Tax Reform Update #2!

On Friday, the GOP recommended the latest version of a tax reform bill that the GOP hopes will pass the House tomorrow, pass the Senate on Wednesday, and be signed into law by the President by Friday.

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; however, please keep in mind that much dissension remains, and the final bill that is passed may be different from this one.

Should you change your corporate structure? No, you should not make an entity change until we have the final legislation. 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; however, we recommend waiting to make this decision until we have final legislation.

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.

Additional provisions of the proposed legislation are listed below.

  • Tax reform will take effect January 1, 2018 and will not be retroactive.
  • State and local tax deduction: This would be limited to only $10,000 and would include the combination of state income tax, property tax, and sales tax.
  • Furniture and equipment deduction: You would be allowed to deduct the full amount of new and used equipment up until 2022. In addition, the Section 179 deduction would be permanent.
  • Pass through income: Pass through entities such as S-Corporations and Partnerships would receive a 20% deduction on their business income. There are proposed limitations to this–for example, a phase out would begin at $315,000 of income for those filing Married Filing Joint.
  • C-Corporation: The new tax rate would be 21%.
  • 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.
  • 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 would be limited to interest on $750,000 of mortgage debt. (Some prior purchases may be grandfathered in to the $1M limit.) Mortgage interest would no longer include Home Equity Debt.

What tax strategies should you consider using before year end?

You may want to consider using some of the following tax strategies during the month of December:

  • Possibly prepay your state income taxes by December 31. Both of the current tax bills eliminate the deduction for state taxes that you pay personally; however, keep in mind that depending on whether you pay the Alternative Minimum Tax, you may cost yourself more taxes by prepaying your state taxes, so ask us for more information if you are considering this strategy.
  • Complete ROTH IRA transfers by December 31 if you wish to convert Traditional IRA contributions to a ROTH IRA. We expect this option to be eliminated starting January 1, 2018.
  • Prepay expenses that you will need to pay the first week or two of January.
  • Consider bulk ordering clinical supplies and office supplies.
  • Delay recording additional income until January. This month may not be the best time to push hard to collect and deposit a significant amount of Accounts Receivable.
  • Use your business credit card in December for expenses. You get the tax deduction when you use the credit card in the store or online, not when you pay the bill.
  • Install equipment and new computers by December 31. You get the deduction when you can “plug it in,” not when you pay the invoice.

Unfortunately, we don’t yet know for certain what the highest tax brackets or income ranges for those brackets will be for 2018 and therefore cannot predict exactly how much of an impact these strategies will have on your wallet. That being said, our team continues to research tax reform so we can give you up-to-date information when it becomes important enough to change your financial habits. We will send you updates as necessary, but please reach out to us if you have any questions in the meantime!