ARDMORE, Pa. — Are you ready for tax “reform?” Thanks to the recently passed Tax Cuts and Jobs Act (TCJA), the tax rate for incorporated coin-operated laundries and businesses will be reduced from its current 35% to 21% — for the 2018 tax year and thereafter. And, although the business tax cuts are, for the most part, permanent, the tax cuts for individuals are only temporary, expiring in 2026.
Unfortunately, while regular C corporations will be taxed at a flat 21% tax rate, the majority of small businesses operating as pass-through entities will face new personal tax rates higher than the corporate tax rate.
LIKE-KIND EXCHANGES, SWAPS AND TRADE-INS
The tax law’s Section 1031 governing like-kind exchanges currently allow coin-operated laundries and other businesses to defer the tax bill on the built-in gains in property by exchanging it for similar property. Although more a strategy for deferring a tax bill when business assets are sold or otherwise disposed of, with multiple exchanges, gains can be deferred for decades and ultimately escape taxation entirely.
Under the TCJA, like-kind exchanges will be limited to so-called “real” property (but not for real property held primarily for sale). The provision redefines like-kind exchanges and includes language that would limit Section 1031 exchanges to exchanges of like-kind “real” property. This ensures real estate investors maintain the benefit of deferring capital gains realized on the sale of property.
SMALL-BUSINESS ACCOUNTING METHOD AND SIMPLICATION
Simplifying the rules governing the method of accounting that must be used for tax purposes is a welcome option. Businesses with average annual gross income of less than $25 million may now use the simple cash-basis accounting method.
Accrual-basis taxpayers include amounts in income when all of the events have occurred that fix the right to receive income can be determined with reasonable accuracy. Cash-basis taxpayers generally include amounts in income when actually or constructively received.
AUTO EXPENSES
New limits on the write-off for the cost of so-called luxury automobiles and personal use property were included in the TCJA. For passenger automobiles and light trucks placed in service after Dec. 31, 2017, where the additional first-year depreciation deduction is not claimed, the maximum amount of allowable depreciation is increased to $10,000 for the year in which the vehicle is first placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period.
For passenger automobiles placed in service after 2018, these dollar limits are indexed for inflation. And for those eligible for bonus or first-year depreciation, the maximum first-year depreciation allowance remains at $8,000.
Similar rules apply to not only passenger automobiles, but to any property used as a means of transportation or used for the purpose of entertainment, recreation, or amusement. Computers and peripheral equipment have been removed from the definition of listed property and are no longer subject to the increased substantiation requirements that have long applied to listed property.
LOSING NOL BENEFITS
One of the main benefits of Net Operating Losses (NOLs) was the fact they could be carried back to more prosperous years to create a refund of taxes paid in those earlier years, thus providing an immediate infusion of badly needed cash. Today, the NOL deduction has been severely limited.
The NOL deduction is now limited to 80% of taxable income and only in special cases will a NOL carryback be permitted. There is no limit on how far forward NOLs may be carried.
ESTATE TAXES
The tax law applies a 40% levy on estates worth more than $5.49 million for individuals and $10.98 million for couples. The newly passed law provides immediate relief from the so-called “Death Tax” by doubling the exemption so it applies to fewer estates. The credit for estate, gift and generation-skipping transfer taxes would be increased to $10 million for decedents dying and gifts made after Dec. 31, 2017. As with most good things, the higher thresholds would sunset in 2026.
MORE, OH, SO MUCH MORE
Obviously, there are many more changes contained in the massive Tax Cuts and Jobs Act. The corporate Alternative Minimum Tax has been eliminated, the tax credit for rehabilitation expenses has been repealed as has the disabled access credit; S corporations attempting to convert to regular C corporations will face new rules; and partnerships will no longer terminate upon the death or exit of a partner.
All in all, however, the Tax Cuts and Jobs Act appears to favor businesses over individuals with longer-lived tax savings. Unfortunately, with few exceptions, the potential savings won’t be seen by coin-operated, self-service laundries or their owner/operators until the tax bill for 2018 comes due.
Miss Part 1? You can read it HERE.
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an attorney or tax adviser for advice regarding your particular situation.
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].