This article is Part 2 of a two-part series that discusses provisions of the new tax law (Tax Cut and Jobs Act) that most impact small to mid-market professional services firms, including lawyers, architects, engineers, financial service providers, insurance brokers, etc.
- 20% deduction for qualified business income
- 21% C corporation tax rate
- Meals & entertainment
- Employee qualified transportation fringes
- Fixed assets & depreciation
- Domestic production deduction (for architects and engineers)
The comments below are high level summaries and do not constitute tax advice. Please consult your tax adviser. If you have questions, do not hesitate to give us a call or an email. This information is subject to change due to ongoing release of guidance from Congress and Treasury.
- Employee qualified transportation fringes are no longer tax deductible
Company provided transit benefits—e.g. employee parking and bus passes—generally are no longer tax deductible to the company. Certain exceptions exist, such as for employee safety. Note however that these benefits remain excluded from employees’ income up to the same limits established under prior law, e.g. $260 per month for 2018 qualified parking.
- Identify your employee transit expense account on the ledger as 0% tax deductible where applicable
- Evaluate your budget for employee transportation fringe benefits given the tax increase that may result from eliminated deductions
- Fixed assets & depreciation
Sec. 179 asset expensing:
The new law increases the annual limit on Sec. 179 fixed asset expensing from $510,000 to $1,000,000 in 2018. The beginning of the Sec. 179 phaseout increased from $2,030,000 to $2,500,000. Therefore your firm can now acquire up to $2,500,000 per year of Sec. 179 eligible assets without the deduction being limited.
Sec. 179 eligible property includes tangible personal property such as computers, equipment, furniture & fixtures, as well as off-the-shelf computer software and qualified improvement property (e.g. certain leasehold improvements). In addition, the definition of Sec. 179 property has expanded to include improvements to roofs, HVAC systems, fire protection & alarm systems, and security systems.
Bonus depreciation has increased to 100% of the value of eligible property (previously 50%). Additionally, the definition of bonus eligible property has expanded from new property only to include both new and used property. Bonus eligible assets include tangible personal property like computers, equipment, furniture & fixtures, as well as computer software.
As currently written, the new law does not allow bonus depreciation on qualified improvement property (e.g. leasehold improvements), an unfavorable change from prior law that Congress is expected to correct in future legislation. Regardless, many small and mid-market professional service firms will still be able to fully deduct qualified improvements under Sec. 179.
- Evaluate whether the generally favorable tax changes to fixed assets impact your budget and timeline for major office improvements.
- For architects & engineers, the domestic production activities deduction has been repealed.
Under prior law, architects and engineers were eligible to claim a deduction equal to 9% of qualified production activities income, subject to a taxable income limit. This included income from services, consulting, design, etc., performed in the U.S. for U.S. real property construction projects. The new law repeals this deduction entirely.
- Architects and engineers should evaluate their project lists and financial projections to consider the increased tax liability that may result from the loss of this deduction.
For more information, please contact Tax Manager, Matt Spencer.