On December 20th, 2017 Congress passed a sweeping overhaul of our tax code. The ‘Tax Cuts and Jobs Act’ revises a significant portion of tax law that affects almost all taxpayers in some way.
Below is a listing of a few significant tax provisions that will change. Please note that most of these changes take effect for the 2018 tax year (not this 2017 upcoming filing, except for fixed asset expensing and medical expense deduction).
|Provision||Previous Rules||New Rules|
|Tax Rates||Seven brackets with top rate 39.6%||Seven brackets with top rate 37%, generally lower rates overall|
|Standard Deduction||$6,500 Single, $13,000 MFJ||$12,000 Single, $24,000 MFJ|
|Personal Exemptions||$4,050 per person||None|
|Moving Expense Deduction||Certain job related moving expense deductible||None, except for military personnel|
|Student Loan Interest Deduction||$2,500 max deduction, subject to AGI limitations||Same as current|
|Alimony Payments||Deductible by payor, included in payee income||No longer deductible from or included in income for agreements made or modified after 12/31/18|
|Taxing of Grad Student Waivers||Not taxable||Same as current|
|Mortgage Interest Deduction||Interest on $1M principal loan balance plus $100k equity line cap||$750k principal loan balance cap, no more equity line interest deduction|
|Medical Expense Deduction||10% of AGI threshold||7.5% of AGI threshold for 2017 & 2018|
|State/Property Tax Deduction||Unlimited, except for high income earners||$10k max deduction on choice of property plus sales or income tax. Taxes paid for carrying on a trade or business are still deductible.|
|Charitable Contributions||Limited to 50% of AGI||Limited to 60% of AGI|
|Athletic Club Contributions for Athletic Ticket/Seating Rights||Deductible up to 80%||Not Deductible|
|Itemized Deductions Subject to 2% of AGI||Unreimbursed employee expenses, tax prep fees, etc.||Not Deductible|
|Child Tax Credit||$1k credit per child, partially refundable||$2k credit per child, with more refundable and higher income phaseout|
|Alternative Minimum Tax||Exemptions of $54,300 single $84,500 MFJ||Exemptions increased to $70,300 single $109,400 MFJ (less people affected)|
|Individual Healthcare Mandate||If no health insurance, imposes a penalty of the greater of $695 or 2.5% of income||Repealed – no penalty, effective 2019|
|Estate Tax||40% tax on estate assets over $5.49M single or $11M using a marital advantage||40% tax stays, but exemption amounts double|
|C Corporate Tax Rate||Graduated tax table based on income, top rate of 35%||Flat tax of 21% regardless of income level|
|Alternative Minimum Tax for C Corps||20% on alternate calculation of tax||Repealed, no Corporate AMT|
|Passthrough Taxation||Taxed at owner’s individual rate||Taxed at owner’s individual rate, but now includes a potential 20% deduction from taxable income|
|Fixed Asset Expensing||50% bonus depreciation available, phased out over the next few years. New items only for bonus depreciation. Section 179 expensing max $500k, phaseout beginning at $2M||100% bonus depreciation through 2022, then phased out. New & Used items qualify, begins 9/27/17. Section 179 max of $1M, with $2.5M beginning phaseout beginning 2018.|
|Business Interest Expense||Full deduction allowed for interest paid.||Interest expense deduction capped at 30% of earnings, with carryforward of unused amounts. Exemption for businesses under $25M receipts.|
|Section 199 DPAD||Deduction for manufacturing type businesses||Repealed|
|Meals & Entertainment||50% deduction for business meals & entertainment, 100% deduction for onsite meals||No deduction for business entertainment, 50% for onsite meals until 2026 and then no deduction thereafter. 50% business meals remain.|
|Like-kind Exchanges||Allowed for tangible and real property||Allowed only for real property.|
|Cash Method of Accounting||Certain businesses with less than $5M in income may use||Increases to income limit to $25M|
|International Income||Worldwide system of taxation||Territorial system, with other modifications|
|Net Operating Losses (NOLs)||Carryback 2 yrs (5 if farming), Carryforward 20 yrs without limits on taxable income||Carryback zero yrs (2 if farming), Carryforward indefinite years. May only offset up to 80% of taxable income.|
Keep in mind that many of the individual changes will revert to the previous law in 2026, such lower individual tax rates, increased standard deduction, and repeal/change to itemized deductions and the personal exemptions. Let’s go a little deeper on some of the provisions.
Individual Tax Rates
2017 rates: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%
2018 – 2025 rates: 10%, 12%, 24%, 32%, 35%, and 37%
The brackets changed somewhat also, generally more advantageous, however, the new top bracket does include a marriage penalty – a bracket that has a higher threshold for single vs. married taxpayers. The Tax Policy Center has created a calculator with basic scenarios to project how tax reform may affect your individual return. The Tax Cuts and Jobs Act calculator can be found here: http://tpc-tax-calculator.urban.org/
Standard Deduction, Itemized Deductions, & Personal Exemptions
Taxpayers may reduce their income by either a standard deduction or a total of itemized deductions; this remains true under both new and old rules. However, new rules increase the standard deduction and restrict or remove many itemized deductions (see above). Old rules also allowed for another reduction of income called a personal exemption of around $4k per person, which was available for the taxpayer, spouse, and dependents. The new standard deduction is almost double that of the old, however, it’s important to consider the fact that personal exemptions are gone under new rules. So when combining the two of these provisions together, it can still be beneficial in many scenarios, but not double the previous benefit. And in fact, if you had several dependents, the removal of personal exemptions may have hurt your tax situation. Again, these provisions are for tax years 2018-2025, the old rules are set to come back in 2026.
Passthrough Income Deduction
Income from a passthrough business (such as an LLC, sole proprietor, partnership, or S Corporation) is reported on the owner’s individual tax return and taxed at individual tax rates. This methodology remains under new rules; what has changed is a new deduction potentially available to this type of income on the individual, trust, or estate return. Things do get a little complex in this new arena, and regulations are not out yet that could change how it’s implemented, but here’s the gist:
- 20% deduction from taxable income for qualified passthrough business income
- Qualified business income is the net amount of income, gain, deduction, and loss attributable to a domestic trade or business
- Qualified business income is determined separately for each qualified trade or business
- Investment income from the business generally does not qualify (Co-op dividends like patronage dividends and per-unit retain allocations do qualify)
- Compensation to the shareholder or partner does not qualify as income for this calculation
- Businesses can take this deduction without further limitations if their personal income is under $157,500 single/ $315,000 MFJ.
- When individual income goes over $157,500 single/ $315,000 MFJ, a limiting calculation is phased in that is based on a calculation involving the greater of owner share of 50% of the business’ W-2 wages paid, OR a combination of 25% of their share of W-2 wages plus 2.5% of the unadjusted basis of all “qualified property” (little more complexity here also).
- Certain service businesses with income over $157,500 single/ $315,000 MFJ cannot take this deduction at all after a phase out. Sorry CPA and law firms, health professionals, financial services, etc. – however, engineers and architects, the new law says you’re ok here.
- Available for the 2018-2025 tax years
Increased Fixed Asset Expensing
100% bonus depreciation will replace the 2017 50% rate that was going to be phased down over the next few years, this begins for assets placed into service on or after 9/27/17 through 2022. Phase down of bonus rates begin in 2023 and end in 2026. This deduction is now available to used property, as well as new – which is a change from previous law.
The Section 179 deduction that is a maximum $500k expense for qualifying property for tax year 2017 will be a maximum of $1M beginning in 2018. Also, the $2M phaseout that is for 2017 will increase to $2.5M beginning in 2018. The $25,000 SUV limitation still applies. The definition of qualifying property for the deduction beginning in 2018 will now include certain qualifying real property, such as improvements to nonresidential property like roofs, HVAC property, and fire/alarm/security systems. This provision does not expire like the bonus depreciation rules do.
Corporate Tax Rate
The Tax Cuts and Jobs Act would permanently lower the maximum corporate tax rate from 35% to 21%, starting in 2018. This is a huge reduction in tax for C Corporations with greater than $75,000 of taxable income (or personal service corporations that were previously taxed at 35% regardless of income), and is the most costly provision in the Act. The goal of this rate reduction is to be more competitive on a global scale, as the U.S. had one of the highest tax corporate rates. Businesses will hopefully invest in their human capital with these savings, by increasing wages and hiring, which would drive the economy and offset the deficit hit. Caveat – the C Corporation rate at 21% means many smaller corporations will have a tax increase going from 15% on first $50,000 of taxable income to 21% now that the system is a flat rate, rather than a graduated system.
This summary is just a taste of what’s in the bill! TD&T will continue to analyze and include more coverage on select topics throughout the year. Please contact us if you have questions or would like assistance with implementation.
Amie Kuntz is a CPA with over 10 years experience in taxation, focusing on privately held businesses and their owners. Amie has experience both in public accounting and private industry, which allows her to understand how tax law affects business owners inside and out. Amie is committed to being a trusted advisor, in conjunction with providing tax planning and compliance.