eliminated involved the costs of business entertainment, other than certain meals. Also removed were deductions for commuting to work, parking at work, and public transportation, in addition to the deduction for the costs of lobbying local governments. A domestic production activities deduction ended as well.
One limitation on deductions for interest payments on business-related loans affects only very large businesses. If a business receives an average of $25 million or more in gross receipts over a three-year period, it will be limited to a deduction that is worth no more than 30 percent of the adjusted taxable income of the business. Certain types of businesses involving real estate and farming can opt out of the limitation in exchange for depreciating their real estate over a longer period. Read more here about this limitation.
Deductions for the net operating losses of a business now are limited to current and future years in which a business suffers losses that exceed its income. The business no longer can carry back the deduction two years. These deductions also are limited to 80 percent of the taxable income of a taxpayer. If you do not use part of this deduction, you can carry the remainder forward and deduct it in future years.