In the last blog, I looked at the impact of depreciation and the 1031 exchange in the recent Tax Cuts and Jobs Act, signed by President Trump last month. There are some other changes that impact business that should be noted as well. Note this blog and the others on tax changes, are designed to bring some awareness to the new changes. You should consult with your tax professional on how these will impact your business.
Meals and Entertainment expenses have undergone a significant change. Entertainment expenses that are incurred or paid beginning this year are no longer deductible. Meals are still 50% deductible. Meals that are provided by an in-house cafeteria are now 50% deductible. After the end of 2025, the meals expense for clients will not be deductible at all. So, the moral here is if you take clients to a sporting event, buy cheap tickets, but spend lavishly on the meal beforehand. And if you are overly concerned with tax liability, stop all client meals in 2026!
Interest expenses now have a limitation for large businesses with average gross receipts of over $25 million. Net interest expense is capped at 30% of the business adjusted taxable income. Between 2018-2021, adjusted taxable income does not include depreciation and amortization. The adjusted tax income is determined at the tax filer levels and unused amounts are carried forward to be used as expense deductions in future tax years. These do not run out. There is a carve out for floor plan interest, which is not subject to the 30% limit.
Research and Development costs spent after 2021 must be capitalized and amortized over five years or 15 years if done outside of the U.S. This includes software development. This change is not in favor of the tax payer as R&D costs are now written off immediately.
Businesses have new tax credits for employer paid family and medical leave. This starts in tax years 2018 and 2019. General Business Credit that is equal to 12.5% of the qualifying wages paid to employers on the Family Medical Leave Act if the rate of payment is at least 50% of the normal wages paid. The credit will increase to a max of 25%, as the wages increase compared to the percentage of total paid.
On rehabilitation of old buildings, the 10% tax credit for qualified rehab expenses on a building originally built before 1936 has been repealed. A 20% credit is available for qualified rehab expenses with respect to certain historic structures. This must be claimed over 5 years.
Remember that tax credits go directly against your tax liability as a dollar for dollar reduction.
Net Operating Losses (NOL) now have some new restrictions. There is an excess business loss rule for a single tax payer of $250,000 or married at $500,000. In the past if you had a farmer with $500,000 of W2 income and a $500,000 farm loss and $100,000 profit from another business, the net taxable income from those two is at $100,000. Now the profit and losses from all the businesses are added together to and compared to the limitations. A farm loss of $500,000 and business profit of $100,000 are subject to the single limit of $250,000. This would reduce the taxable income in this example to $750,000 and have a carry forward of $150,000.
Before 2017, NOLs were carried back 2 years and forward 20 years. Now NOLs cannot be carried back, except for some farm losses. The carryover is limited to 80% of taxable income and there is no expiration on the time frame for a carry forward.
So overall, some of these changes are in favor and others are not for the business tax payer. It is important to gain a full understanding of the new tax law considering how this will impact your situation.