Breaking Down the House Tax Bill from a Business Perspective

Breaking Down the House Tax Bill from a Business Perspective

The long awaited tax bill was finally released yesterday. Outlined below, we will try to break down the highlights from a business perspective.

Flow through changes

The promised 25% “business tax rate” comes with many qualifiers.

• All income allocated to a passive investor is subject to the 25% rate.

For shareholders/partners who materially participate, you have a choice:

• Default into treatment of 30% of flow-through income being taxed at the 25% rate, with the rest at your individual rate, or
• Make an argument, using a formula, based on the facts and circumstances of their business that more than 30% of the income is attributable to capital, and should be taxed at 25%.

For those of us in the accounting/law/personal services world, the default setting is that 0% of our income is taxed at 25%, but again, we can try and argue that our business generates some income from capital and should get the rate.

Other Business Tax Changes:

• Corporations and partnerships with a C corporation partner will now be able to use the cash method as long as average receipts for the previous three years are less than $25 million, rather than $5 million under current law.
• All businesses would be allowed to use the cash method – even if they have inventory if average receipts is less than $25M.
• Corporate NOLs would only be allowable to offset 90% of income, similar to the current rules on AMT, and all carrybacks would be eliminated.
• No uniform capitalization on up to $25M of average receipts. This applies to both producers and resellers.
• For the next five years, businesses can immediately expense all assets with a life less than 20 years. Doesn’t have to be a new asset, just first use BY THE TAXPAYER.
• For after immediate expensing phases out, Section 179 is being raised to $5M from $500K, with a phase out starting at $20M of assets.
• Businesses with average receipts > $25M will lose all interest expense deductions that exceed 30% of EBITDA.
• No more like-kind exchanges on personal property; just real property.
• No more domestic manufacturing deduction.
• It looks like all deductions for entertainment, but not meals, would be disallowed.
• It appears all contributions to capital of a corporation or partnership would be taxable if the entity doesn’t issue an equity interest with a FMV equal to the contribution.
• The technical termination rules for partnerships of Section 708 would be repealed.
• Pretty much all credits disappear except for R&D and low-income housing.
• Amounts paid to corporate executives in excess of $1M for performance-based bonuses would not be allowed.

Withum’s Tax Services

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