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The Tax Cuts and Jobs Act, enacted in December 2017, affects nearly every business and individual in 2018 and the years ahead. As a small business or self-employed taxpayer, you should understand how the new tax law could affect your bottom line and how the changes for individuals relate to your business situation.

 

A comparison for businesses

This side-by-side comparison shows you what’s different after the Tax Cuts and Jobs Act and can help you plan accordingly.

See how tax reform affects your business

In connection with guidance that Treasury and the IRS have provided about the TCJA’s $10,000 cap on state and local tax deductions, a revenue procedure has been released providing a safe harbor under section 162 that applies to payments made by a C corp or specified pass-through entity to a 170(c) organization in return for a state or local tax credit.

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Eligible taxpayers may now deduct up to 20 percent of certain business income from domestic businesses operated as sole proprietorships partnerships, S corporations and some trusts and estates. The deduction may also be claimed on certain dividends.  Eligible taxpayers can claim the deduction for the first time on the 2018 federal income tax return they file in 2019.

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The Treasury Department and the Internal Revenue Service issued Notice 2018-14 and Publication 15, Employer's Tax Guide to help businesses apply law changes to withholding. These materials are designed to help employers and employees with a variety of withholding matters during and after the transition to new, reduced tax rates and updated withholding tables.

More information is available in Notice 1036 and the IRS Tax Withholding Estimator Tables Frequently Asked Questions.

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Businesses can immediately expense more under the new law. A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million.

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New 100-percent depreciation deduction 

The new 100-percent depreciation deduction allows businesses to write off most depreciable business assets in the year they are placed in service by the business.

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Recovery period for residential rental property

The general recovery period for residential rental property is 27.5 years. The law changed the alternative depreciation system recovery period for residential rental property from 40 years to 30 years.

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The new law disallows employer deductions for (1) activities generally considered to be entertainment, amusement, or recreation; (2) membership dues for clubs organized for business, pleasure, recreation, or other social purposes; or (3) a facility used in connection with the above items, even if the activity is related to the active conduct of trade or business.

It also disallows deductions for expenses associated with transportation fringe benefits or expenses incurred providing transportation for commuting (except as necessary for employee safety).

Under the new law, there is now a prohibition on cash, gift cards and other non-tangible personal property as employee achievement awards. Special rules allow an employee to exclude certain achievement awards from their wages if the awards are tangible personal property.

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Like-kind exchange treatment now applies only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange.

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TCJA keeps the 20 percent credit for qualified rehabilitation expenditures for certified historic structures, but requires that taxpayers take the 20 percent credit over five years instead of in the year they placed the building into service. The 10 percent credit for pre-1936 buildings is repealed under TCJA. This provision is effective for amounts that taxpayers pay or incur for qualified expenditures after December 31, 2017.

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TCJA changed the accounting procedures under several different situations. IRS guidance provides procedures for eligible businesses to obtain automatic consent to change their method of accounting.

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Eligible terminated S corporations are required to change from the overall cash method to an overall accrual method of accounting because of a revocation of its S corporation election, and they should make this method change for the C corporation’s first taxable year after such revocation.

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Many U.S. corporations elect to use a fiscal year end and not a calendar year end for federal income tax reporting purposes. Due to a provision in the TCJA, a corporation with a fiscal year that includes Jan. 1, 2018 will pay federal income tax using a blended tax rate and not the flat 21 percent tax rate under the TCJA that would generally apply to taxable years beginning after Dec. 31, 2017.

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A general business credit employers may claim, based on wages paid to qualifying employees while they are on family and medical leave, subject to certain conditions.

Eligible employers who set up qualifying paid family leave programs or amend existing programs by Dec. 31, 2018 will be eligible to claim the employer credit for paid family and medical leave, retroactive to the beginning of the employer’s 2018 tax year, for qualifying leave already provided. Notice 2018-71 provides detailed guidance on the new credit in a question and answer format.

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Many farmers and ranchers will benefit from tax law changes that affect net operating losses, pass-through entities and accounting method changes.

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Opportunity zones are an economic development tool—that is, they are designed to spur economic development and job creation in distressed communities. Opportunity Zones are designed to spur economic development by providing tax benefits to investors.

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