NEW LEGISLATION BUSINESS

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1 NEW LEGISLATION BUSINESS 2 Land Grant University Tax Education Foundation Corporate Tax Rate Employer Credit for Paid Family and Medical Leave Credit for Prior-Year Minimum Tax Liability of Corporations Repeal of Alternative Minimum Tax for Corporations Exclusion for Employee Achievement Awards Contributions to Capital Denial of Deduction for Sexual Harassment or Sexual Abuse Settlements Denial of Deduction for Local Lobbying Expenses Modification of Limitation on Excessive Employee Remuneration Denial of Deduction for Certain Fines and Penalties Business Interest Deduction Is Limited Temporary 100% Bonus Depreciation for Certain Business Assets Modifications of Treatment of Certain Farm Property Applicable Recovery Period for Real Property Use of Alternative Depreciation System for Electing Farming Businesses Modification of Net Operating Loss Deduction Amortization of Research and Experimental Expenditures Expensing Depreciable Business Assets Repeal of Domestic Production Activities Deduction Qualified Business Income Deduction Reduction in Dividends Received Deduction Expensing of Costs of Replanting Citrus Plants Production Period for Beer, Wine, and Distilled Spirits Small Business Accounting Method Reform and Simplification Entertainment, Transportation, and Food and Beverage Expenses Land Grant University Tax Education Foundation, Inc. 23

2 Depreciation Limits on Automobiles and Computer Equipment Tax Year of Inclusion Limit on Losses for Taxpayers Other Than C Corporations S Corporation Conversions to C Corporations Unrelated Business Taxable Income Separately Computed Unrelated Business Taxable Income Increased by Disallowed Fringe Benefits.. 54 Charitable Contribution Deduction for Electing Small Business Trusts Charitable Contributions and Foreign Taxes Impact Limit on Allowance of Partner s Share of Loss Repeal of Technical Termination of Partnerships Definition of Substantial Built-In Loss on Transfer of a Partnership Interest Like-Kind Exchanges Partnership Profits Interests Issued or Held for Performance of Investment Services Certain Self-Created Property Is Not a Capital Asset Expansion of Qualifying Beneficiaries of an Electing Small Business Trust Excise Tax on Excess Tax-Exempt Organization Executive Compensation.57 INTRODUCTION The Tax Cuts and Jobs Act of 2017 (TCJA), Pub. L. No , substantially changes how tax practitioners will advise taxpayers and file 2018 tax returns. This chapter reviews changes in business tax laws made by the TCJA. It also includes changes to certain tax-exempt entity provisions. This chapter is organized numerically by Internal Revenue Code section. This chapter will be updated as guidance and regulations are issued. 21% Corporate Tax Rate I.R.C. 11, 1445; TCJA Effective for tax years after December 31, 2017 The corporate tax rate is a flat 21%. A corporation with a fiscal year that includes January 1, 2018 will pay a blended rate. The I.R.C. 1445(e) withholding tax on the sale of US real property interests is amended to reflect the highest rate of tax in effect for the tax year under I.R.C. 11(b). The I.R.C limit on accumulated earnings credit for certain controlled corporations is amended to $250,000 [$150,000 if any component member is a service corporation described in I.R.C. 535(c)(2)(B)]. 24 NEW LEGISLATION BUSINESS Employer Credit for Paid Family and Medical Leave I.R.C. 45S; TCJA Generally effective for wages paid in tax years beginning after December 31, 2017, and before January 1, 2020 The TCJA establishes the I.R.C. 45S credit for paid family and medical leave. Eligible employers can claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which the employees are on family and medical leave and the rate of payment under the program is 50% of the wages typically paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%.

3 For hourly employees, the credit cannot exceed the employee s regular hourly wage rate multiplied by the number of hours of leave taken. To calculate this limit for a nonhourly employee, the employer must prorate the employee s wages to an hourly wage rate under regulations to be established by the IRS. The maximum amount of family and medical leave that may be taken into account for any employee each tax year is 12 weeks. An eligible employer is one who has in place a written policy that allows all qualifying full-time employees not less than 2 weeks of annual paid family and medical leave, and who allows all lessthan-full-time qualifying employees a proportionate amount of leave. The policy must require payment that is not less than 50% of the employee s regular wage rate. Leave paid for by a state or local government or required by state or local law is not included in the amount of family and medical leave provided by the employer. To be an eligible employer, an employer must provide certain protections applicable under the Family and Medical Leave Act of 1993, regardless of whether they otherwise apply. Specifically, the employer must provide paid family and medical leave in compliance with a policy that ensures that the employer will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under the policy; and will not discharge or in any other manner discriminate against any individual for opposing any practice prohibited by the policy. A qualifying employee means any employee as defined in section 3(e) of the Fair Labor Standards Act of 1938 who has been employed by the employer for 1 year or more, and who for the preceding year, had compensation that was not more than 60% of the compensation threshold for highly compensated employees under I.R.C. 414(q)(1)(B)(i). The compensation threshold is $120,000 in The IRS will determine whether an employer or an employee satisfies the applicable requirements for an eligible employer or qualifying employee based on information that the employer provides. Family and medical leave is defined as leave described in section 102 of the Family and Medical Leave Act of It is leave for the following purposes: Because of the birth of a son or daughter of the employee and to care for such son or daughter Because of the placement of a son or daughter with the employee for adoption or foster care To care for the spouse, or a son, daughter, or parent, of the employee, if such spouse, son, daughter, or parent has a serious health condition Because of a serious health condition that makes the employee unable to perform the functions of the position of such employee Because of any qualifying exigency (as defined in regulations that the IRS will issue) arising out of the fact that the spouse, or a son, daughter, or parent of the employee is on covered active duty (or has been notified of an impending call or order to covered active duty) in the Armed Forces To care for a covered servicemember who is the spouse, son, daughter, parent, or next of kin of the employee If an employer provides paid leave as vacation leave, personal leave, or other medical or sick leave, this paid leave is not family and medical leave. The employer can elect to not have the credit apply. The credit is allowed against AMT. The employer cannot take both a credit and a deduction for amounts paid for family and medical leave. Family and Medical Leave Credit The IRS has issued guidance that clarifies when an employer can claim a credit for family and medical leave paid to an employee. See the Business Issues chapter for a discussion of the new guidance. 2 Family and Medical Leave 25

4 Credit for Prior-Year Minimum Tax Liability of Corporations I.R.C. 53; TCJA Generally effective for tax years beginning after December 31, Refundability is effective for a tax year of a corporation beginning in 2018, 2019, 2020, or The minimum tax credit (MTC) of a corporation can be applied to offset regular tax liability in any tax year. In 2018, 2019, 2020, and 2021, the MTC may be refundable. The refundable portion of the MTC is 50% (100% in a tax year beginning in 2021) of the excess (if any) of the MTC for the tax year over the MTC that offsets regular tax liability for the tax year. In short tax years, the refundable credit amount is prorated based on the number of days in the tax year. Repeal of Alternative Minimum Tax for Corporations I.R.C. 55; TCJA Effective for tax years beginning after December 31, 2017 The TCJA repeals the AMT for corporations. The TCJA also makes conforming changes to several other Code provisions to reflect the repeal of the corporate AMT. Individual AMT The TCJA does not repeal the AMT for individuals, but it increases the AMT exemption amount. See the New Legislation Individual chapter for information about the increased exemption amount. Exclusion for Employee Achievement Awards I.R.C. 74, 274; TCJA Effective for amounts paid or incurred after December 31, 2017 An employee achievement award is an item of tangible personal property given to an employee in recognition of either length of service or safety achievement and presented as part of a meaningful presentation. The TCJA adds a definition of tangible personal property that may be considered a deductible employee achievement award. It provides that tangible personal property does not include cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items preselected or preapproved by the employer); or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. This definition clarifies but does not change present law and guidance. Contributions to Capital I.R.C. 118; TCJA Effective for contributions made after December 22, However, the provision does not apply to any contribution made after December 22, 2017, by a governmental entity pursuant to a master development plan that has been approved prior to such date by a governmental entity. A corporation s gross income does not include contributions to capital. The term contributions to capital does not include 1. any contribution in aid of construction or any other contribution as a customer or potential customer, and 26 NEW LEGISLATION BUSINESS

5 2. any contribution by a governmental entity or civic group (other than a contribution made by a shareholder as such). I.R.C. 118, as modified, continues to apply to only corporations. Denial of Deduction for Sexual Harassment or Sexual Abuse Settlements I.R.C. 162; TCJA Effective for amounts paid or incurred after December 22, 2017 Under the TCJA, I.R.C. 162(q) denies a deduction for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement. Settlements See the Individual Issues chapter for a further discussion of the taxation of settlements, fines, and penalties. Denial of Deduction for Local Lobbying Expenses I.R.C. 162; TCJA COPYRIGHT 8/27/2018 LGUTEF Effective for amounts paid or incurred on or after December 22, 2017 The TCJA repeals the exception for amounts paid or incurred related to lobbying local councils or similar governing bodies, including Indian tribal governments. Thus, the general disallowance rules applicable to lobbying and political expenditures apply to costs incurred related to such local legislation. Modification of Limitation on Excessive Employee Remuneration I.R.C. 162; TCJA Effective for tax years beginning after December 31, The provisions do not apply to remuneration that is provided pursuant to a binding contract that was in effect on November 2, 2017, and was not modified in any material respect on or after that date. I.R.C. 162(m) limits the allowable deduction for compensation paid to a covered employee of a publicly held corporation. The deduction is limited to no more than $1,000,000 per year. The TCJA revises the definition of covered employee to include an individual who is the principal executive officer or the principal financial officer at any time during the tax year. Covered employees are also the three most highly compensated officers for the tax year (other than the principal executive officer or principal financial officer) who are required to be reported on the company s proxy statement (the statement required under the Securities Exchange Act of 1934). In addition, if an individual is a covered employee with respect to a corporation for a tax year beginning after December 31, 2016, the individual remains a covered employee for all future years. Thus, an individual remains a covered employee with respect to compensation otherwise deductible for subsequent years, including for years during which the individual is no longer employed by the corporation and years after the individual has died. The TCJA extends the applicability of section 162(m) to include all domestic publicly traded corporations and certain publicly traded foreign companies. The expanded definition of a publicly traded corporation may include certain additional corporations that are not publicly traded, such as large private C or S corporations. The TCJA also eliminates the exceptions for commissions and performance-based compensation from the definition of compensation subject to the deduction limit. Thus, such compensation is included in determining the amount of compensation that exceeds the $1,000,000 limit. 2 Modification of Limitation on Excessive Employee Remuneration 27

6 Denial of Deduction for Certain Fines and Penalties I.R.C. 162, 6050X; TCJA The provision denying the deduction and the reporting provision are effective for amounts paid or incurred on or after December 22, 2017, except that they do not apply to amounts paid or incurred under any binding order or agreement entered into before such date. This exception does not apply to an order or agreement requiring court approval unless the approval was obtained before such date. With some exceptions (discussed later), the TCJA denies a deduction for any amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry by the government or entity into the potential violation of any law. This provision applies only where a government (or other entity treated in a manner similar to a government) is a complainant or investigator with respect to the violation or potential violation of any law. It does not apply to payments made by one private party to another in a lawsuit between private parties. Even if a court enters a judgment or directs a result in a private dispute, the payment is not made at the direction of a government for purposes of this provision. Several exceptions apply, and a deduction may be allowed for the following: Amounts that constitute restitution (including remediation of property) for damage or harm that was caused by violation of any law or the potential violation of any law Amounts that are paid to come into compliance with any law Any amount paid or incurred as reimbursement to the government or entity for the costs of any investigation or litigation or amount paid or incurred pursuant to an order of a court in a suit in which no government or governmental entity is a party Certain amounts paid as restitution for failure to pay tax 28 NEW LEGISLATION BUSINESS Amounts paid or incurred as taxes due The TCJA requires government agencies (or entities treated as government agencies) to report to the IRS and to the taxpayer the amount of each settlement agreement or order entered into where the aggregate amount required to be paid or incurred to or at the direction of the government is at least $600 (or such other amount as the IRS may specify). The report must separately identify any amounts that are for restitution or remediation of property, or correction of noncompliance. The report must be made at the time the agreement is entered into, as determined by the IRS. Government Penalties and Fines See the Individual Issues chapter for a detailed discussion of the disallowance of the deduction for government fines and penalties, and the specific requirements to qualify for the exceptions. Business Interest Deduction Is Limited I.R.C. 163; TCJA Effective for tax years beginning after December 31, 2017 The deduction for business interest is limited to the sum of 1. business interest income, 2. 30% of the adjusted taxable income of the taxpayer for the tax year (but not less than zero), and 3. the floor plan financing interest of the taxpayer for the tax year. Business Interest Limits The IRS has issued proposed regulations on the business interest limits. See the Business Issues chapter for a discussion of the proposed regulations.

7 By including business interest income and floor plan financing interest in the limitation, the rule operates to allow floor plan financing interest to be fully deductible and to limit the deduction for net interest expense (less floor plan financing interest) to 30% of adjusted taxable income. That is, a deduction for business interest is allowed to the full extent of business interest income and any floor plan financing interest. To the extent that business interest exceeds business interest income and floor plan financing interest, the deduction for the net interest expense is limited to 30% of adjusted taxable income. The interest limitation does not apply to certain small businesses (discussed later). Example 2.1 Calculating the Limitation In 2020, Acme Corporation has $100,000 adjusted taxable income, $20,000 business interest income, and $120,000 business interest expense. Acme s deduction for business interest is limited to $50,000, calculated as follows: 1. The deduction is allowed to the full extent of the $20,000 business interest income. 2. The remaining net interest expense is limited to 30% of adjusted taxable income [$120,000 business interest $20,000 business interest income = $100,000 net interest expense, which is limited to $30,000 (30% $100,000 adjusted taxable income)]. 3. The allowable deduction is $50,000 [$20,000 + $30,000]. 4. The $70,000 disallowed interest [$100,000 $30,000] can be carried forward indefinitely. 1. Any item of income, gain, deduction, or loss that is not properly allocable to a trade or business 2. Any business interest or business interest income 3. The amount of any NOL deduction under I.R.C The amount of any deduction allowed under I.R.C. 199A 5. For tax years beginning before January 1, 2022, any deduction allowable for depreciation, amortization, or depletion 6. Other adjustments that the IRS may specify Additionally, because the TCJA repeals the I.R.C. 199 domestic production activities deduction effective December 31, 2017, adjusted taxable income is computed without regard to that deduction. Business Interest Business interest means any interest paid or accrued on indebtedness properly allocable to a trade or business. Any amount treated as interest under the Internal Revenue Code is interest for purposes of the business interest limitation. It does not include investment interest. Business Interest Income Business interest income means the amount of interest includable in the gross income of the taxpayer for the tax year that is properly allocable to a trade or business. It does not include investment income. 2 Definitions For purposes of calculating the limitation on the business interest deduction, the TCJA defines adjusted taxable income, business interest, business interest income, floor plan financing interest, and floor plan financing indebtedness. Adjusted Taxable Income Adjusted taxable income means the taxable income of the taxpayer computed without regard to the following: Observation Corporation s Interest Income and Expense Because the I.R.C. 163(d) investment interest limitation does not apply to corporations, a corporation does not have investment interest or investment income within the meaning of section 163(d). Thus, a corporation s interest income and interest expense are properly allocable to a trade or business, unless the trade or business is otherwise excluded from the application of the business interest limitation. Business Interest Deduction Is Limited 29

8 Floor Plan Financing Interest Floor plan financing interest is interest paid or accrued on floor plan financing indebtedness. Floor Plan Financing Indebtedness Floor plan financing indebtedness means indebtedness that is used to finance the acquisition of motor vehicles held for sale or lease and is secured by the acquired inventory. A motor vehicle is any of the following: Any self-propelled vehicle designed for transporting persons or property on a public street, highway, or road A boat Farm machinery or equipment Deferred Interest The limitation applies after the application of provisions that subject interest to deferral, capitalization, or other limitations. Thus, I.R.C. 163(j) applies to interest deductions that are deferred for example, under I.R.C. 163(e) or I.R.C. 267(a)(3)(B) in the tax year to which such deductions are deferred. Section 163(j) applies after I.R.C. 263A is applied to capitalize interest and after, for example, I.R.C. 265 or I.R.C. 279 is applied to disallow interest. Carryover COPYRIGHT 8/27/2018 LGUTEF Business interest that is disallowed because of the business interest limitation can be carried forward indefinitely, subject to the restrictions applicable to partnerships described later. Small Business Exemption The business interest limitation does not apply to a taxpayer that is not a tax shelter (prohibited from using the cash method of accounting) if the taxpayer meets the $25,000,000 gross receipts test (see the later discussion of the gross receipts test). For a sole proprietorship, the gross receipts test is applied as if the taxpayer was a corporation or partnership. Exceptions for Certain Trades or Businesses The term trade or business does not include the following: 30 NEW LEGISLATION BUSINESS 1. The trade or business of performing services as an employee 2. Any electing real property trade or business 3. Any electing farming business 4. The trade or business of the furnishing or sale of certain utilities by regulated public utilities Employee The trade or business of performing services as an employee is not a trade or business for purposes of the business interest limitation. Thus, an employee s wages are not counted in the taxpayer s adjusted taxable income for purposes of determining the limitation. Electing Real Property Trade or Business An electing real property trade or business is not a trade or business for purposes of the business interest limitation, and at the taxpayer s election, the business interest limitation does not apply to such trades or businesses. Once made, the election is irrevocable. An electing real property trade or business means any trade or business that is described in I.R.C. 469(c)(7)(C). A trade or business described in section 469(c)(7)(C) is a real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. This definition is intended to include real property trades or businesses conducted by a corporation or a real estate investment trust (REIT). Operation or management of a lodging facility is a real property operation or management trade or business. Observation Definition The definition of a real property trade or business refers only to the section 469(c)(7)(C) description, and not to other rules of section 469 [such as the rule of section 469(c)(2) that passive activities include rental activities or the rule of section 469(a) that a passive activity loss is limited under section 469]. Thus, the other rules of section 469 are not made applicable by this reference.

9 Electing Farming Business An electing farming business is not a trade or business for purposes of the business interest limitation, and at the taxpayer s election, the business interest limitation does not apply to such trades or businesses. Once made, the election is irrevocable. The term electing farming business means a farming business as defined in I.R.C. 263A(e)(4) that makes an election under this rule, or any trade or business of a specified agricultural or horticultural cooperative as defined in I.R.C. 199A(g)(2). Under section 263A(e)(4), a farming business includes the trade or business of operating a nursery or sod farm; or the raising or harvesting of trees bearing fruit, nuts, or other crops, or ornamental trees (other than evergreen trees that are more than 6 years old at the time they are severed from their roots). Treas. Reg A-4(a) (4) further defines a farming business as a trade or business involving the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity. Examples of a farming business include the trade or business of operating a nursery or sod farm; the raising or harvesting of trees bearing fruit, nuts, or other crops; the raising of ornamental trees (other than evergreen trees that are more than 6 years old at the time they are severed from their roots); and the raising, shearing, feeding, caring for, training, and management of animals. A farming business also includes processing activities that are normally incident to the growing, raising, or harvesting of agricultural or horticultural products. A farming business does not include contract harvesting of an agricultural or horticultural commodity grown or raised by another taxpayer, or merely buying and reselling plants or animals grown or raised by another taxpayer. Regulated Public Utility Certain regulated public utilities are not a trade or business for purposes of the business interest limitation and the business interest limitation does not apply to such trades or businesses. Specifically, it does not apply to the trade or business of the furnishing or sale of 1. electrical energy, water, or sewage disposal services; 2. gas or steam through a local distribution system; or 3. transportation of gas or steam by pipeline if the rates for such furnishing or sale have been established or approved by a. a state or political subdivision of a state, b. any agency or instrumentality of the United States, c. a public service or public utility commission or other similar body of any state or political subdivision, or d. the governing or ratemaking body of an electric cooperative. Interest expenses paid or incurred in such trades or businesses is not business interest subject to the limitation and is generally deductible in the computation of taxable income. Rules Applicable to Electing Businesses See the discussion of I.R.C. 168(g)(1)(F) in this chapter for the requirement that an electing real property trade or business use the alternative depreciation system. See the discussion of I.R.C. 168(g)(1)(G) in this chapter for the requirement that an electing farming business use the alternative depreciation system. Application to Partnerships The business interest limitation is applied at the partnership level and any deduction for business interest is taken into account in determining the partnership s nonseparately stated taxable income or loss. The adjusted taxable income of each partner is determined without regard to the partner s distributive share of any items of income, gain, deduction, or loss of the partnership. This amount is the Ordinary business income or loss reflected on Form 1065, U.S. Return of Partnership Income. The partner s distributive share is reflected in box 1 of Schedule K-1 (Form 1065). This rule is intended to prevent double counting. Without such a rule, the same dollars of adjusted taxable income of a partnership could generate additional interest deductions as the income passes through to the partners. 2 Business Interest Deduction Is Limited 31

10 Example 2.2 No Double-Counting Rule ABC is a partnership owned by XYZ Corporation and an individual. ABC generates $200 of noninterest income. Its only expense is $60 business interest. ABC s deduction for business interest is limited to 30% of adjusted taxable income, which is $60 ($200 30%). ABC deducts $60 of business interest and reports $140 ordinary business income. XYZ s distributive share of ABC s ordinary business income is $70 ($140 2). XYZ has $0 net taxable income from its other operations. None of its net income is attributable to interest income. XYZ has a $25 business interest expense, which is not included in its calculation of net taxable income. In the absence of any special rule, the $70 taxable income from XYZ s distributive share of ABC s income would allow XYZ to deduct up to an additional $21 of interest ($70 30%) and only $4 would be disallowed ($25 $21). As a result, XYZ s $100 share of ABC s adjusted taxable income would generate $51 ($30 + $21) of interest deductions, which exceeds the 30% limitation. If XYZ was a pass-through entity rather than a corporation, additional deductions might also be available at each tier. The double counting rule provides that XYZ s adjusted taxable income is computed without regard to the $70 distributive share from the partnership. As a result, XYZ has $0 adjusted taxable income. XYZ s deduction for business interest is limited to $0 (30% $0), which results in a $25 deduction disallowance. Each partner s adjusted taxable income is increased by the partner s distributive share of the partnership s excess taxable income (defined later). Thus, the limit on the amount allowed as a deduction for business interest is increased by a partner s distributive share of the partnership s excess taxable income. This allows a partner to deduct additional interest expense the partner may have paid or incurred to the extent the partnership could have deducted more business interest. For this purpose, a partner s distributive share of partnership excess taxable income is determined in the same manner as the partner s distributive share of the partnership s nonseparately stated taxable income or loss. 32 NEW LEGISLATION BUSINESS The term excess taxable income means, with respect to any partnership, the amount that bears the same ratio to the partnership s adjusted taxable income as 1. the excess (if any) of 30% of the adjusted taxable income of the partnership over the amount (if any) by which the business interest of the partnership, reduced by floor plan financing interest, exceeds the business interest income of the partnership bears to 2. 30% of the adjusted taxable income of the partnership. Example 2.3 Limit Increased by Excess Taxable Income The facts are the same as in Example 2.2 except ABC has only $40 business interest. As in Example 2.2, ABC has a $60 limit on its interest deduction. The limit exceeds ABC s business interest by $20 ($60 $40). ABC s excess taxable income is $66.67 [($20 $60) $200]. XYZ s distributive share of the excess taxable income from ABC Partnership is $ XYZ s deduction for net business interest is limited to 30% of the sum of its adjusted taxable income plus its distributive share of the excess taxable income from ABC Partnership. XYZ can deduct $10 [30% ($0 + $33.33)]. XYZ has an interest deduction disallowance of $15 ($25 $10). Partnership Carryforwards The amount of any business interest that is not deductible by a partnership because of the business interest limitation is not treated as business interest paid or accrued by the partnership in the succeeding tax year and is treated as excess business interest that is allocated to each partner in the same manner as the non-separately stated taxable income or loss of the partnership. If a partner is allocated any excess business interest from a partnership under this rule, the excess business interest is treated as business interest paid or accrued by the partner in the next succeeding tax year in which the partner is allocated excess taxable income from the partnership, but only to the extent of the excess taxable income. Thus, the partner can deduct its share of the partnership s excess business interest in any future year, but only against excess taxable

11 income attributed to the partner by the partnership whose activities gave rise to the excess business interest carryforward. Any such deduction requires a corresponding reduction in excess taxable income. Any portion of the excess business interest remaining after the carryforward is treated as business interest paid or accrued in succeeding tax years, subject to the same limitations. For purposes of applying this rule, excess taxable income allocated to a partner from a partnership for any tax year is not taken into account for any business interest other than excess business interest from the partnership until all excess business interest for the tax year and all preceding tax years has been treated as paid or accrued. carried over under I.R.C. 381 to a distributee or transferee corporation for distributions in I.R.C. 332 liquidations or for certain transfers under I.R.C But carryovers of disallowed interest are treated as items of prechange loss that are subject to the I.R.C. 382 limitation. As a conforming change, a loss corporation is defined to include a corporation with a carryover of disallowed interest. S Corporations and Shareholders Rules similar to those for partnerships apply to an S corporation and its shareholders. However, the partnership rules on carryforwards do not apply to S corporations and their shareholders. 2 Basis Adjustments The adjusted basis of a partner in a partnership interest is reduced (but not below zero) by the amount of excess business interest allocated to the partner even though the carryforward does not give rise to a partner deduction in the year of the basis reduction. However, the partner s deduction in a future year for interest carried forward does not reduce the partner s basis in the partnership interest. Special Rule for Dispositions If a partner disposes of a partnership interest, the partner s basis in the partnership interest is increased immediately before the disposition by the excess (if any) of the amount of the basis reduction over the portion of any excess business interest allocated to the partner that has previously been treated as business interest paid or accrued by the partner (i.e., excess interest expense that has been deducted by the partner against excess taxable income of the same partnership). The basis increase also applies to transfers of the partnership interest (including transfers upon death) in a transaction in which gain is not recognized in whole or in part. No deduction is allowed for any excess business interest resulting in a basis increase. Carryovers in Corporate Transactions Carryovers of disallowed business interest to tax years ending after the date of distribution or transfer are included in the list of items that are Temporary 100% Bonus Depreciation for Certain Business Assets I.R.C. 168; TCJA The amendments made by this section apply to property acquired and placed in service after September 27, Property is not treated as acquired after September 27, 2017, if the taxpayer entered into a written binding contract for its acquisition before September 28, The amendments made by this section apply to specified plants planted or grafted after September 27, The I.R.C. 168(k) bonus depreciation is increased and extended as follows: 100% for property placed in service after September 27, 2017, and before January 1, % for property placed in service after December 31, 2022, and before January 1, % for property placed in service after December 31, 2023, and before January 1, % for property placed in service after December 31, 2024, and before January 1, % for property placed in service after December 31, 2025, and before January 1, 2027 Temporary 100% Bonus Depreciation for Certain Business Assets 33

12 The following different dates apply for certain aircraft and certain long-production-period property: 100% for property placed in service after September 27, 2017, and before January 1, % for property placed in service after December 31, 2023, and before January 1, % for property placed in service after December 31, 2024, and before January 1, % for property placed in service after December 31, 2025, and before January 1, % for property placed in service after December 31, 2026, and before January 1, 2028 The section 168(k) bonus depreciation for plants bearing fruits and nuts is increased and extended as follows: 100% for a plant that is planted or grafted after September 27, 2017, and before January 1, % for a plant that is planted or grafted after December 31, 2022, and before January 1, % for a plant that is planted or grafted after December 31, 2023, and before January 1, % for a plant that is planted or grafted after December 31, 2024, and before January 1, % for a plant that is planted or grafted after December 31, 2025, and before January 1, 2027 By extending the placed-in-service deadline for qualified property, the TCJA: (1) eliminates the 2018 and 2019 phasedown of the section 280F $8,000 first-year depreciation increase for passenger automobiles that are qualified property and (2) extends the increased depreciation limit to December 31, The depreciation limits for passenger automobiles are discussed later. The TCJA makes numerous conforming amendments to make section 168 consistent with these and other changes. As a conforming amendment to the repeal of corporate AMT, the TCJA repeals the election to accelerate AMT credits in lieu of bonus depreciation. Observation Phasedown To qualify for the new phasedown of bonus depreciation and the I.R.C. 280F increased limit on the depreciation deduction for certain passenger automobiles, the property must be both acquired and placed in service after September 27, If the property was acquired before September 28, 2017, and placed in service after September 27, 2017, the new rules do not apply. The Consolidated Appropriations Act (the Appropriations Act), 2018, Pub. L. No , clarifies that for longer-production-period property and certain aircraft acquired before September 28, 2017, and placed in service in 2018, 50% applies to the entire adjusted basis, and if placed in service in 2019, 40% applies to the entire adjusted basis. Application to Used Property Bonus depreciation is allowed if the original use begins with the taxpayer or the taxpayer acquires property that was not used by the taxpayer at any time prior to the acquisition. To prevent abuses, the additional first-year depreciation deduction applies only to property purchased in an arm slength transaction. It does not apply to property received as a gift or from a decedent. In the case of trade-ins, like-kind exchanges, or involuntary conversions, it applies only to any money paid in addition to the traded-in property or in excess of the adjusted basis of the replaced property. It does not apply to property acquired in a nontaxable exchange such as a reorganization; or to property acquired from a member of the taxpayer s family, including a spouse, ancestors, and lineal descendants, or from another related entity as defined in I.R.C It also does not apply to property acquired from a person who controls, is controlled by, or is under common control with, the taxpayer. Thus, it does not apply, for example, if one member of an affiliated group of corporations purchases property from another member, or if an individual who controls a corporation purchases property from that corporation. 34 NEW LEGISLATION BUSINESS

13 Exclusions The TCJA excludes from the definition of qualified property certain public utility property and property of certain businesses that have floor plan financing indebtedness, and such property is not eligible for bonus depreciation. Specifically, it excludes any property that is primarily used in the trade or business of the furnishing or sale of 1. electrical energy, water, or sewage disposal services; 2. gas or steam through a local distribution system; or 3. transportation of gas or steam by pipeline. Such property is excluded if the rates for such furnishing or sale have been established or approved by a state or political subdivision thereof, by any agency or instrumentality of the United States, by a public service or public utility commission or other similar body of any state or political subdivision thereof, or by the governing or ratemaking body of an electric cooperative. In addition, the TCJA excludes from the definition of qualified property any property used in a trade or business that has had floor plan financing indebtedness, unless the taxpayer with such trade or business is not a tax shelter prohibited from using the cash method and is exempt from the interest limitation rules in TCJA (discussed earlier) by meeting the small business gross receipts test of I.R.C. 448(c) (discussed later). Film, Television, and Theater Productions COPYRIGHT 8/27/2018 LGUTEF The TCJA expands the definition of qualified property eligible for the additional first-year depreciation allowance to include qualified film, television, and live theatrical productions placed in service after September 27, 2017, and before January 1, 2027, for which a deduction otherwise would have been allowable under I.R.C. 181 without regard to the dollar limitation or termination of that section. For purposes of this provision, a production is considered placed in service at the time of initial release, broadcast, or live staged performance (i.e., at the time of the first commercial exhibition, broadcast, or live staged performance of a production to an audience). Transition Rule A transition rule provides that for a taxpayer s first tax year ending after September 27, 2017, the taxpayer can elect to apply a 50% allowance instead of the 100% allowance. Modifications of Treatment of Certain Farm Property I.R.C. 168; TCJA Effective for property placed in service after December 31, 2017, in tax years ending after such date The TCJA shortens the recovery period from 7 to 5 years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, if the original use of the asset commences with the taxpayer and it is placed in service after December 31, The TCJA also repeals the required use of the 150% declining balance method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property). The 150% declining balance method will continue to apply to any 15-year or 20-year property used in the farming business to which the straight-line method does not apply, or to property for which the taxpayer elects the use of the 150% declining balance method. For these purposes, the term farming business means a farming business as defined in I.R.C. 263A(e)(4). Thus, a farming business is a trade or business involving the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity (e.g., the trade or business of operating a nursery or sod farm; the raising or harvesting of trees bearing fruit, nuts, or other crops; the raising of ornamental trees other than evergreen trees that are more than 6 years old at the time they are severed from their roots; and the raising, shearing, feeding, caring for, training, and management of animals). A farming business includes processing activities that are normally incident to the growing, raising, or harvesting of agricultural or horticultural products. A farming business does not include contract harvesting of an agricultural or horticultural commodity grown 2 Modifications of Treatment of Certain Farm Property 35

14 or raised by another taxpayer, or merely buying and reselling plants or animals grown or raised by another taxpayer. Farm Depreciation See the Agricultural and Natural Resource Issues chapter for a detailed discussion of depreciation of farm assets. Applicable Recovery Period for Real Property I.R.C. 168, 179; TCJA COPYRIGHT 8/27/2018 LGUTEF Effective for property placed in service after December 31, 2017 The TCJA eliminates the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property, and replaces them with qualified improvement property. Qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service, except for any improvement expense that is attributable to 1. enlargement of the building, 2. any elevator or escalator, or 3. the internal structural framework of the building. [I.R.C. 168(e)(6)] Under the TCJA, the statutory language for I.R.C. 168(e)(3)(E) does not include qualified improvement property, leaving it as nonresidential real property [39-year MACRS and not subject to bonus depreciation or some other class of property (e.g., a property with 15-year MACRS)]. However, according to the Conference Committee Report, qualified improvement property was intended to be 15-year property. It is expected that Congress will provide a technical correction designating the property class life as 15 years. Proposed regulations include qualified improvement property as property that is eligible for 100% bonus depreciation. Qualified 36 NEW LEGISLATION BUSINESS improvement property is depreciated on the straight-line method. The text of the TCJA fails to provide an ADS recovery period for the 15-year qualified improvement property. Thus, qualified improvement property placed in service after December 31, 2017, should be generally depreciable over 15 years (see the earlier discussion of a technical correction) using the straight-line method and half-year convention, without regard to whether the improvements are property subject to a lease, placed in service more than 3 years after the date the building was first placed in service, or made to a restaurant building. Restaurant building property placed in service after December 31, 2017, that does not meet the definition of qualified improvement property is depreciable over 25 years as nonresidential real property, using the straight-line method and the midmonth convention. As a conforming amendment, the TCJA replaces the references in I.R.C. 179(f) to qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property with a reference to qualified improvement property. Thus, for example, the provision allows section 179 expensing for qualified improvement property without regard to whether the improvements are property subject to a lease, placed in service more than 3 years after the date the building was first placed in service, or made to a restaurant building. Restaurant building property placed in service after December 31, 2017, that does not meet the definition of qualified improvement property is not eligible for section 179 expensing. The TCJA also requires a real property trade or business electing out of the limitation on the deduction for interest (discussed earlier) to use ADS to depreciate any of its nonresidential real property, residential rental property, and qualified improvement property. A real property trade or business is any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. A mortgage broker who is a broker of financial instruments is not in a real property trade or business for this purpose. The TCJA shortens the ADS recovery period for residential rental property from 40 years to 30 years.

15 Use of Alternative Depreciation System for Electing Farming Businesses I.R.C. 168; TCJA Effective for tax years beginning after December 31, 2017 The TCJA requires a farming business (defined earlier) electing out of the limitation on the deduction for interest to use ADS to depreciate any property with a recovery period of 10 years or more (e.g., property such as single-purpose agricultural or horticultural structures, trees or vines bearing fruit or nuts, farm buildings, and certain land improvements). Modification of Net Operating Loss Deduction I.R.C. 172; TCJA COPYRIGHT 8/27/2018 LGUTEF The limitation on losses applies to losses arising in tax years beginning after December 31, The limitation on carryovers applies to net operating losses arising in tax years ending after December 31, The net operating loss (NOL) deduction is limited to 80% of taxable income (computed without regard to the NOL deduction). The limitation does not apply to a property and casualty insurance company. Specifically, the TCJA limits an NOL to the lesser of the aggregate of the NOL carryovers to that year, plus the NOL carrybacks to that year; or 80% of taxable income, computed without the NOL deduction. Example 2.4 NOL Limitation in Carryover Year Southside Corp. is a calendar-year taxpayer. In 2018, Southside had a $95,000 NOL that is carried forward to In 2019, Southside has $100,000 taxable income and no other NOL carryovers. Southside s 2019 NOL deduction is limited to $80,000 ($100,000 80%). Southside can deduct an $80,000 NOL in Southside cannot deduct the remaining $15,000 ($95,000 $80,000) in 2019, but it can carry forward the NOL indefinitely. The TCJA also repeals the 2-year NOL carryback and special carryback provisions and allows a taxpayer to indefinitely carry forward an NOL. A taxpayer can carry back farming losses 2 years. A farming loss is the lesser of 1. the amount that would be the NOL for the tax year if only income and deductions attributable to farming businesses [as defined in section 263A(e)(4)] are taken into account, or 2. the amount of the NOL for the tax year. A farming loss for any tax year is treated as a separate NOL and is taken into account after the remaining portion of the NOL for the tax year. Property and casualty insurance companies are still subject to the 2-year carryback and 20-year carryforward. A taxpayer who is entitled to the 2-year carryback can elect not to apply the 2-year carryback to such loss year. The election must be made in a manner prescribed by the IRS and must be made by the due date (including extensions of time) for filing the taxpayer s return for the tax year of the NOL. The election is irrevocable. Observation Disaster Losses Notwithstanding the amendments made to the NOL deduction and the repeal of the deduction for personal casualty losses, the TCJA retains the present-law 3-year carryback for the portion of the NOL for any tax year that is a net disaster loss subject to section 504(b) of the Disaster Tax Relief and Airport and Airway Extension Act of 2017, Pub. L. No (i.e., a net disaster loss arising from Hurricanes Harvey, Irma, or Maria). See the New Legislation Additional chapter for a discussion of net disaster losses. 2 Modification of Net Operating Loss Deduction 37