Congress passed tax reform during the week before Christmas of 2017. This was the most sweeping tax law change since the recodification of the tax code in 1986. While it will take some time to determine the finer points of this tax reform plan, we have the nuts and bolts in place to determine what the impact will be for most of our clients.
The impact that the reform will have on businesses is tremendous. The law is full of benefits and incentives for businesses of all types. The law includes a reduction in tax rates and acceleration of deductions. The following changes impact C Corporations: (Corporation will mean C Corporation for the entirety of this article)
-Worldwide to Territorial Tax Regime-Prior to the passage of this tax law, a corporation had to pay US income tax on earnings from operations worldwide. If a US corporation made a profit in China and paid tax on that profit in China, the corporation had to pay US income tax on that profit when the company sent the profit back to the US. This resulted in a lot of companies making a profit overseas and leaving that profit overseas instead of sending the money back to the US to invest in their businesses here. There were some laws in place to prevent double taxation, but generally speaking, the process lead to a lot of companies leaving their profits overseas. The tax reform included a law allowing companies to deduct profits earned overseas from their US income tax return. If a company has any profits overseas at the passage of the reform, those earnings will be subject to 15.5% tax. This allows all companies to start with a clean slate under the new system.
-Tax Rates-The corporate tax rate was reduced from 35% to 21%. The result of this reduction in tax rates led some companies to announce increases in minimum wage amounts and one time bonuses for employees.
-Depreciation-The law increased the amount of depreciation on fixed assets a taxpayer may elect to deduct in the current year through several different mechanisms. The 179 expense election and bonus depreciation were both increased. While this is a benefit, it should be noted that this accelerates a businesses deduction instead of forcing the taxpayer to expense a purchase over the course of several years. This is strictly a timing issue. It is designed to encourage and/or reward investment in businesses by business owners with accelerated deductions.
-Accounting Methods-The law expanded the availability of the cash basis accounting method to larger businesses. It also reduced the requirements for capitalizing inventory. While this is a benefit, it should be noted that no new deductions were written into law. The deductions are now easier to write off more quickly. Also, this change makes record keeping somewhat easier.
-Meals & Entertainment-Under the old law, taxpayers could deduct 50% of their meals & entertainment expenses that had a business purpose. Under the new law, meals still qualify for a deduction, but entertainment does not qualify. Those expenses have to be added back in full.