Tax Attic: Tax Cuts and Job Act of 2017 can affect businesses of all types and sizes

The publicity that we have heard consistently is that the Tax Cuts and Job Act of 2017 is great for big businesses. That is true mainly because the current progressive corporate tax rate that started at 15% and went up to 38% will be replaced by a universal 21% tax rate. The hope is that the companies that save the most tax dollars will pass some of those billions of tax savings on to their customers and employees. My own personal opinion in this area is that perhaps the minimum wage could have been raised to $15 as a trade-off to get the lower tax rate. I know there are a few companies announcing that intention but that was voluntary. Of course, President Trump didn’t ask my opinion and if he would have called, I wouldn’t have recognized his number and probably wouldn’t have answered the call anyway. We will all have to wait and see and hope those tax savings do get passed on. In the meantime, let’s take a look at the provisions in the Tax Cuts and Job Act of 2017 (TCJA2017) that President Trump signed into law on December 22 that can affect businesses of all types and sizes; not only just big business.

First, all businesses will be able to immediately write-off more capital purchases under a provision called “bonus depreciation”. Originally, bonus depreciation applied to only new capital purchases and for 2017 only 50% of the purchase could be immediately written off. The TCJA2017 law allows businesses to writ-off 100% of the purchase cost whether the piece of equipment is new or used. That is great news for all businesses, big or small. When I “write off”, I mean the amount that can be taken as a deduction on the current tax return. For example, Action Tax buys a new copier for $10,000 on July 1, 2017. Under the existing bonus depreciation rules, I could use bonus depreciation to write-off 50% or $5,000 on my 2017 tax return. If I had purchased a used copier, the existing bonus depreciation rules would not have applied because the copier was not new. I would have had to spread out the deduction for the copier over the current year and the next seven years. Not nearly as good from a tax point of view as writing the cost off all in one year. Even though the TCJA2017 predominantly takes affect on January 1, 2018, the bonus depreciation provision was the exception and does apply to purchases made after September 27, 2017. Why September 27? That was the day a rough draft of theTCJA2017 was released for discussion purposes.  Had I made my copier purchase after September 27, Action Tax could have written off the full $10,000 whether the copier was new or used. The 100% rate will apply through all of 2018 and them will drop back to the prior 50% rate beginning in 2019.

Second, the definition of capital purchases that can be written off under the bonus depreciation or Section 179 expensing provision has been expanded. This expanded definition takes effect on January 1, 2018 and applies to purchases made through December 31, 2022. Capital purchases used in a non-residential (commercial) setting-think Action Tax Services’ building as opposed to a residential rental-with a usage life of 20 years or less will qualify for a fast write-off. Examples of purchases that qualify would be roofs, air conditioning units, heating units, fire protection, alarm systems and refrigeration units. Under the old rules, these were considered part of the building and while the building had to be depreciated over 39 ½ years, the roof, for example, had to be depreciated over 20 years. Now that has changed to allow for a faster write-off and, again, that is a welcome change. In addition, capital purchases used in businesses that predominantly furnish lodging, such as a motel or hotel, will be allowed to write-off those purchases in the year of purchase. Included in this category would be appliances, furniture and other items such as cabinets and decorations. This is a substantial expansion of this particular provision.

Third, a new credit called the Family Leave Credit has been created beginning in 2018. Employers of all sizes that pay employees for a family leave under the Family and Medical Leave Act may qualify for a tax credit of from 12.5% up to 25% of wages paid to the employee as long as the employee is paid at least 50% of his/her regular wage. The credit could go up a full 25% if the employer pays the employee 100% of the regular wage. This is an interesting credit and we will all see what the final rules read like when they are issued. There are a multitude of additional provisions in the TCJA2017 that will affect businesses and individual taxpayers over the next few years. We will continue to look at those provisions throughout the coming year. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.

He owns Action Tax Service on Northland Dr in Rockford.

Contact Jerry at www.actiontaxservice.com