Breaking News for Business Taxpayers

The House has released a tax bill.

This bill contains sweeping changes for both businesses and individuals. Most provisions are effective for tax years beginning after 2017.

What happens from here? The Senate will introduce its version of the bill. The Joint Committee will be charged with hammering out the differences and producing a bill to be voted on by both chambers.

Yeo & Yeo will monitor the activity as it unfolds. Follow us on social media and continue to check our blog for late-breaking news and updated information about the tax bills.

Overview of proposed changes impacting business taxpayers

Corporate Rate Reduction. Corporate tax rate cut to a flat 20%; 25% for personal service corporations. Corporate AMT would be repealed.

Taxation of Pass-through Income. The proposal contains a complex set of rules governing the tax rate applicable to income from S corporations, partnerships, LLCs and sole proprietorships.

• Passive Activities. Income from passive activities qualify for 25% tax rate.

• Nonpassive Activities. In order to prevent abuse, active businesses will use a default 70%-30% allocation ratio. 70% will be taxed at ordinary individual rates with 30% qualifying for the 25% rate. For personal services, like doctors, lawyers, accountants, and financial advisors, all income is presumed to be earned income and subject to ordinary individual rates. An alternate calculation will be available.

Business Asset Purchases. 100% bonus depreciation for assets purchased after September 27, 2017, expires in 2023. This provision is expanded to include used property, but specifically excludes property used in real estate businesses. Section 179 limit increases to $5,000,000 for purchases after 2017.

Many Deductions and Credits Limited or Repealed 

Repealed. Business Entertainment Expense, Domestic Production Activity Deduction, Work Opportunity Credit, Rehab Credit, tax-free employer educational assistance payments, employer child care credit, lobbying expense deduction, partnership technical termination rules.

Limited. Net interest deduction limited to 30% of adjusted income, Net Operating Losses will only offset 90% of taxable income, Net Operating Losses will not be allowed a carryback, like-kind exchanges will only be allowed for real estate.

Retained. Research and Development Credit, Low Income Housing Credit.

Small Business Breaks. Small businesses defined as those with gross revenue of $25 million or less will have some breaks in the new rules:

• Will not be subject to the net interest deduction limitation;
• Will be allowed to use the cash basis of accounting;
• Will be allowed to account for inventory as non-incidental supplies;
• Will be exempt from Section 263A UNICAP rules;
• Will be allowed to utilize the completed contract method.

If you have questions, please contact a member of Yeo & Yeo’s Tax Services Group or your local Yeo & Yeo office.