The Tax Cuts and Jobs Act (TCJA) signed into law in 2017 made major changes to business taxation. The TCJA granted significant tax savings to many companies. Check whether your business takes advantage of the opportunities provided by the TCJA using this guide.
What Is the Tax Cuts and Jobs Act?
The TCJA—signed into law on December 22, 2017—contains a series of changes to individual and business taxation. The overall impact of the TCJA's tax reform remains controversial, but businesses and business owners emerged as clear winners overall.
Besides individual and business taxation, the TCJA also had extensive effects on estate taxation, nonprofit taxation, and taxation of foreign income. The vast majority of TCJA provisions still apply today.
How Tax Reform Affects Businesses
The TCJA dramatically lowered the tax rate on C corporations from a maximum rate of 35% to a flat 21% tax rate. Almost as importantly, alternative minimum tax (AMT)—a potential additional tax incurred by certain corporations to make it harder to avoid taxes—no longer applies to C corporations. These two changes make C corporations considerably more attractive than before when choosing an entity type for your business.
Tax reform also made it easier for businesses to deduct the cost of assets immediately rather than depreciating them. It doubled the Section 179 depreciation maximum and increased its phase-out threshold. The TCJA also raised the bonus depreciation percentage from 50 percent to 100 percent, though this starts to phase out in 2023.
Depreciation rules also changed with increased depreciation limits for passenger vehicles and several changes to real estate and farm depreciation. Computers and related peripherals no longer qualify as listed property—a type of property subject to special rules regarding personal use.
The cash accounting gross receipts threshold rose from $5,000,000 to $25,000,000—meaning more businesses can use the usually simpler cash method of accounting.
However, not every provision of the TCJA benefits businesses. Business entertainment expenses no longer qualify for a deduction, while new rules apply to the 50% deduction for business meals. The business interest deduction also became less generous, though this doesn't apply to certain businesses, including most small businesses. Businesses can no longer claim the domestic production activities deduction (DPAD) for manufacturing activities.
Most significantly, net operating losses (NOLs) no longer carry back to previous tax years—though this only starts in 2021 due to a subsequent law. Also, NOL carry forwards can only offset 80% of taxable income.
The TCJA has many other provisions affecting businesses. The IRS has provided an online summary of these provisions.
Impact of Tax Reform on Business Owners
The TCJA also made many changes to individual income tax, some of which apply to business owners. Most—but not all—of the changes to individual income tax will expire after 2025.
Business owners can deduct up to 20% of their share of the qualified business income (QBI) of certain pass-through businesses. This provision does not apply to C corporations.
The changes to individual income tax rates impact the business owners of pass-through entities. Most individual tax rates fell. Also, the individual deduction for state and local taxes now has a $10,000 limit, which could negatively affect business owners with pass-through entities in high tax states.
The TCJA had a substantial impact on businesses and business owners alike, often resulting in significantly lower tax liability. However, many businesses still do not take full advantage of the TCJA's provisions. Consult your tax advisor to ensure that you and your business receive the full benefit of tax reform.