By Thomas K. Furrier and Laura Liewen
1) Owners of pass-through entities may get a significant deduction from the new 199A deduction, but it is a complex and time-consuming calculation. This new provision gives eligible businesses up to a 20 percent tax deduction on certain qualified business income. However, the new 199A deduction requires additional reporting for every pass-through entity. Because the deduction is taken at the individual level, every pass-through entity’s tax return will need to report specific information to its owners so that they can determine if they are eligible for the deduction. Both businesses and individuals can expect longer tax preparation times because of this new deduction.
2) Depreciation expensing has increased. Bonus depreciation has increased to 100 percent of eligible property acquired through 2022 and eligible property now includes used property. Eligible property may include automotive vehicles, machinery and equipment, furniture, etc. For passenger autos the first-year depreciation is $10,000, or $18,000 if eligible for bonus depreciation. For heavy vehicles with a GVW over 6,000 pounds, 100 percent of the cost may be deductible using bonus depreciation. The new law also expands Section 179 expensing on nonresidential property to include qualified improvements, roofs, HVACs, fire protection, alarms and security systems. The maximum Section 179 deduction has increased to $1 million. Not all states conform to these rules, which can cause higher income for state income tax purposes.
3) Business losses over certain thresholds may be required to be carried forward as a net operating loss in future years. The new law caps currently deductible aggregate excess business losses at $500,000 for married filing joint taxpayers and $250,000 for all other taxpayers. Taxpayers with business losses will be limited to offsetting non-business income by these threshold amounts. Additionally, for losses arising after 2017, the NOL deduction is limited to 80 percent of taxable income, determined without regard to the NOL carryforward. This limitation may significantly limit the utilization of NOLs in subsequent years.
4) Opportunity Zone Fund Investments can be a great opportunity for investors, but there is still little guidance for certain types of investments. Investors may be able to defer or eliminate tax on capital gains that are invested in opportunity-zone funds. The funds deploy capital in designated opportunity-zone areas and provide tax benefits to its investors. The tax on the capital gains that are reinvested in a fund are eligible for deferment and partial elimination depending on the length of time the investment in the fund is held. The appreciation on the investment in the fund may be excluded from tax if it is held for at least 10 years. This can be a great way to reduce or eliminate tax on a long-term investment strategy.
5) Not all states conform to the new rules – which can create significant differences between federal and state reportable taxable income. As of this writing, the state of Arizona has not passed a conformity law to adopt the federal changes from the 2017 tax law into Arizona law. A couple of significant federal-state differences for business owners may be the allowable federal 100 percent bonus depreciation as well as the federal inclusion of used property in the definition of eligible property for bonus depreciation purposes. These depreciation changes are not recognized by many states. Further, the new 199A deduction is not currently permitted for Arizona tax purposes. These, among other differences, should be considered in business owners’ tax planning and should be discussed with their accountants.