This is the 6th article in a series of 8 discussing the key business tax law changes that are made under the newly passed tax reform, the Tax Cut and Jobs Act. In this article, I’m discussing the change in depreciation for business property, business interest expense limitations among other changes that are taking effect for the 2018 tax years.
If you’re planning on opening a business in 2018 and your plans include improving the nonresidential property, you’ll enjoy a shorter cost recovery period of 15 years. Under the old law, there were separate definitions and requirements for qualified leasehold improvements, qualified restaurant and qualified retail improvements and these have now been eliminated.
If you have debt in your business then this next tax law change may affect you. For tax years beginning in 2018, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. If you do have excess interest, this can generally be carried forward indefinitely but there are certain restrictions applicable to partnerships. This interest deduction limitation will be determined at the tax filer level but, special rules apply to pass through entities which require the determination to be made at the entity level, for example the partnership level instead of the partner level.
If you’re wondering how to compute your businesses adjusted taxable income, this is your net income computed without depreciation, amortization or depletion. There are exceptions to these rules of course so, if you’re a small business with average annual gross receipts for a three-tax year period that don’t exceed $25 million, than this business-interest-limit provision won’t apply to you. Big sigh of relief from all small business owners!
If your business is expected to lose money, you now have limitations on carrying the losses forward or back. Under the old law, net operating losses or NOLs, could generally be carried back 2 years and forward 20 years to offset taxable income in those years. Under the new law, unless you’re a farmer, the 2 year carryback is no longer available and you’re limited to 80% of taxable income to take it against but any excess can now be carried forward indefinitely.
If this information has been helpful and you want to learn more, visit my website at actservices-inc.com.
