The recently enacted Tax Cuts and Jobs Act (TCJA) has altered the tax landscape for businesses and individuals. The changes are extensive, and this blog post provides a high-level overview of some of the highlights to keep you informed. If we prepared your 2017 personal income tax return, we have already provided you with a brief 2018 tax projection based on information available to us at the time. Due to the sweeping nature of the changes and the need for continued guidance, we want to share additional details of the law and encourage you to contact us should you need more assistance.
Business income tax provisions under the new law:
New corporate tax rate for C corporations
The prior-law graduated corporate tax rates have been consolidated into one 21% flat rate. The separate rate for personal service corporations of 35% has been repealed. These changes are effective for tax years beginning after Dec. 31, 2017. For fiscal-year corporations, the calculation of tax will be determined using a blended rate based on the number of months at the old versus the new rate structure.
Alternative minimum tax (AMT) repeal
The corporate AMT has been repealed by the TCJA.
Bonus depreciation and Sec. 179 expensing of fixed assets
Bonus depreciation and Sec. 179 expensing of property have been available in varying amounts for quite a while. The new tax law has increased the bonus depreciation percentage to 100% until 2023, where it will decrease by 20% per year until it reaches zero. Bonus depreciation now applies to both new and used qualified property. The Sec. 179 expense limit is now $1 million of allowable expensing with a total purchase threshold of $2.5 million. If you purchase more than $2.5 million in eligible fixed assets during the taxable year, the expense limit allowed will be reduced.
The higher limits and expansion in the definition of property that qualifies for these deductions allows for tax planning opportunities. As part of your planning, we’d like to understand your asset purchasing behavior and plans for the future so we can maximize these deductions for you.
New deduction for qualified business income
A new deduction, effective for tax years 2018 through 2025, was introduced in the TCJA that allows individuals a deduction of 20% of qualified business income from a partnership, S corporation or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.
This deduction will reduce taxable income, but not adjusted gross income, and is available regardless of whether you itemize your deductions. There are some limitations and restrictions to this provision. This deduction changes the planning dynamics for many businesses.
Net operating losses (NOLs)
Under the prior tax law, NOLs could be carried back two years or carried forward for 20 years. Unfortunately, the TCJA repealed the ability to carry back a NOL and claim a refund for already-paid taxes, effective for tax years starting after Dec. 31, 2017. If you have a tax situation that resulted in a NOL, we can advise you of the best options.
Interest expense deductibility
The TCJA introduced a limit in the deductibility of business interest to 30% of taxable income. However, this limitation does not apply to most taxpayers with gross receipts of $25 million or less.
The TCJA repealed the deduction for business entertainment. This includes expenditures such as taking clients to sporting events and shows and paying for season tickets for various entertainment events. Since these items are no longer deductible, it is important to make changes to your company’s internal accounting to appropriately identify and categorize these items. We are happy to discuss how to account for these items internally to accommodate your tax compliance reporting.
Like-kind exchange restrictions
The new tax law restricts like-kind exchanges to real property (e.g., buildings and land). Under prior law, you could utilize a like-kind exchange for tangible personal property and intangible property used in a business or held for investment. Be aware of this change and contact us so we can help you plan accordingly.
Individual income tax provisions under the new law:
Changes in tax rates
You may have heard in the news that the goal of tax reform was to reduce the number of tax rates from the existing seven rates to three. While that was discussed, the bill that was signed into law still has seven rates, but they are now generally lower with the highest rate being reduced from 39.6% to 37%. The tax rates applicable to net capital gains and qualified dividends did not change.
Elimination of personal and dependent exemptions
In the past, taxpayers received an exemption for themselves, their spouse and each of the eligible dependents that they claimed on their tax return. The TCJA eliminated these exemptions through Dec. 31, 2025 (essentially in exchange for the increased standard deduction).
Increased standard deduction
The new standard deductions are:
- Heads of household: $18,000
- Married filing jointly: $24,000
- All other taxpayers: $12,000
Although you may have historically had itemized deductions exceeding these amounts, other changes to itemized deductions may affect whether you are above the standard deduction in a given year. The increased standard deduction is effective through Dec. 31, 2025.
Child and family tax credit
The TCJA increased the child credit for children under age 17 to $2,000 and also introduced a new $500 credit for a taxpayer’s dependents who are not their qualifying children. In addition, the phase-out limits for these credits have increased to $400,000 for joint filers ($200,000 for others), so that far more individuals will be able to take advantage of this credit.
Changes to itemized deductions
- The overall phase out of itemized deductions has been repealed.
- The itemized deduction for state and local taxes is limited to a total of $10,000 ($5,000 for those using the filing status of married filing separately). For example, if you paid $15,000 in state income taxes and $6,000 in real estate taxes on your home ($21,000 in total), you would not be able to deduct the $11,000 that exceeds the deduction threshold.
- Mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million). Loans in existence on December 15, 2017 are grandfathered (balance up to $1 million still allowed).
- Interest on home equity indebtedness (such as a home equity line of credit) is no longer deductible unless the debt is really acquisition indebtedness (used for home improvement). Consider whether the indebtedness was used for business or investment purposes to determine if an interest deduction may be available in a different category.
- Cash donations to public charities are now deductible up to 60% of adjusted gross income.
- Donations to colleges and universities for ticket or seat rights at sporting events are no longer deductible.
- Miscellaneous itemized deductions, such as investment management fees, tax preparation fees, unreimbursed employee business expenses and safe deposit box rental fees are no longer deductible.
- Medical expenses are deductible by the amount the expenses exceed 7.5% of adjusted gross income for 2018 (limit changes to 10% starting in 2019).
These changes (except as noted) to itemized deductions are in effect from Jan. 1, 2018 through Dec. 31, 2025.
The practical effect of the changes to itemized deductions and the personal exemptions is that far fewer people will itemize their deductions. This achieves one goal of tax reform in that fewer disputes are created between taxpayers and IRS.
Please call our office to schedule a planning meeting.
While the TCJA is effective now, there are still many uncertainties. Additional technical guidance and regulations are necessary to provide more clarity on some of the changes. The Internal Revenue Service is working to provide that guidance, which we expect later this year.
Please contact our office should you need further help in understanding and taking advantage of opportunities created under the new law.