There are a number of provisions in the new Tax Cut and Jobs Act that affect businesses.
One of them has to do with a choice of entity decision. C Corps now have a 21% flat tax rate. However, when deciding whether a C Corp makes sense, a taxpayer would want to take into consideration once distributions are made to shareholders in the form of dividends, there is a 15% tax on that, additionally, there may also be a 3.8% investment tax on that. So, weighing whether a C Corp makes sense or not is not as simple as looking at the flat tax rate.
In an effort to level the playing field, a new 20% deduction is now available to certain float-through entities, such as limited liability partnerships and limited liability companies. However, this 20% deduction is based out over certain income levels of the owners. There is also some alternative calculations dependant on the level of income that the owner is recognizing.
There is an additional restriction placed on entities that are now defined as specified service trade or businesses. These businesses are in the areas of health, law, and accounting, as well as some other listed businesses, except for architects and engineers. There is also a definition of a service trade or business that includes any trade or business where the principal asset is the skill or reputation of its employees or owners.
The second aspect of the Tax Act is the new rules for depreciation. Under the act, depreciation can be taken 100% on property that is placed in service after September 27, 2017. Finally, there is also an increase in the amount that a company can take as a Section 179 deduction, up to 1 million dollars. There is also one other big bonus in the Act as it relates to depreciation, in that used property can now be deducted as a depreciation, which before it couldn’t. These new depreciation rules may lead some companies to want to pursue an asset purchase rather than a stock purchase, depending upon the facts and circumstances.
The next aspect of the Tax Act that affects businesses is the treatment of net operating losses. Historically net operating losses could be carried back 2 years, and the difference carried forward 20 years. Companies can now take up to 80% of the taxable income of the company and offset the net operating loss against that income. The carryback is no longer available, but the difference can be carried forward indefinitely.
The last aspect of the Tax Act has to do with the expensing or deducting of expenses relating to sexual harassment or sexual abuse claims. Under Texas and Federal statutes, sexual harassment claims are employment-based, which means the company, not the individual is responsible. With sexual abuse claims, the individual can be held responsible. Once the claim has been made and investigated, that process can be a very expensive proposition. So, depending on the outcome, a company now will have to decide the benefits of deducting the expenses relating to the investigation, defense and actual payment of the claim vs. the publicity that the claim can bring.
At this point, the IRS has not issued any regulations regarding the new Tax Act. It is hopeful that those regulations will be issued and some clarity will be given to some of these provisions.