Tax Cuts and Jobs Act: A comparison for businesses (IRS website, Oct. 31, 2018)
IRS has posted a useful comparison of nineteen tax changes for business in the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017). Divided into three columns that cover the tax provision, prior law rules (where applicable) and the changes made by the TCJA, the comparison is a handy tool for keeping track of the many changes to deductions, depreciation, expensing, tax credits, and other rules for business. This article highlights some of the more helpful explanations of key changes. We’ve added parenthetical changes were necessary and provided references to where the rules are discussed in-depth.
Limits on deductions for meals & entertainment. Under prior law, a business could deduct up to 50% of entertainment expenses directly related to the active conduct of a trade or business or incurred immediately before or after a substantial and bona fide business discussion. (Meal expenses essentially were covered by the same rules.)
The TCJA generally eliminated the deduction for any expenses related to activities considered entertainment, amusement or recreation. (Effective for amounts paid or incurred after Dec. 31, 2017.) But 50% of the cost of business meals is deductible if the taxpayer (or an employee of the taxpayer) is present and the food or beverages aren’t lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact. But if provided during or at an entertainment activity, the food and beverages must be bought separately from the entertainment, or the cost of the food or beverages must be stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
(Notice 2018-76, 2018-42 IRB; IR 2018-195; IRS guidance on the deductibility of meals purchased in an entertainment context)
New limits on deduction for business interest expenses. Under prior law, the deduction for net interest was limited to 50% of adjusted taxable income for firms with a debt-equity ratio above 1.5. Interest above the limit could be carried forward indefinitely.
The TCJA limits deductions for business interest incurred by certain businesses. (Effective for tax years beginning after Dec. 31, 2017.) Generally, for businesses with $25 million or less in average annual gross receipts, business interest expense is limited to business interest income plus 30% of the business’s adjusted taxable income and floor-plan financing interest
There are some exceptions to the limit, and some businesses can elect out of this limit. Disallowed interest above the limit may be carried forward indefinitely, with special rules for partnerships.
(IR 2018-82; Notice 2018-28, 2018-16 IRB; IRS Notice explains new business interest expense limitations)
New employer credit for paid family and medical leave. The TCJA added a new tax credit for employers that offer paid family and medical leave to their employees. It applies to wages paid in tax years beginning after Dec. 31, 2017, and before Jan. 1, 2020.
The credit is a percentage of wages (as determined for Federal Unemployment Tax Act (FUTA) purposes and without regard to the $7,000 FUTA wage limitation) paid to a qualifying employee while on family and medical leave for up to 12 weeks per tax year. The percentage can range from 12.5% to 25%, depending on the percentage of wages paid during the leave.
(Notice 2018-71; IR 2018-191; IRS issues Q&As on new Code Sec. 45S employer credit for paid family and medical leave)
Changes to cash method of accounting for some businesses. Under prior law, small business taxpayers with average annual gross receipts of $5 million or less in a prior three-year period could use the cash method of accounting.
The TCJA allows small business taxpayers with average annual gross receipts of $25 million or less in the prior three-year period to use the cash method of accounting. (Effective for tax years beginning after 2017.) The law expands the number of small business taxpayers eligible to use the cash method of accounting and exempts these small businesses from certain accounting rules for inventories, cost capitalization (under the so-called UNICAP rules) and long-term contracts (more construction contracts will qualify for the exception from the requirement to use the percentage of completion method). As a result, more small business taxpayers can change to cash method accounting starting after Dec. 31, 2017.
(Rev Proc 2018-40, 2018-34 IRB; IR 2018-160; IRS updates automatic accounting method changes to reflect TCJA)
Conversions from an S corporation to a C corporation. Under prior law, where an S corporation converted to a C corporation, net adjustments were needed to prevent amounts from being duplicated or omitted as a result of an accounting method change and attributable to the revocation of the S corporation election (e.g. adjustments required because of a required change from the cash method to an accrual method); net adjustments that decreased taxable income generally were taken into account entirely in the year of change, and net adjustments that increased taxable income generally were taken into account ratably during the four-tax-year period beginning with the year of change.
Distributions of cash by the C corporation to its shareholders during a post-termination transition period (generally one year after the conversion) were, to the extent of stock basis, tax-free, then capital gain to the extent of remaining accumulated adjustments account (AAA). Distributions more than AAA were treated as dividends coming from accumulated Earnings and Profits (E&P). Distributions after that period were dividends to the extent of E&P and taxed as dividends.
The TCJA makes two modifications for a C corporation that (a) was an S corporation on Dec. 21, 2017 and revokes its S corporation election after Dec. 21, 2017, but before Dec. 22, 2019, and (b) has the same owners of stock in identical proportions on the date of revocation and on Dec. 22, 2017.
- The period for including net adjustments that are needed to prevent amounts from being duplicated or omitted as a result of an accounting method change and attributable to the revocation of the S corporation election is changed to six years. This six-year period applies to net adjustments that decrease taxable income as well as net adjustments that increase taxable income.
- Distributions of cash following the post-termination transition period are treated as coming out of the corporation’s AAA and E&P proportionally.
(Rev Proc 2018-44, 2018-37 IRB; IRS amends accounting method change Rev Proc to reflect S corp revocation rule)
