The Tax Cuts & Jobs Act of 2017 (TCJA) was the most extensive overhaul of the tax code in three decades. Along with creating a single corporate tax rate of 21%, several other changes affect businesses.
Changes to Bonus Depreciation Rules
Previously, bonus depreciation was only allowed for “original use” property. The new rules enable bonus depreciation for both new construction and used property acquired on/after September 28th, 2017.
The new bonus depreciation rate is 100% for assets with a 20-Year tax life or less. The 100% bonus depreciation rate will affect new and used property placed into service through December 31st, 2022. For purposes of the 100% additional first-year depreciation deduction, the depreciable property will meet the requirements if the property is acquired/constructed by the taxpayer on/after September 28th, 2017, but only if no written binding contract for the acquisition of the property was in effect before September 28th, 2017.
The Tax Impact
Our example is an existing building with a basis of $1,050,000. The numbers below show the difference between existing properties purchased on/before September 27th, 2017, and existing properties purchased on/after September 28th, 2017. We have netted out the standard 39-Year straight-line depreciation to show the benefits derived from the cost segregation study.
Purchased on/before September 27, 2017
|Years 1-6||$ 150,720|
Purchased on/after September 28, 2017
|Year 1||$ 245,994|
For qualifying new construction and/or purchased properties placed into service on or after September 28th, 2017, the total impact of a cost segregation study will be realized in the first year of ownership (previously it took six years, or more, to derive the full benefit of a study).
Section 179 Expense Changes
The law allows full expensing of short-lived capital investments rather than requiring them to be depreciated over time—for five years—but phase the change out by 20 percentage points per year after that.
Certain Real Property assets will be eligible for 179 expensing.
This will include improvements to:
- Fire Protection & Alarm Systems
- Security Systems
To be eligible, these improvements must be made to a non-residential property after the building was first placed into service.
Section 179 expensing has also been expanded to include tangible personal property used to furnish lodging. This includes appliances and furniture that are used in hotels, apartment buildings, and student housing.
Section 179 expensing will continue to be limited. However, the 2018 limitations will be doubled to $1,000,000 with the phase-out limitation of $2,500,000.
What Will Not Change
Land and Improvements
Land and land improvements do not qualify as section 179 property. Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences.
Even if the requirements explained earlier are met, you cannot take the section 179 deduction for property:
- You lease to others (if you are a noncorporate lessor).
- That is used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code.
- To be used by specific tax-exempt organizations, except property used in connection with the production of income subject to the tax on an unrelated trade or business income.
- Used by governmental units or foreign persons or entities, except property used under a lease term of less than six months.
Generally, you cannot claim a section 179 deduction based on the cost of the property you lease to someone else. This rule does not apply to corporations. However, you can claim a section 179 deduction for the cost of the following property:
- Property you manufacture or produce and lease to others.
- Property you purchase and lease to others if both the following tests are met.
- The term of the lease (including options to renew) is less than 50% of the property’s class life.
- For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property.
Qualified Property Changes
From 2018 onward, the following have been replaced by Qualified Improvement Property (QIP):
- Qualified Leasehold Improvement Property (QLHI)
- Qualified Retail Improvement Property (QIP)
- Qualified Restaurant Property (QRP)
They will have a general 15-Year recovery period. QIP property is any non-structural improvement to the interior portion of a non-residential building. The improvement must be placed into service after the building was first placed into service.
- Enlargement of the building
- Elevators or escalators
- Structural framework
The most significant impact of the new Qualified Property rules is on Restaurant property. The new rules will require Restaurant buildings to be depreciated over 39 years (instead of the previous 15-year QRP property). Interior improvements that are non-structural and placed into service after the building was placed into service can qualify as Qualified Improvement Property (QIP) with 15-year treatment and bonus eligible.
Corporate Tax Rate Changes
As previously mentioned, the tax rates for corporations have changed to a flat 21%. The previous corporate rates ranged from 15% to 39%.
Individual Tax Rate Changes
|Tax Rate||Individual||Married Filing Jointly|
|10%||$0 – $9,525||$0 – $19,050|
|12%||$9,526 – $38,700||$19,051 – $77,400|
|22%||$38,701 – $82,500||77,401 – $165,000|
|24%||$82,501 – $157-500||$165,001 – $315,000|
|32%||$157,501 – $200,000||$315,001 – $400,000|
|35%||$200,001 – $500,000||$400,001 – $600,000|
|Tax Rate||Individual||Married Filing Jointly|
|10%||$0 – $9,325||$0 – $13,350|
|15%||$9,326 – $37,950||$13,351 -0 $50,800|
|25%||$36,951 – $91,900||$50,801 – $131,200|
|28%||$91,901 – $191,650||$131,201 – $212,500|
|33%||$191,651 – $416,700||$212,501 – $416,700|
|35%||$416,701 – $418,400||$416,701 – $444,650|
|39.6%||$418,401 +||$444,501 +|
Pass-Through Entity Deduction
Owners of pass-through entities such as Sole Proprietorships, Partnerships, LLCs, S-Corporations, Estates & Trusts will now have the ability to deduct 20% of their Qualified Business Income (QBI). However, there are limiting conditions.
For individual taxpayers, the threshold is $157,500, and for married taxpayers filing jointly, the threshold is $315,000.
Suppose the business is a specified service business and taxable income exceeds the income limitation. The phase-in range equals $207,500 for individual taxpayers and $415,000 for married taxpayers filing jointly. In that case, the deduction is lost completely.
Wages and Capital Limitations
If the business does not qualify as a specified service business and taxable income exceeds the income limitation, then the wages and capital limitations begin. The wages and capital limitations are in place to reduce or eliminate the 20% deduction for taxpayers whose taxable income exceeds the income limitation.
Net Operating Loss Carrybacks
The Tax Cuts and Jobs Act (TCJA) changed the NOL rules, as well. It:
- Limited NOL deductions to 80% of taxable income
- Disallowed NOL carrybacks
- Lifted the 20-year limit on NOL carryovers.
However, under the CARES Act of 2020, these changes were suspended, and a Net Operating Loss from the tax year 2018, 2019, or 2020 can be carried back five years if the taxpayer chooses to do so. In 2021.
Cost Segregation Studies
Cost segregation studies can increase NOL’s by increasing depreciation deductions from income and creating more considerable losses. Cost Segregation Studies can be completed for retroactive years in what is commonly called a “Look Back” study.
To take advantage of the provisions under the CARES Act, taxpayers should file amended and original tax returns by October 15th, 2021. Deciding to forgo the carryback is irrevocable.