Tax reform is here, and a number of ACCA's priorities are being included in this legislation: estate tax; HEAT Act; geothermal; business expensing; and a few others. Unfortunately, the changes to pass-through businesses are not ideal. For the most part, this is a good bill for the HVAC Industry. Despite the many positive aspects for our industry, we remain hard at work to work to continue to improve our position. Below you will find my latest update on what’s in the legislation.
Business Tax Rates:
Death Tax Repeal:
- ACCA member businesses classified as C-corporations will have their tax rate reduced from 35% to 20%. One of the largest pay-fors to lower the corporate rate is a deem repatriation of foreign profits, since ACCA members are exclusively domestic there is no downside to the reduction in the corporate tax rate by itself.
- Corporate Alternative Minimum Tax is repealed.
- Pass through companies (sole proprietorships, partnerships, S-corporations, and limited liability companies) will receive a cap of 25% tax rate on business income, however the committee has put special rules in place to combat abuse by individuals trying to hide salaries as pass-through income.
- For owners who are also employed by the firm there are two options for dividing total income between business and labor income:
- The first option would allow business owners to consider 30% of the total profits as business income, the rest is considered labor income to the business owner and taxed at the personal rate.
- The second option is a formula that will calculate the business income derived from returns to business capital. The formula would measure the capital percentage based on a rate of return (the Federal short-term rate plus 7 percent) multiplied by the capital investments of the business. This formula would be binding for five years.
- For the percentage of income considered labor income, the personal tax rates have been cut from seven bracket to four:
- Married filing jointly:
- $0- $90,000 -12%
- $90,001 - $260,000 – 25%
- $260,000 - $1,000,000 – 35%
- Greater than $100,000,001 – 39.6%**
- **Incomes between $1,200,000 - $1,614,000 will not qualify for the 12%, the first dollar after applicable deductions is taxed at 25%
- For business owners employed at the firm using the 70/30 split will create a top blended effective tax rate of between 28% and 35% depending on total income.
- For owners who are not employed by the firm, the profit is all considered business income and is capped at the 25% tax rate.
- All of the changes to the business and personal tax rates are considered permanent.
- The unified exclusion for estate and gift taxes is immediately doubled to $11.2 million per individual and effective January 1, 2024 the estate tax is repealed and the gift tax rate will be reduced to 35%.
- Full step-up in basis is retained.
Section 179 small business expensing:
- Pass through firms with gross receipts of less than $25 million (averaged over three years) can deduct interest in full. Corporations and large pass through firms are limited to an interest deduction equal 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA), with a five-year carry forward.
- These new rules will only apply to new loans, not existing loans.
- The small business expensing limitation under section 179 would be increased to $5 million (from $500,000) and the phase-out amount would be increased to $20 million. The provision would modify the expensing limitation by indexing both the $5 million and $20 million limits for inflation.
- The increase in limits will be permanent.
- Included in the expansion of Section 179 is a provision allowing commercial building owners to expense the cost of upgraded HVAC systems. The provision would modify the definition of Section 179 property to include qualified energy efficient heating and air-conditioning property permanently. The provision to is effective for property acquired and placed in service after November 2, 2017.
- This provision is also permanent as part of Section 179.
- The legislation increases Bonus Depreciation to 100% for five years. Any property with a depreciation schedule of less than 20 years qualifies for Bonus Depreciation. ACCA members will be able to expense any qualifying property placed in service after September 27, 2017 and before January 1, 2023.
- This provision sets up the next "extenders" debate starting in 2022.
Section 1031 exchanges:
- The Tax Cut and Jobs Act does not change LIFO accounting rules.
- Section 1031 exchanges for the purpose of deferral of capital gains will be limited to real property. With the allowance of full expensing on most personal property there is no longer a need to provide preferential treatment to personal property under Section 1031.
- Several parts of Section 48 are extended. The 10% tax credit for geothermal heat pumps is extended for any product in which construction began prior to January, 1, 2028. This provision is also retroactive to December 31, 2016.
Section 25(D) is extended through 2021 with a phase down from 30% currently to 26% in 2020 and 22% in 2021. This is another provision that could possibly be extended in the future. Entertainment expenses:
- Section 179D expired at the end of 2016, the Tax Cut and Jobs Act does not extend Section 179D.
- Deductions for entertainment expenses will no longer be allowed. Activities that previously qualified included: entertainment, amusement or recreation activities, facilities, or membership dues relating to such activities or other social purposes.
If you have questions about tax reform or want more information, email me at firstname.lastname@example.org