The Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law in December 2017 and made some of the biggest changes to tax law since the passage of the Internal Revenue Code of 1986. Its sweeping effects won't affect the taxes you're filing this year but be ready for big changes in how you file next year. Here's how the TCJA could affect you.
Businesses will likely have dramatically less tax liability
One of the most significant changes implemented by the TCJA is the reduction of the corporate tax rate. The maximum corporate tax rate has been reduced from 35 percent to 21 percent. Additionally, the range and size of available corporate tax deductions has expanded. The combination of these two changes begs an important question for most businesses: How many deductions can realistically be absorbed going forward?
Not to be left out, pass-through businesses such as partnerships, S-Corps and Limited Liability Companies who pay taxes at the individual owner level, also received a tax cut from the TCJA. The new law provides a 20% deduction against trade or business income. Top individual tax rates of 37% can be reduced to an effective tax rate of 29.6% with this benefit. Pass-through business owners should consult their financial advisors since this benefit has income and industry-related eligibility requirements.
100 percent expensing will apply to newly purchased assets
Qualified capital equipment purchased and placed into service after Sept. 27, 2017 and before January 1, 2023, is eligible for 100 percent expensing which all business owners can claim. Those who invest in qualified equipment during that time can simply expense 100 percent of the equipment cost in the first year of ownership. This is great news for many equipment-intensive corporations.
However, Key Equipment Finance points out, "The benefit of such a write-off has less impact in a 21 percent corporate tax environment . . . therefore some businesses might be unable to absorb all the depreciation benefits available to them." In such a case, leasing equipment using a qualified tax lease could allow them "to monetize otherwise unused depreciation benefits."
Businesses should also note that the temporary increase in expensing allowance also applies to pre-owned equipment purchases.