Tax Reform Basics Small Businesses and Pass-Through Entities

Several provisions of the Tax Cuts and Jobs Act (TCJA) impact small entities and pass-through entities. Pick the tax changes highlighted below and explain to a client how it differs from pre-TCJA law. Is the new provision more favorable or less favorable to the taxpayer? Be sure to support your comments with information you find in the library or in the IRS code

During this session, we will highlight provisions in the Tax Cuts and Jobs Act that was signed into law on December 22nd of 2017 that affects small businesses. There were many provisions, and we do not have time today to cover them all, but we have picked some that we believe will be relevant to you. So we will review the following topics. New rules for depreciation. Modifications of the treatment of certain farm property. A collection topic, the time limit for contesting levies. Information on like-kind exchanges. The Qualified Business Income Deduction, better known as The 199A deduction. And the gift and estate tax exclusion. So with that, let's start with new rules for depreciation that can be found on the next slide. So we will be talking about section 179 property placed in service in taxable years beginning after December 31, 2017. The maximum section 179 deduction increased from $500,000 to $1 million. And I remember when I started with the IRS back in 1985, the 179 deduction was $10,000. So you can see just how much it is now. I very valuable deduction for small businesses. The election is made to claim the 179 deduction on form 4562. And just like to add that this deduction cannot add to or create a loss. Also, the deductions phase out threshold has increased from $2 million to $2.5 million. And some refer to that as the investment limitation. So the maximum 179 deduction is reduced dollar for dollar by the cost of qualified property that exceeds this limit or $2.5 million. In addition the definition of section 179 property now includes, if the taxpayer elects, qualified improvement property. And what that means is any improvement that is to section 1250 property to an interior portion of a building that is non-residential real property if the improvement is placed in service by the taxpayer after the date that the building was first placed in service. Improvements do not qualify if they are attributable to the enlargement of the building, you know, any elevator or escalator or the internal structural framework of the building. And in addition, the following improvements also are subject to 179 and that would be non-residential real property, again, placed in service after the property was first placed in service. So that means you can't just take it on newly acquired property. But it applies to roofs, HVAC equipment, fire protection systems, alarm systems, and security systems. The new law also expands the definition of section 179 property to in include certain depreciable tangible personal property when used when furnishing lodging. And what I mean by that would be beds, furniture in hotels, and apartment buildings. For qualified property acquired and placed in service after September 27, 2017, and, so, this is actually a retroactive provision. The bonus depreciation increased from 50% to 100%. The slide shows you the change in the percentage after 2022. Also, qualified film, television, or live theatrical productions are now eligible for bonus depreciation rather than its prior treatment as being able to be immediately expensed under section 181. So now a taxpayer can use the new bonus depreciation if a deduction otherwise would have been allowable under section 181.

So on the next slide, I'd like to talk about what I think is really one of the biggest changes to the bonus depreciation and that is in addition to new property, the new rules allow the additional first year depreciation now on used property. And a couple of caveats to that. So you can't have used the property at any time before acquiring it. And you can't acquire the property from a related party. So I think as you'll see on the next slide, it can be used property, but new to you. Okay? So what that means is you can't have a acquired property from a component member of a controlled group of corporations. Your basis can't be determined based on what that basis would have been on the hands of the seller or the transferor, and your basis is not figured under the provision for deciding the basis of the property acquired from a decedent. For property place in service after 12/31/2017, I'm going to talk a little bit about luxury automobiles. So if you don't take the additional first year bonus depreciation, the maximum allowable depreciation deduction for the first year is $10,000. $16,000 for the second year. And then $9,000 for the third year. And then after that, $5,760. But if you elect the first year bonus depreciation, the allowable depreciation deduction for the first year is increased by $8,000. It's now $18,000. In addition, as you can see in the second bullet, the new law shortens the recovery period for machinery and equipment used in a farming business. It was seven years, and now it's five. And it excludes grain bins, and cotton ginning assets, fence and other land improvements. In addition, the original use of the property must begin with the taxpayer after 12/31/2017 and that's as well as the recovery period. And as you can see on the last bullet, the new law removes computers or peripheral equipment from the definition of listed property. And that's provision 13202 of the tax cuts and jobs act.