Federal Tax Code Changes

President Donald Trump signed the Tax Cut and Jobs Act (Public Law No: 115-97) into law on December 22, delivering on a campaign promise and making major changes to the federal tax code for the first time in 31 years. This historic legislative accomplishment is causing businesses across the country to reevaluate their operations and make sure they are prepared for the present and future.

Given the budget constraints that lawmakers had in enacting tax reform, most of the tax changes for corporations are permanent and most of the tax changes for individuals expire and return to current law after 2025. As Building and Service Contractors Association International (BSCAI) members file their 2017 tax returns, they should also speak to their tax advisors and prepare for the new tax law.

On the corporate side, the income tax rate for all C corporations has been lowered to 21 percent starting in 2018. In addition, the alternative minimum tax (AMT) for corporations has been permanently repealed.

There is also plenty of good news for the many small businesses structured as pass-through entities such as LLCs, partnerships, and S Corporations. While pass-through businesses are still taxed at individual income tax rates, the new law establishes a 20 percent deduction. Keep in mind that pass-through businesses will also benefit from the lowering of individual income tax rates.

As businesses consider future investments to operations, they should note the changes made to bonus depreciation and Section 179. Accelerated bonus depreciation applies through 2022 allowing full and immediate expensing of short-lived capital investments. It phases out between 2023 and 2027 and returns to current law in 2028. 

In an important change to bonus depreciation, the tax incentive applies both to new equipment placed in service or used equipment purchased and placed in service. Previously, bonus depreciation only applied to new equipment placed in service.

Companies choosing the Section 179 will also benefit. The new law raises the Section 179 deduction to $1 million with a phase-out starting at $2.5 million. It also expands the tax incentive to include improvements made to existing nonresidential real property including roofs, heating and air-conditioning.

Other small business provisions that have changed include net operating loss (NOL) and business interest deductibility. Changes to the NOL provision include eliminating carrybacks, allowing for unlimited carryforwards, and limiting it to 80 percent of taxable income. As for business interest deductibility, it is now capped at 30 percent of earnings for businesses with over $25 million in earnings; businesses below that threshold are not subject to the limitation.

Small family-owned businesses will continue to have estate tax relief under the new law. It doubles the exemption levels ($11.2 million for individuals, $22.4 million for couples), indexes for inflation and maintains stepped-up basis. Congress will need to act in the future to preserve the changes as it expires at the end of 2025 and returns to the prior law.

Many businesses have issued one-time bonuses to their employees as part of the new tax law. Moreover, in January, the Internal Revenue Service (IRS) published new withholding tables. That means employees should be noticing a small increase in their take-home pay.

Early in the tax reform process, Republicans in the House of Representatives wanted to reduce the number of individual income tax brackets and reduce the rates. Although they were unsuccessful on the former, they were successful on the latter. The current seven bracket structure remains in place but most of the rates have been reduced, including the top rate that is now 37 percent.

Fewer taxpayers are expected to itemize their tax returns as the standard deduction has been nearly doubled. Under the new law, the standard deduction is $12,000 for individuals and $24,000 for couples. Keep in mind that the new law also eliminates personal exemptions, which allows taxpayers to claim an exemption for themselves, their spouse, and qualifying dependents.

The state and local tax (SALT) deduction has been capped at $10,000. It applies to state and local property tax and either state and local sales tax or state and local income tax. This change could be an issue for individuals living in the highest cost areas of the country.

However, changes to the individual AMT may help alleviate some of the tax burdens for individuals living in areas where cost-of-living is high. Exemption levels have been raised to $70,300 for individual filers and $109,400 for married filers. The phase-out has also been raised to $500,000 for individuals, $1 million for couples and indexed for inflation.

BSCAI’s Government Affairs staff closely followed the tax reform negotiations on Capitol Hill, and continues to provide information to its membership so they can make informed business decisions.