The 2017 Tax Cuts and Jobs Act (TCJA) made a significant impact on the US tax system; how will this law affect corporations?
One of the major changes for corporations is the reduction of the federal income tax rate from 35% to 21%. Lawmakers believe that this tax reform will encourage business owners to conduct business within the US. Businesses with a C Corporation structure have declined over the last decade due to the popularity of S Corporations and LLCs. However, many entrepreneurs are reconsidering forming their new businesses as a C Corporation with this reduced tax rate.
Net Operating Loss Carry Over
Aside from the corporate tax rate, the TCJA also made some changes on the treatment of Net Operating Loss Carry Over (NOLCO). NOLCO can carry over indefinitely and limited to 80% of the company’s taxable income. The act repealed the carry back option for Net Operating Loss (NOL) and is no longer applicable.
Corporate Alternative Tax
The Corporate Alternative Minimum Tax (AMT) is repealed. Previously, corporations were required to compute their tax liability using the regular income tax calculation and the corporate alternative minimum tax. Then, they would pay the highest amount between the two.
TCJA also affects bonus depreciation of newly acquired properties. For the first year the property is in service, both new and used properties can now deduct 100% bonus depreciation, up from 50%.
Domestic Production Activities Deduction
The domestic production activities deduction (DPAD) is no longer an option. The DPAD’s goal was to provide tax incentives for businesses who produce most of their goods or work in the US rather than sending them abroad.