By now you have most likely heard that President Trump signed the Tax Cuts and Jobs Act on December 22, 2017. Most of the conversation regarding the new law has revolved around the changes to personal tax rates and deductions. You may have also heard about the corporate tax rate reduction for corporations and pass-through businesses. Like any other bill, there are other changes in the bill that have not garnered as much attention; however, some of these items will most likely affect your business taxes and indirectly your personal taxes. We have selected three provisions that might affect your business taxes.
Like-Kind Exchange Treatment
The new law allows “like-kind” exchange treatment only for real property transactions. Like-kind exchange treatment will not be applicable for transactions involving personal property, for example, equipment. A typical example of this type of transaction was to trade in one business vehicle for a new business vehicle. Under current law, no gain or loss is recognized from the transaction. Under the new law, you will have to recognize the gain/loss on the sale of the vehicle. If you are looking to implement a like-kind exchange for business-related real estate, you can do that provided you meet all of the criteria.
Depreciation Related Deductions
The act allows for greater opportunities for expensing fixed asset purchases, mainly related to equipment purchases; however, some real property improvements are also included. The act allows for 100% first-year expensing deduction for qualified property, which generally means brand new tools and equipment, however, some types of real property improvements also qualify. This is applicable to assets acquired after September 27, 2017, and prior to January 1, 2023. After that date, the 100% first-year expensing decreases over the next 4 years. The current limitation is 50% first-year expensing which was to be reduced over the next few tax years. The new law also allows for greater first-year expensing of fixed assets by making a section 179 election, with a $1,000,000 limitation, which was previously $500,000, provided other criteria are met. There are also changes as to which property is eligible for the election to expense assets placed in service. So, if you are looking to buy new equipment in the next five years, there is a good chance you may be able to write the entire expense off in the year purchased. Please note there are separate rules for vehicle purchases that depend on the attributes of the vehicle purchased.
Employer’s Deduction for Entertainment Expenses
Looking to take a client to the big game or out for a round of golf, you might want to think again as the deductibility of entertainment expenses was disallowed beginning January 1, 2018. Entertainment includes any activity that is generally considered to be entertainment, amusement or recreation, membership dues for any club organized for business, pleasure, recreation, or other social purposes or a facility, in whole or in part, that is used in connection with the above items. Some examples of entertainment would be tickets to sports, musical or theatrical events, golf outings, country club memberships and other club memberships.
There are numerous business tax law changes in the recently passed tax legislation. We have highlighted a few of the notable items that will affect most small businesses. Note that the bill disallows some tax deferral strategies on one hand but expands the immediate expensing of new and used equipment on the other, and there may be some changes to the deductibility of other items.
Have additional questions about the federal tax law changes? Contact your accountant to help explain the changes to you.