The "Tax Cuts and Jobs Act" signed by President Trump on December 22, 2017, contains numerous provisions that impact business that specialize in providing professional services in the field of engineering. Below is a summary of some of the key provisions:
Corporate and Non-corporate:
Limits on the Deduction of Business Interest - IRC Sec. 163(j)
Generally, for tax years beginning after Dec. 31, 2017, every business, regardless of its form, will be subject to a disallowance of a deduction for net interest expense in excess of 30% of the business's adjusted taxable income. For pass-through entities, the limitation is determined at the entity level, not at the owner level. Any disallowed business interest expense deduction is carried forward indefinitely to future tax years.
Small businesses with average annual gross receipts under $25 million during the three preceding tax years are exempt from this 30% limitation.
Increased Sec. 179 Expensing
For eligible property placed in service in tax years beginning after Dec. 31, 2017, under Section 179 of the Internal Revenue Code (IRC), businesses can expense up to $1,000,000, with dollar-for-dollar phase-out of the $1,000,000 limitation beginning when the total eligible property placed in service is above $2,500,000.
"Qualified Real Property" eligible for IRC Sec. 179 expensing includes additional improvements to nonresidential real property (roofs, HVAC, fire protection and alarm systems, and security systems)
Temporary 100% Cost Recovery - IRC Sec. 168(k)
100% first-year deduction for the adjusted basis of qualified property (original use or used property) acquired and placed in service after September 27, 2017 and before January 1, 2023, with a 20% annual phase-down beginning with eligible property placed in service on or after January 1, 2023.
Net Operating Loss (NOL) - IRC Sec. 172
For losses arising in tax years beginning after December 31, 2017, the general two-year NOL carryback and the special carryback provisions have been repealed. However, NOLs may be carried forward indefinitely (formerly, a 20-year carryforward period).
The NOL deduction will be limited to 80% of taxable income. Carryovers to other years will be adjusted to take account of the 80% limitation.
Repeal of the domestic production activity deduction - IRC Sec. 199
For tax years beginning after Dec. 31, 2017, the domestic production activities deduction (“DPAD”) allowed for certain qualifying U.S.-based activities, including engineering activities, generally equal to 9% qualified production activities income for the tax year, has been repealed.
Limitation on deduction by employers of meals and entertainment expenses (IRC Sec. 274)
For amounts paid or incurred after December 31, 2017, the provision provides that no deduction is allowed with respect to (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with any of the above items. The present-law exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer's trade or business (and the related rule applying a 50 percent limit to such deductions) has been repealed.
Taxpayers may still generally deduct 50 percent of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). For amounts incurred and paid after December 31, 2017 and until December 31, 2025, the provision expands this 50 percent limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer. Such amounts incurred and paid after December 31, 2025 are not deductible.
Permanent Reduction in Corporate Income Tax Rate
Beginning with the 2018 tax year, taxable income of a Subchapter C corporation will be subject to a flat 21% tax rate. In addition, the corporate alternative minimum tax has been repealed.
Businesses with a fiscal year ending during 2018 would use a blended rate based on the 2017 and 2018 corporate tax rates (under IRC Sec. 15) in determining corporate income tax for the tax year (unless further guidance provided).
Deduction related to Qualified Business Income - IRC Sec. 199A
Generally, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, many non-corporate taxpayers that have qualified business income (QBI) from a partnership, Subchapter S Corporation, or sole proprietorship are allowed to deduct 20% of the QBI for the tax year. The deduction reduces taxable income, rather than adjusted gross income.
In general, the deduction cannot exceed 20% of the excess of the taxpayer's taxable income over net capital gain. Taxpayers whose taxable income exceeds the threshold amount of $157,500 ($315,000 in the case of a joint return) are also subject to limitations based on the W-2 wages and the adjusted basis in acquired qualified property.
QBI is generally defined as the net amount of “qualified items of income, gain, deduction, and loss” effectively connected with the conduct of a qualified U.S. trade or business (including engineering services). QBI may also include business activity with Puerto Rico. Businesses will need to have the ability to break-out domestic and non-domestic activity for purposes of this deduction.
QBI does not include: certain investment items; reasonable compensation paid to the taxpayer by any qualified trade or business for services rendered with respect to the trade or business; any guaranteed payment to a partner for services to the business; or a payment to a partner for services rendered with respect to the trade or business.