Tax Reform Impact

by Karen Stern

The recently passed tax reform bill, commonly referred to as the Tax Cuts and Jobs Act (TCJA), is the most expansive federal tax legislation since 1986. It includes a multitude of provisions that could have a major impact on small businesses in particular. Some of the most significant changes include:

• Replacement of graduated corporate tax rates ranging from 15 percent to 35 percent with a flat corporate rate of 21 percent.
• New 20 percent qualified business income deduction for owners of pass-through entities and sole proprietorships through 2025.
• Doubling of bonus depreciation to allow for a 100 percent deduction and an expansion of qualified assets to include used assets — effective for assets acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.
• Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phase-out threshold to $2.5 million
• New disallowance of deduction for net interest expense in excess of 30 percent of the business’s adjusted taxable income; taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the three previous tax years are exempt from the interest deduction limitation.
• Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction, for all taxpayers, effective for tax years beginning after Dec. 31, 2017.
• New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation; most significantly, the deduction for business-related entertainment expenses is completely disallowed.

Each of these provisions generally applies to tax years beginning after Dec. 31, 2017, unless noted otherwise above. Additional rules and limits may apply, and there are other provisions under the TCJA that may affect your business.

Karen Stern, CPA, (kstern@bswllc.com), partner in charge, Brown Smith Wallace Entrepreneurial Services Group, provides tax and accounting services for companies ranging from start-ups to $20 million in revenue.