Hello everyone, I hope this finds you doing well.
At the end of last year Congress enacted the Tax Cuts and
Jobs Act (TCJA) which includes a sweeping tax package. Here is a look at some
of the more important elements of the new law that have an impact on
individuals and businesses. Unless otherwise noted, the changes are effective
for tax years beginning in 2018 through 2025.
Over the next couple of months we are going to be contacting
clients that may need to change the structure of their business in order to
take full advantage of some of the new tax laws.
Please read through these changes and let us know if you
have any questions or concerns. We are still waiting on guidance from the IRS
on how some of these new laws will apply to certain situations.
Tax Changes for
Individuals
· Tax rates. The new law imposes a new
tax rate structure with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and
37%. The top rate was reduced from 39.6% to 37% and applies to taxable income
above $500,000 for single taxpayers, and $600,000 for married couples filing
jointly. The rates applicable to net capital gains and qualified dividends were
not changed.
· Standard deduction. The new law
increases the standard deduction to $24,000 for joint filers, $18,000 for heads
of household, and $12,000 for singles and married taxpayers filing separately.
· Exemptions. The new law suspends the
deduction for personal exemptions. Thus, starting in 2018, taxpayers can no
longer claim personal or dependency exemptions.
· New deduction for “qualified business
income.” Starting in 2018, taxpayers are allowed a deduction equal to 20
percent of “qualified business income,” otherwise known as “pass-through”
income, i.e., income from partnerships, S corporations, LLCs, and sole
proprietorships. The income must be from a trade or business within the U.S.
Investment income does not qualify, nor do amounts received from an S
corporation as reasonable compensation or from a partnership as a guaranteed
payment for services provided to the trade or business. The deduction is not
used in computing adjusted gross income, just taxable income. For taxpayers
with taxable income above $157,500 ($315,000 for joint filers), (1) a
limitation based on W-2 wages paid by the business and depreciable tangible
property used in the business is phased in, and (2) income from the following
trades or businesses is phased out of qualified business income: health, law,
consulting, athletics, financial or brokerage services, or where the principal
asset is the reputation or skill of one or more employees or owners.
· Child and family tax credit. The new
law increases the credit for qualifying children (i.e., children under 17) to
$2,000 from $1,000, and increases to $1,400 the refundable portion of the
credit. It also introduces a new (nonrefundable) $500 credit for a taxpayer's
dependents who are not qualifying children. The adjusted gross income level at
which the credits begin to be phased out has been increased to $200,000
($400,000 for joint filers).
· State and local taxes. The itemized
deduction for state and local income and property taxes is limited to a total
of $10,000 starting in 2018.
· Mortgage interest. Under the new law,
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), starting
with loans taken out in 2018. And there is no longer any deduction for interest
on home equity loans, regardless of when the debt was incurred.
· Miscellaneous itemized deductions.
There is no longer a deduction for miscellaneous itemized deductions which were
formerly deductible to the extent they exceeded 2 percent of adjusted gross
income. This category included items such as tax preparation costs, investment
expenses, union dues, and unreimbursed employee expenses.
· Medical expenses. Under the new law,
for 2017 and 2018, medical expenses are deductible to the extent they exceed
7.5 percent of adjusted gross income for all taxpayers. Previously, the AGI
“floor” was 10% for most taxpayers.
· Moving expenses. The deduction for
job-related moving expenses has been eliminated, except for certain military
personnel. The exclusion for moving expense reimbursements has also been
suspended.
· Alimony. For post-2018 divorce decrees
and separation agreements, alimony will not be deductible by the paying spouse
and will not be taxable to the receiving spouse.
· Health care “individual mandate.”
Starting in 2019, there is no longer a penalty for individuals who fail to
obtain minimum essential health coverage.
· Estate and gift tax exemption.
Effective for decedents dying, and gifts made, in 2018, the estate and gift tax
exemption has been increased to roughly $11.2 million ($22.4 million for
married couples).
· Alternative minimum tax (AMT) exemption.
The AMT has been retained for individuals by the new law but the exemption has
been increased to $109,400 for joint filers ($54,700 for married taxpayers
filing separately), and $70,300 for unmarried taxpayers. The exemption is
phased out for taxpayers with alternative minimum taxable income over $1
million for joint filers, and over $500,000 for all others.
Tax Changes for
Businesses
· Corporate tax rates reduced. One of the
more significant new law provisions cuts the corporate tax rate to a flat 21%.
Before the new law, rates were graduated, starting at 15% for taxable income up
to $50,000, with rates at 25% for income between 50,001 and $75,000, 34% for income
between $75,001 and $10 million, and 35% for income above $10 million.
· Alternative minimum tax repealed for
corporations. The corporate alternative minimum tax (AMT) has been repealed
by the new law.
· Net Operating Loss (“NOL”) deduction
modified. Under the new law, generally, NOLs arising in tax years ending
after 2017 can only be carried forward, not back. The general two-year
carryback rule, and other special carryback provisions, have been repealed.
However, a two-year carryback for certain farming losses is allowed. These NOLs
can be carried forward indefinitely, rather than expiring after 20 years.
Additionally, under the new law, for losses arising in tax years beginning
after 2017, the NOL deduction is limited to 80% of taxable income, determined
without regard to the deduction. Carryovers to other years are adjusted to take
account of the 80% limitation.
· Limit on business interest deduction.
Under the new law, every business, regardless of its form, is limited to a
deduction for business interest equal to 30% of its adjusted taxable income.
For pass-through entities such as partnerships and S corporations, the
determination is made at the entity, i.e., partnership or S corporation, level.
Adjusted taxable income is computed without regard to the repealed domestic
production activities deduction and, for tax years beginning after 2017 and
before 2022, without regard to deductions for depreciation, amortization, or
depletion. Any business interest disallowed under this rule is carried into the
following year, and, generally, may be carried forward indefinitely. The
limitation does not apply to taxpayers (other than tax shelters) with average
annual gross receipts of $25 million or less for the three-year period ending
with the prior tax year. Real property trades or businesses can elect to have
the rule not apply if they elect to use the alternative depreciation system for
real property used in their trade or business. Certain additional rules apply
to partnerships.
· Domestic production activities deduction
(“DPAD”) repealed. The new law repeals the DPAD for tax years beginning
after 2017. The DPAD formerly allowed taxpayers to deduct 9% (6% for certain
oil and gas activities) of the lesser of the taxpayer's (1) qualified
production activities income (“QPAI”) or (2) taxable income for the year,
limited to 50% of the W-2 wages paid by the taxpayer for the year. QPAI was the
taxpayer's receipts, minus expenses allocable to the receipts, from property
manufactured, produced, grown, or extracted within the U.S.; qualified film
productions; production of electricity, natural gas, or potable water;
construction activities performed in the U.S.; and certain engineering or
architectural services.
· Increased Code Sec. 179 expensing. The
new law increases the maximum amount that may be expensed under Code Sec. 179
to $1 million. If more than $2.5 million of property is placed in service
during the year, the $1 million limitation is reduced by the excess over $2.5
million. Both the $1 million and the $2.5 million amounts are indexed for
inflation after 2018. The expense election has also been expanded to cover (1)
certain depreciable tangible personal property used mostly to furnish lodging
or in connection with furnishing lodging, and (2) the following improvements to
nonresidential real property made after it was first placed in service: roofs;
heating, ventilation, and air-conditioning property; fire protection and alarm
systems; security systems; and any other building improvements that aren't
elevators or escalators, don't enlarge the building, and aren't attributable to
internal structural framework.
· Bonus depreciation. Under the new law,
a 100% first-year deduction is allowed for qualified new and used property
acquired and placed in service after September 27, 2017 and before 2023.
Pre-Act law provided for a 50% allowance, to be phased down for property placed
in service after 2017. Under the new law, the 100% allowance is phased down
starting after 2023.
· Computers and peripheral equipment. The
new law removes computers and peripheral equipment from the definition of
listed property. Thus, the heightened substantiation requirements and possibly
slower cost recovery for listed property no longer apply.
· Like-kind exchange treatment limited.
Under the new law, the rule allowing the deferral of gain on like-kind
exchanges of property held for productive use in a taxpayer's trade or business
or for investment purposes is limited to cover only like-kind exchanges of real
property not held primarily for sale. Under a transition rule, the pre-TCJA law
applies to exchanges of personal property if the taxpayer has either disposed
of the property given up or obtained the replacement property before 2018.
· Partnership “technical termination” rule
repealed. Before the new law, partnerships experienced a “technical
termination” if, within any 12-month period, there was a sale or exchange of at
least 50% of the total interest in partnership capital and profits. This
resulted in a deemed contribution of all partnership assets and liabilities to
a new partnership in exchange for an interest in it, followed by a deemed
distribution of interests in the new partnership to the purchasing partners and
continuing partners from the terminated partnership. Some of the tax attributes
of the old partnership terminated, its tax year closed, partnership-level
elections ceased to apply, and depreciation recovery periods restarted. This
often imposed unintended burdens and costs on the parties. The new law repeals
this rule. A partnership termination is no longer triggered if within a
12-month period, there is a sale or exchange of 50% or more of total
partnership capital and profits interests. A partnership termination will still
occur only if no part of any business, financial operation, or venture of the
partnership continues to be carried on by any of its partners in a partnership.
As you can see from
this overview, the new law affects many areas of taxation. If you wish to
discuss the impact of the law on your particular situation, please give me a
call.
Thank you!
Andrew McMillan, CPA
Tax Partner
REH CPA, PLLC
704-662-8249
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