Highlights of Tax Reform for Businesses
October 10, 2018
The following is excerpted from IRS Fact Sheet FS-2018-17.
The Tax Cuts and Jobs Act (TCJA) included a few dozen tax law changes that affect businesses. Most of the changes in the new law take effect in 2018 and will affect tax returns filed in 2019.
Business Taxpayers Should Re-estimate Estimated Tax Payments
The TCJA changed the way tax is calculated for most taxpayers, including those with substantial income not subject to withholding, such as small business owners and self-employed individuals. Among other reforms, the new law changed the tax rates and brackets, revised business expense deductions, increased the standard deduction, removed personal exemptions, increased the child tax credit and limited or discontinued certain deductions. As a result, many taxpayers may need to raise or lower the amount of tax they pay each quarter through the estimated tax system.
New or Revised Deductions for Businesses
- Qualified business income. Many taxpayers may be eligible for a new deduction for qualified business income (QBI) from a qualified trade or business operated directly or through a pass-through entity. For more information, see the FAQs on the Deduction for Qualified Business Income.
- Meal and entertainment expenses. Taxpayers can’t deduct certain fines and penalties for violation of the law. See Notice 2018-23 for more details.
- Fines and penalties paid to a government.Taxpayers can’t deduct certain payments made in sexual harassment or sexual abuse cases.
- Payments made in sexual harassment or sexual abuse cases. Taxpayers can’t deduct certain payments made in sexual harassment or sexual abuse cases.
- Payments under state or local tax credit programs. Business taxpayers who make business-related payments to charities or government entities for which the taxpayers receive state or local tax credits can generally deduct the payments as business expenses.
- The business expense deduction is available to any business taxpayer, regardless of whether it’s doing business as a sole proprietor, partnership or corporation, as long as the payment qualifies as an ordinary and necessary business expense.
Changes to Fringe Benefit Deductions
There are important changes to fringe benefit deductions that employers need to know about. These changes can affect a business’s bottom line and its employee’ deductions.
- Transportation fringe benefits. The new law disallows deductions for expenses associated with qualified transportation fringe benefits or expenses incurred providing transportation for commuting (except as necessary for employee safety).
- Bicycle commuting reimbursements. Under the new tax law, employers can deduct qualified bicycle commuting reimbursements as a business expense for 2018 through 2025. The new tax law suspends the exclusion of qualified bicycle commuting reimbursements from an employee’s income for 2018 through 2025. Employers must now include these reimbursements in the employee’s wages.
- Moving expenses. Employers must now include moving expense reimbursements in employees’ wages. The new tax law suspends the former exclusion for qualified moving expense reimbursements. One exception: Active duty members of the U.S. Armed Forces can still exclude moving expenses from their income. Notice 2018-75 provides guidance on 2018 reimbursements for employees’ 2017 moves. Generally, reimbursements in this situation are not taxed.
- Achievement awards. Special rules allow an employee to exclude achievement awards from wages if the awards are tangible personal property. An employer also may deduct awards that are tangible personal property, subject to certain deduction limits. The new law clarifies the definition of tangible personal property.
See the Employer Update on IRS.gov for more details.
Changes to Depreciation and Expensing for Businesses
The TCJA changed some laws regarding depreciation and expensing. These changes can affect a business’s tax situation. Here are the highlights:
- Businesses can immediately expense more under the new law.
- Temporary 100 percent expensing for certain business assets (first year bonus depreciation).
- Changes to depreciation limitations on luxury automobiles and personal use property.
- The treatment of certain farm property changed.
- Applicable recovery period for real property.
- Use of alternative depreciation system for farming businesses.
More details are in FS-2018-9, New rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act.
New and Revised Tax Credits for Businesses
- New employer credit for paid family and medical leave. This general business credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. The credit is generally effective for wages paid in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2020. For more information, see the Frequently Asked Questions about the Employer Credit for Paid Family and Medical Leave and Notice 2018-71.
- Rehabilitation tax credit. The new law affects the rehabilitation tax credit for amounts that taxpayers pay or incur for qualified expenditures after Dec. 31, 2017. It repeals the 10 percent credit for buildings placed in service before 1936. It keeps the 20 percent credit for expenses to rehabilitate a certified historic structure, but requires taxpayers to prorate the 20 percent credit over five years instead of in the year they placed the building into service.
- Accounting methods
- Small businesses. The new tax law 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. The law expands the number of small business taxpayers eligible to use the cash method of accounting and also exempts these small businesses from certain accounting rules for inventories, cost capitalization and long-term contracts. As a result, more small business taxpayers are allowed to change to the cash method of accounting starting after Dec. 31, 2017.
- S corporation to C corporation. An eligible terminated S corporation that is required to change from the overall cash method to an overall accrual method of accounting because of a revocation of its S corporation election that makes this method change for the C corporation’s first taxable year after such revocation must use a 6-year section 481(a) adjustment period. See Revenue Procedure 2018-44 for details.
- Like-kind exchanges. Under the new law, deferral of gain or loss now applies only to exchanges of real property and not to exchanges of personal or intangible property. See more details on the Like-Kind Exchanges – Real Estate Tax Tips page on IRS.gov.
- International business. The Tax Cuts and Jobs Act changed some things related to international businesses. Learn more on the tax reform page for international taxpayers and businesses.
- Wrongful IRS levy. Individuals and businesses have more time to file an administrative claim or to bring a civil action for wrongful levy or seizure. The new law extended the time limit for filing an administrative claim and for bringing a suit for wrongful levy from nine months to two years. For more information, see news release 2018-126.