Tax Reform Update: Additional Business Provisions

Since the recent signing into law of the Tax Cuts and Jobs Act on December 22, 2017, the CK team has received many inquiries about its effect on future tax burdens. According to a recent survey from HubSpot, 88.5% of small businesses don’t understand the full impact of the tax bill. It’s apparent that business owners are seeking more clarity. As your trusted business advisors, we hear you loud and clear. To help you get through this transition, we will be posting our latest insights into the effects of the new law. You can subscribe here to receive our weekly email updates.

Over the past few weeks, we have reviewed changes in business tax that garnered the most attention – such as the qualified business income deduction. This week, we will review some provisions that aren’t getting as much press: changes in net operating loss rules and provisions affecting “small business” taxpayers. Let’s review:

Net Operating Losses

Under prior law, businesses and individuals could carry back net operating losses to two prior tax years, generating refund opportunities in those years. Any losses not utilized under the carryforward provisions were carried forward 20 years.

For tax years beginning after December 31, 2017, there is no longer a provision for net operating loss carrybacks (except for certain cases for farmers and insurance companies).  Instead, losses can be carried forward indefinitely to apply to future tax years. However, there is now a limitation – the losses can only offset up to 80% of the taxable income for any future year.

We believe this will affect business’ tax planning, in particular. With the new 100% bonus provisions, there was a good chance that the business could create a net operating loss by using this accelerated depreciation provision. However, now that these losses cannot be carried back, planning for the timing of depreciation expenses will be critical.

The “Small Business” Exception

Under prior law, certain tax provisions applied once a business exceeded $10 million of average gross receipts in a 3-year period. These provisions include:

  • Availability of the cash method of accounting for certain taxpayers
  • Required use of inventories
  • Capitalization and inclusion of certain expenses in inventory costs (263A)
  • Accounting for long term contracts

For tax years ending after December 31, 2017, the above provisions apply once a business exceeds $25 million of average gross receipts in a 3-year period. For businesses under the $25 million threshold that were previously subject to the above provisions, reviewing the tax effect of an accounting method change should be considered.

Click here to read about the individual provisions of tax reform. If we can be a resource as you consider how the business tax changes will affect you, please call us at 630-953-4900.