How the Tax Reform Affects C Corporations
On December 20th, 2017 one of the largest tax reform bills in recent decades was passed. C corporations, which experience a double-taxation due to taxation at corporate and income-distribution levels, should experience some benefit resulting from the taxation changes.
The Corporate Tax Rate
The new law incorporates a set 21% tax rate for all C corporations, which previously was variable based on a graduated rate structure ranging from 15% to 35%. Most businesses will benefit from a lower tax rate, though some businesses who were in the lower tax rate bracket before will be subject to an increased tax rate.
Alternative Minimum Tax
Additionally, the corporate alternative minimum tax (AMT) has been eliminated under the reform, which under prior law required businesses to complete both calculations and pay the higher of the two amounts.
Due to the change of corporate income tax, the dividend-received deduction has also been changed to align percentage limitations. For corporate subsidiaries with at least 20% ownership, the formerly 80% deduction is now a 65% deduction. For corporate subsidiaries with less than 20% ownership, the deduction has been reduced from 70% to 50%.
How the Tax Reform Affects All Businesses
Net Operating Losses
The net operating loss (NOL), or the amount at which a taxpayer’s business deductions exceed its gross income, has been limited to 80% of the business’ taxable income. Additionally, the NOL was able to be carried back 2 years and carried forward 20 years, but the 2-year carry-back has been removed under the new reform.
Depreciating and Expensing
The former bonus depreciation, or additional depreciation allowed within a businesses’ first year, has been extended from 50% to 100%. This provision will expire after the year 2022 and will further extend the current 50% bonus depreciation through 2026.
Employment-Related Fringe Benefits
The Act removes the ability for a business to claim a deduction on expenses related to entertainment, amusement, or other social purposes, including entertainment tickets and skyboxes. However, through 2025, the 50% limit will be extended for food and beverage expenses that are provided to employees.
For a more precise analysis of how the new tax law affects you and your business, please consult a tax advisor.