3 Favorable TCJA Changes for Businesses
The Tax Cuts and Jobs Act (TCJA) contains several provisions that will lower federal income taxes for businesses. Here’s an overview of three pro-business changes.
1. Tax Rate Changes
The TCJA permanently reduced the corporate federal income tax rate to a flat 21% for tax years beginning after 2017.
For 2018 through 2025, the TCJA also lowered the individual federal income tax rates on income from pass-through business entities. These include sole proprietorships, limited liability companies (LLCs), partnerships and S corporations. For those years, the maximum individual federal rate is 37%. However, the 3.8% net investment income tax (NIIT) may also apply to passive business income recognized by individual taxpayers.
Important: The federal income tax rates are unchanged for long-term capital gains recognized by individuals. The maximum rate is 20%, but the 3.8% NIIT may also apply.
2. New Deduction for Income from Pass-Through Business Entities
For tax years beginning in 2018 through 2025, the qualified business income (QBI) deduction is potentially available to individual pass-through entity owners. The deduction can be up to 20% of an owner’s share of passed-through QBI. This break expires at the end of 2025, unless Congress extends it.
Numerous rules and restrictions apply to the QBI deduction. For example, above certain income levels, the deduction may be limited or eliminated for service businesses and businesses that haven’t paid enough in W-2 wages or invested enough in fixed assets. Contact your tax pro to determine whether you qualify for this tax break.
3. Expanded First-Year Depreciation Breaks
The TCJA allows 100% first-year bonus depreciation for qualifying property placed in service between September 28, 2017, and December 31, 2022. The bonus depreciation percentages are scheduled to gradually phase out as follows:
- 80% for property placed in service in calendar year 2023,
- 60% for property placed in service in calendar year 2024,
- 40% for property placed in service in calendar year 2025, and
- 20% for property placed in service in calendar year 2026.
Bonus depreciation is scheduled to expire at the end of 2026, unless Congress extends it.
Important: For certain property with longer production periods and aircraft, the bonus depreciation cutbacks are delayed by one year. For example, the 100% bonus depreciation rate applies to such property that’s placed in service before the end of 2023, and the 20% rate applies to property that’s placed in service in calendar year 2027.
In addition, the TCJA permanently increases the maximum Section 179 deduction to $1 million for qualifying property placed in service in tax years beginning in 2018. That amount will be adjusted annually for inflation.
The Sec. 179 deduction phaseout threshold has also been permanently increased to $2.5 million, with annual inflation adjustments.
For tax years beginning in 2019, the maximum deduction is $1.02 million, and the phaseout threshold is $2.55 million.
As under prior law, Sec. 179 deductions can be claimed for qualifying real property expenditures, up to the maximum annual allowance. There’s no separate limit for real property expenditures, so Sec. 179 deductions claimed for real property reduce the maximum annual allowance dollar for dollar.
Questions? Contact a Brady Ware tax advisor today!