Tax Cuts & Jobs Act Highlights

On Dec. 22, the President signed into law The Tax Cuts & Jobs Act, which is the largest tax reform in over 3 decades.  As you have been reading in our Tax Reform Updates, unfortunately, the new tax law probably will not reduce your taxes as much as you had hoped for during the last year.  The Act increases the complexity of tax filing and, because it increases your taxes in some ways yet may decrease it in other ways, we will not be able to calculate the exact effect tax reform will have on your wallet until our tax software publishes the final worksheets for us to use.  As always, we continue to study the Act and look for ways in which we can use the new tax legislation to save you as much in taxes as possible.

What are a few key highlights of this bill, and how may it affect you?

Some of the most important aspects of the new bill are summarized below for your review and not many changes need to be made before year end, if you have been following our suggestions this year.

Should you change your corporate structure? No, under most situations, you should notmake an entity change. While being structured as a C-Corporation may sound as if it would save you more taxes than being structured as an S-Corporation, that does not appear to be the case in the long run. Although C-Corporations may have a lower tax bracket at 21%, the owners will continue to have double taxation when taking cash out of the company and may pay higher taxes when selling the business years from now.

Should you incorporate if you have a Sole Proprietorship? Yes, as we may have discussed with you, it would be wise to consider this for 2018.

Should you prepay state taxes for 2018 and beyond? No. One of the surprising details of the new proposed legislation is that you will NOT be allowed to prepay future state taxes. We know of law firms who set up large fund accounts for their clients to be able to do just this, but the proposed tax law specifically disallows this.  All tax payments made this year for 2018 will be required to be treated as a payment made on the last day of 2018.

Business Tax Reform Highlights: 

  • Tax reform will take effect January 1, 2018 and will not be retroactive.
  • Dues, entertainment: these expenses are no longer deductible!  Even Dues paid to groups formed for a business purposes (such as study clubs and State associations) are no longer deductible
  • Meals for employees: these are no longer 100% deductible and will be only 50% deductible, if paid to employees for the convenience of the employer
  • Furniture and equipment deduction: You will be allowed to deduct up to $1 million of new and used equipment, as long as less than $2.5 million was placed in service.
  • Luxury automobile deprecation: the annual deduction will increase from $3,160 first year to $10,000 thus increasing the cap to $50,000, with a sliding scale across years
  • Bonus depreciation: will now have 100% deduction for assets
  • Company vans/automobiles over 6,000 pounds: the deduction remains the same and Section 179 may still be used for these purchases.  When traded in, it will be subject to gain and loss rules and taxed rather than simply rolled forward into the new purchase
  • Pass through income: Pass through entities such as S-Corporations and Partnerships will receive a 20% deduction on their “Qualified Business Income”; however, it only applies to a specific set of businesses.  In addition, note that a new tax code section has been added for this provision, called Section 199A “Qualified Business Income.”  The calculations will relate to income for partnerships, S corporations, and sole proprietorships and will have limitations for the maximum deduction allowed.
  • Service industries and pass through income:  note that the 20% deduction does NOT apply to service businesses unless the owner’s income is lower than $207,500 if filing single or $415,000 if filing married filing joint.  For income between $315,000-415,000 for Married Filing Joint, the deduction will be phased out using a sliding scale.
  • C-Corporation: The new tax rate is a flat 21% and the business alternative minimum tax has been repealed.
  • Business interest not as deductible: interest paid on business debt will only be deductible for up to 30% of your business’ “adjusted taxable income”.  For pass through entities, the deduction will be calculated at the entity level instead of the partner level
  • Sec 199 Manufacturing Deduction: this deduction has been eliminated and was often used for milling crowns, making molds, etc.
  • Section 1031 exchanges: no longer applies to personal property.  Exchanges will be allowed to defer the gain on sale of real property that is not primarily held with the intent to sell it
  • Net operating losses: starting in 2018, losses are limited to 80% of taxable income and may be carried forward only–no longer may they be carried back to prior years; however, for most businesses they may now be carried forward indefinitely

Individual Tax Reform Highlights: 

  • Tax reform will take effect January 1, 2018 and will not be retroactive
  • State and local tax deduction: This is now limited to only $10,000 and includes the combination of state income tax, property tax, and sales tax.  Unfortunately, for most of our clients, this increases their Federal taxes due to the fact they often pay over $30,000 on State and Local taxes
  • Itemized deductions & charitable contributions: amount paid for college games no longer deductible as charitable contributions
  • Miscellaneous itemized deductions: no longer can deduct investment expenses, home office expenses, and unreimbursed employee expenses.
  • Individual tax rates: There would be 7 tax brackets with the top rate being 37% (down from 39.6%) and the lowest rate being 10%. These rates would expire in 2026
  • Standard deduction increased significantly: increased to $24,000 for married filing joint; $18,000 for head of household; $12,000 for all other taxpayers.  Indexed for inflation
  • Child Tax Credit: Increased to $2,000 per child
  • Medical expense deduction: You would be able to once again deduct expenses over 7.5% of your Adjusted Gross Income
  • Mortgage interest deduction: This is now limited to interest on $750,000 of mortgage debt. (Some prior purchases may be grandfathered in to the $1M limit.) Mortgage interest will no longer include Home Equity Debt
  • Kiddie tax repealed: income for children will now be taxed at Single tax rates rather than a portion of it being taxed at the parent’s rate, which is significant for children working for a family business.  And, unearned income will now be taxed at the rate for Estates and Trusts
  • Alimony changes: you will no longer receive a tax deduction for alimony paid, nor will the recipient pay income taxes on alimony received.  This is not retroactive and will not apply to any existing divorce decrees that are modified in future years but does apply to divorces executed after Dec. 31, 2018
  • Alternative minimum tax: it was not eliminated; however, fewer individuals will be impacted by it through 2026.  The threshold is now $1 million for Married Filing Joint and $500,000 for Single filers.