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PL 115-97, Business Taxes, Part 2

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This is but  a continuation of our discussion of the changed IRS code, as a result of passing a version of HR-1.  The series started last Wednesday or Thursday, where we discussed personal tax provisions of the law.  Yesterday, we started on the business taxes.  We will continue today- and finish tomorrow.

 

Net Operating Losses

When a firm generates a loss, it had IRS code permission to carry back that loss to the previous two years (which means an amended tax return is filed) or forward for the next 20 years, until the loss had been extinguished.  (This is akin to individual taxpayers dealing with a big stock loss- except that doesn’t get carried backward, just forward, with a maximum capital loss of $ 3K a year allowed.)

The new rules will let one carryback the loss but will now limit that deduction to 80% (the House version had limited this to 90%) of the corporation’s profits for the years to which the loss is carried back.

(See this provision that will affect pass-through companies, discussed earlier in this series.)

Section 1031 Exchanges

Most of you know this section as it applies to real estate sales.  A seller found a property that it can buy that is “similar” [in function, not in size or location] and not pay capital gains on the sale of the property.  In essence, the basis is rolled into the new property, which means the IRS doesn’t get to collect taxes for a while (until there is no longer a 1031 exchange made upon the property sale).

But, more things were permitted to have the gain extended forward under Section 1031.  No- not stocks, bonds, or partnership shares.  (In other words, things that are held primarily to promote a sale of the item in the future to generate a gain.)    Except, the new law stipulates that 1031 exchanges will only be allowed for real property from now on.

Don’t jump ahead.  Stop right here.  Did you realize that I just told you that trading in your business vehicle is now a taxable event?  (Not just vehicles, but planes, collectibles, and equipment.)  Form 4797 will now be filed if you trade in a car.  (It used to be enforced only if you sold the vehicle privately and bought a new car in a separate transaction.)

So, from now on- don’t trade in your business vehicle.  Sell it first! You will get more money for it, but since you’ve probably depreciated it anyway (so it is technically worthless), you can use some of those gains to pay for the taxes on your disposition of the vehicle.

Lobbying

This one really makes me happy.  Right now, businesses cannot deduct the costs of lobbying.  (You may now realize why so many of these firms are considered to be “public relations” entities and try to avoid having to register as “lobbyists”.)  Except when businesses lobby our local governments, the IRS was required to accept those costs as deductible.

That exception evaporates under the new proposed law.

Entertainment

Most of you know that entertainment expenses are currently only 50% deductible.  Just like meals, unless the meals are provided to one’s employees as a means to have them keep working (like overtime or working through lunches).  The other half of the expense was not deductible against one’s profits.

Except the new law outlaws ALL entertainment expenses.  No amusement or recreational activities or membership dues related to these activities or for social purposes.  No transportation fringe benefits and no on-premises gyms.

Corporate Entertainment is NOT deductible

And, if this were a non-profit entity, these sort of activities will now be taxable to the non-profit!

Although not entertainment, this section also disallows the deduction of qualified transportation expenses for employees (except when necessary for the safety of the employee) or to assist in commutation costs between an employee’s residence and the place of employment

Employee meals

This is going to affect my son- and his employer, among many other folks.

Up until the signing of this new law, employers were able to provide meals for their staff if they worked through lunch or through dinner, or worked hours of overtime.  Employers provided these meals so their staff wouldn’t leave the premises; and, in such cases, the employer’s costs were 100% deductible.

Until now.  As of 2018, the employer is going to be able to deduct only ½ the cost of those meals.  In other words, these meals will have the same deduction rate as the cost for any other meal the company wishes to deduct.

Oh, wait.  It gets worse.  As of 1 January 2026, these meals will NOT be deductible at all.  The employer will have to eat the entire cost of such provided meals.

PatentsCanadian Patent

Before, when we sold a patent (or were paid for their value), the gains were considered to be a long-term capital gain.  (Unless we sold it in 1 year or less, which made it a short-term capital gain.)   That stays- the idea that I would be ordinary income was stripped from the final version that passed.

Carried Interest

By the way, there was no change in the carried interest for one of the big class of GOP donors- they still get their special reductions.  These gains  are treated as capital gains with a maximum tax rate of 23.8%, if they are held for three years.  Otherwise, they would be taxed at the marginal tax rate that obtains (which could be as high as 37%).  But, don’t worry, these funds ensure that they are always considered long-term capital gains.

Carried Interest

Oh, and these benefits apply even if they had a cashless contribution  (i.e., none of their money was involved in the transaction; so it’s interest garnered on zero!) in the investment (or used a “waiver of management fee”) to justify this tax preference.

Partnership Terminations

Termination of a partnership has heretofore been defined as when the business ceases to be functional or there is a sale of 50% or more (in a given year) of the partnerships’ capital and/or profit interests.  The latter reason is called a technical termination.

Partnerships

Under the proposed law, technical terminations would no longer be mandated.  The partnership can still be considered to be ongoing and patent.

OK.  While I had hoped this would be just a four part series, it’s getting a bit long.  So, there will be another post to complete the discussion of the changes to business taxation!

See you tomorrow.Roy A. Ackerman, Ph.D., E.A.

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