Important Highlights for Individuals and Small Businesses
On December 15, 2017, Congress released the 2017 Tax Cut and Jobs Act (“the Act”) that has now passed both the House and Senate and is expected to be signed immediately by President Trump. The Act represents the most sweeping changes in the tax code in over 30 years. Since the Act was published on December 15, we have been analyzing its details to advise clients on its key impacts and planning opportunities.
There are almost 1100 pages in the Act. We have attempted here to summarize some key provisions that we believe are applicable to most business and individual taxpayers, with primary focus on planning opportunities that should be seized by December 31, 2017 where possible to minimize tax. However, you should note that due to the complexity of tax law and the number of changes included in the Act, many tax planning opportunities will need to be tailored to your specific situation to be most effective and avoid unintended side-effects or issues. Consult your tax advisor for details and assistance.
Highlighted tax planning opportunities to consider before December 31, 2017:
- Income Deferral to 2018: Due to the reduction in income tax rates across the board for both businesses and individuals effective in 2018, most taxpayers will benefit from deferring taxable income to the extent possible from 2017 to 2018.
- Deductions Acceleration into 2017: With income tax rates higher across the board for both businesses and individuals effective in 2017 relative to 2018, most taxpayers will benefit from maximizing deductions in 2017 that would otherwise fall in 2018.
- State & Local Taxes: Pay all deductible 2017 state and local taxes (income, property, and sales if applicable) by December 31, 2017 in order to help ensure deductibility. The Act caps combined state and local income (or sales) taxes and property taxes at $10,000 ($5,000 for married separate filers) per year starting in 2018. This cap does not apply to taxes incurred in a trade or business or for the production of income. The Act prevents the 2017 deduction of prepaid state and local income taxes for future (post-2017) tax years. But it does not prevent the deduction of prepaid property taxes.
- Miscellaneous Itemized Deductions: Pay these items by December 31, 2017 also if they are likely to exceed the 2% floor on 2017 Adjusted Gross Income. These deductions, which include tax preparation and planning fees, investment fees, and unreimbursed business expenses for employees are subject to suspension for tax years 2018-2025 under the Act.
- College Athletic Seat Rights: Pay these items by December 31, 2017. The Act repeals the charitable deduction for amounts paid after 2017 to an institution of higher education for the right to purchase tickets or seating at athletic events.
- Moving Expenses: Pay these items by December 31, 2017. The Act suspends this deduction for tax years 2018-2025.
- Business Entertainment Expenses: Consider paying these amounts by December 31, 2017. This category of business expenses, until now 50% deductible, is repealed for tax years after 2017.
- Business Equipment: Consider purchasing and placing in service by December 31, 2017 certain new or used business equipment previously eligible for 50% bonus deprecation to take advantage of immediate 100% business expensing for items placed in service after September 27, 2017.
- Net Operating Losses: For taxpayers with the opportunity to trigger or increase losses contributing to a Net Operating Loss (NOL), generally relating to net business losses, in 2017 and with substantial taxable income in prior carryback years, consider maximizing deductible losses in 2017. The act repeals the NOL carryback provisions, generally back 2 years before carryforward up to 20 years and forces carryforward of NOL’s incurred after 2017, subject to limitation of 80% of taxable income in the carryforward years.
Individuals- Summary of Certain Key Changes in the Act
An expanded discussion of Individual tax changes can be found here.
New Income Tax Rates & Brackets
These rates and brackets are effective for Tax Years beginning after December 31, 2017 and before January 1, 2026.
FOR MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES
|If taxable income is:||The tax is:|
|Not over $19,050||10% of taxable income|
|Over $19,050 but not over $77,400||$1,905 plus 12% of the excess over $19,050|
|Over $77,400 but not over $165,000||$8,907 plus 22% of the excess over $77,400|
|Over $165,000 but not over $315,000||$28,179 plus 24% of the excess over $165,000|
|Over $315,000 but not over $400,000||$64,179 plus 32% of the excess over $315,000|
|Over $400,000 but not over $600,000||$91,379 plus 35% of the excess over $400,000|
|Over $600,000||$161,379 plus 37% of the excess over $600,000|
FOR SINGLE INDIVIDUALS (OTHER THAN HEADS OF HOUSEHOLDS AND SURVIVING SPOUSES):
|If taxable income is:||The tax is:|
|Not over $9,525||10% of taxable income|
|Over $9,525 but not over $38,700||$952.50 plus 12% of the excess over $9,525|
|Over $38,700 but not over $82,500||$4,453.50 plus 22% of the excess over $38,700|
|Over $82,500 but not over $157,500||$14,089.50 plus 24% of the excess over $82,500|
|Over $157,500 but not over $200,000||$32,089.50 plus 32% of the excess over $157,000|
|Over $200,000 but not over $500,000||$45,689.50 plus 35% of the excess over $200,000|
|Over $500,000||$150,689.50 plus 37% of the excess over $500,000|
Standard Deduction and Exemptions
The 2017 Tax Cuts and Jobs Act made the following changes to the Standard Deduction and Personal Exemptions. These changes are effective for Tax Years beginning after December 31, 2017 and before January 1, 2026.
The Standard Deduction has been increased as follows:
|Married Filing Jointly||$24,000.00|
|Head of Household||$18,000.00|
Note: These standard deduction changes will be adjusted for inflation beginning in tax years after 2018. There are no changes in the additional standard deduction for the elderly and blind.
Personal Exemptions are suspended for Tax Years beginning after December 31, 2017 and before January 1, 2026. For the Tax Year ending on December 31, 2017, the Personal Exemption of $4,150 is still applicable, subject to phase out for higher income earners.
The 2017 Tax Cuts and Jobs Act has eliminated or capped many of the itemized deductions that were available. These changes are effective for Tax Years beginning after December 31, 2017 and before January 1, 2026.
The overall limitation on Itemized Deductions, commonly referred to as the “Pease” limitation has been suspended. There will no longer be a 3% reduction in Itemized Deductions based on Income Levels during this 2018-2025 suspension period.
Medical Expense Deduction
For the tax years 2017 and 2018, the medical expense deduction threshold has been temporarily reduced from 10% to 7.5% of Adjusted Gross Income (AGI). This is effective for Tax Years 2017 and 2018 only. The rule limiting the medical expense deduction for AMT purposes to 10% of AGI also does not apply for the 2017 and 2018 Tax Years.
State and Local Tax Deduction
As noted above, the Act caps combined state and local income (or sales) taxes and property taxes at $10,000 ($5,000 for married separate filers) per year starting in 2018. This cap does not apply to taxes incurred in a trade or business or for the production of income.
Mortgage Interest Deduction
(Only applies to mortgage indebtedness incurred on or after December 15, 2017. Other caveats apply regarding execution of a binding contract and subsequent purchase. You will need to discuss this with your tax advisor to see if they apply.)
The deduction for mortgage interest on home equity indebtedness is suspended for tax years 2018-2025. This is generally mortgage interest on amounts borrowed up to $100,000 under a qualified mortgage but not used for purchase or improvements on a principal residence or second home.
The mortgage interest deduction is limited to underlying indebtedness of up to $750,000 ($375,000 for Married Filing Separately).
Refinancing of previous indebtedness is allowed, and the old rules apply as long as the indebtedness resulting from the refinancing does not exceed the amount of the refinanced indebtedness. In other words, you cannot refinance more than your current mortgage balance and deduct interest on the excess.
Charitable Contribution Deduction
The 50% limitation for cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding the 60% limitation are generally allowed to be carried forward for up to 5 years.
Miscellaneous Itemized Deductions (Subject to 2% floor)
The deduction for miscellaneous itemized deductions that are subject to a 2% floor is suspended. These include unreimbursed employee expenses, union dues, continuing education, tax prep fees, investment expenses/fees, safe deposit box, etc.
Other Key Changes for Individuals
Alimony Deduction by Payer & Inclusion in Income by Payee
The 2017 Tax Cuts and Job Act suspends the ability to deduct alimony paid and the inclusion in income of alimony received for Divorce or Separation Agreements executed after December 31, 2018. This also includes a Divorce or Separation Agreement executed before that date, but modified after that date if the modification expressly provides that this new provision applies to such modification.
Moving Expenses and Reimbursements
As noted above, the act suspends the deduction for certain qualified moving expenses and the exclusion from income on certain moving expense reimbursements. Certain exclusions apply for active duty military.
Child Tax Credit
The child tax credit has been increased to $2,000 for each child under the age of 17 effective for tax years 2018-2025. The income limits for phase-out of the credit were also increased to $400,000 for Married Filing Joint taxpayers and $200,000 for all other taxpayers. The credit is refundable up to $1,400 for certain low-income taxpayers.
Obamacare Insurance Penalty
The act permanently repeals for months beginning after December 31, 2018 the penalty under Obamacare on individual taxpayers for failure to maintain insurance meeting ACA requirements.
The “kiddie tax” provisions for certain dependent children have been substantially modified for tax years after 2017 to make the applicable child’s earned income taxed at the rates for single taxpayers and unearned income subject to tax at rates for trusts and estates, rather than tied to the parents’ tax rates.
For tax years 2018-2025 those rates are as follows:
|If taxable income is:||The tax is:|
|Not over $2,550||10% of taxable income|
|Over $2,550 but not over $9,150||$255, plus 24% of the excess over $2,550|
|Over $9,150 but not over $12,500||$1,839, plus 35% of the excess over $9,150|
|Over $12,500||$3,011.50, plus 37% of the excess over $12,500|
Thus, there may be some opportunity for parents to gift to children assets that produce less than $12,500 of taxable income and save overall income tax as a family if the parents are in the top bracket.
Alternative Minimum Tax (AMT)
Individual AMT has been modified for tax years 2018-2025 to substantially increase exemption amounts to the following amounts:
Married Joint and Surviving Spouses — $109,400
Single Filers — $70,300
Married Separate — $54,700
Further, these income phase-out threshold for these exemptions is substantially increased to the following amounts:
Married Joint and Surviving Spouses — $1,000,000
All Others — $500,000
Section 529 Education Plans
Qualified higher education expense definition is expanded for distributions after December 31, 2017 to include tuition at elementary and secondary schools up to $10,000 per year. Prior to this change only certain post-secondary expenses qualified.
For tax years after 2017 taxpayers will no longer be able to recharacterize Roth conversions to unwind some or all of the conversion amount.
Estate and Gift Tax
The current lifetime estate and gift tax exemption amounts are doubled for tax years 2018-2025, subject to inflation-indexing. This projects to approximately $11.2 million per person in 2018 ($22.4 million per married couple, with the portability provision remaining).
Businesses- Summary of Certain Key Changes in the Act
An expanded discussion of Business tax changes can be found here.
Corporate Tax Rate
For tax years beginning after December 31, 2017, the corporate tax rate has been reduced from a top rate of 35% under a marginal rate structure to a flat rate of 21%. This applies to C-Corporation only.
Corporate Alternative Minimum Tax (AMT)
Corporate AMT applicable to C-Corporations is repealed effective for tax years beginning after December 31, 2017.
Expensing and Depreciation:
For property placed in service after December 31, 2017, Section 179 Expensing is increased from $500,000 to $1,000,000 with the phase out threshold increased to $2,500,000. These amounts will be indexed for inflation in tax years beginning after 2018.
Passenger vehicles are included in Section 179, but only to the extent of specified dollar limitations (Consult your tax advisor). Special rules and limitations exist for SUV’s over 6,000 pounds, but under 14,000 Pounds (Consult your tax advisor).
Depreciation rules for real estate are amended for certain real property to replace existing qualified leasehold improvement property, qualified restaurant property, and qualified retail property subject to a 15-year recovery period with a single classification for “qualified improvement property” with the same 15-year recovery period. This relates to certain interior improvements to nonresidential real property that are placed in service after 2017 and after the initial placed-in-service date of the real property.
Temporary Cost Recovery of Qualified Business Assets
As noted above, qualified property placed in service after September 27, 2017, and before January 1, 2023, 50% Bonus Depreciation on qualified business property has been increased to 100% Depreciation Deduction. It has also been expanded to cover both new and used business property. The depreciation deduction phases down gradually in subsequent years beginning January 1, 2023.
Note: 100% Depreciation Deduction is not the same as Section 179 Expensing. An entirely different set of rules apply to Section 179 Expensing. It is important to consult with your tax advisor regarding this distinction and potentially different impact.
Limitation on Deductibility of Business Interest
For tax years beginning after December 31, 2017, Net Interest Expense as a business deduction is limited to 30% of the business’s Adjusted Taxable Income plus floor plan financing interest (applicable to certain auto, truck and equipment dealerships). This limitation applies to all businesses regardless of their form, but subject to an exemption for small businesses with no more than $25 million of average annual gross receipts over the prior 3 years. The Net Interest Expense disallowance is determined at the Tax Filer level, but special rules apply to pass through entities.
Adjusted Taxable Income is computed without taking Depreciation, Amortization, or Depletion into account.
Certain businesses are able to elect out of the business interest limitation, such as real estate and farming businesses, but this affects their depreciation provisions on property, resulting in a longer depreciation recovery period under revised ADS depreciation rules.
Domestic Production Activities Deductions (DPAD- Section 199 Deduction)
This special deduction for domestic production companies in a wide-range of industries, including manufacturing, construction and film studios is repealed for tax years after 2017.
Net Operating Losses
As noted above, Net Operating Losses incurred in tax years ending after December 31, 2017, will no longer be allowed to be carried back two years. However, carryback provisions do continue to apply in the case of certain losses incurred in the trade or business of farming.
New Credit for Employer Paid Family Leave
A General Business Credit will be available for tax years beginning after December 31, 2017, but not beginning after December 31, 2019 for employers who pay the wages of employees who are on Family and Medical Leave (FMLA). The credit equals 12.5% of the amount of wages paid to the qualifying employee under FMLA provided the rate of payment is 50% of the wages normally paid to the employee. The credit is increased by .25 % for each percentage point above the 50% of wages paid and capped at a maximum of 25%.
20% Passthrough Deduction for Certain Partnerships, S-Corps and Sole Proprietors
For tax years beginning after December 31, 2017 and before January 1, 2026 Sole-Proprietorships, Partnerships, LLCs, and S-Corporations are going to be allowed a 20% Deduction for Qualified Business Income (QBI) from taxable income on individual returns, subject to certain limitations, exemptions and caps.
Specified service trades or businesses as defined in IRC 1202(e)(3)(A) are excluded from QBI and hence the resulting deduction. These are generally businesses in fields such as health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, any trade or business the principal asset of which is the reputation or skill of one or more of its owners or employees (excluding engineering and architecture), or any business that involves the performance of services that consist investment and investment management, trading or dealing in securities, partnership interest, or commodities.
An exception for specified service trades or businesses applies if taxable income is not over $315,000 for married joint filers ($157,500 for other individuals), subject to inflation indexing after 2018. The deduction phases out over the next $100,000 of taxable income for married joint filers and $50,000 for other individuals.
Qualified Business Income (QBI) Defined
QBI is defined as the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer. It does not include the following: any item taken into account in determining net long-term capital gain or loss, dividends, income equivalent to a dividend, or payments in lieu of a dividend, interest income other than that which is properly allocable to a trade or business, the excess of gain over loss from commodities transactions, the excess of foreign currency gains or losses other than transactions directly related to business needs of the business activity, income from notional contracts other than clearly identified hedging transactions, and any amount received from an annuity that is not used in the trade or business of the business activity.
Wage and Depreciable Property Limits
For pass-through entities, other than sole proprietorships, the deduction is limited to the greater of:
- 50% of W-2 Wages Paid with respect to the qualified trade or business, or
- 25% of W-2 Wages Paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property, which is defined in IRC 199A(b)(6) as tangible, depreciable property held by and available for use in the business at the close of the tax year, which is used at any point during the tax year in the production of qualified business income, and the depreciable period for which has not ended before the close of the tax year.
For an S-Corporation or Partnership, QBI also does not include any amount treated as reasonable compensation of the taxpayer, or guaranteed payment for services rendered with respect to the trade or business.
Other rules and limitations also apply. Due to the complexities of this deduction, you will need to consult with your tax advisor on how to properly calculate your QBI and eligible deduction amounts.
Small Business Accounting Methods
For tax years beginning after December 31, 2017 the ability to use the cash method of accounting would be expanded to apply to businesses with average annual gross receipts for the prior 3 years not exceeding $25 million and would be expanded to include C-Corporations and partnerships with C-Corporation clients (other than tax shelters). A change to this method would constitute a voluntary change of accounting method, subject to IRC 481(a) adjustment rules and reporting, as would the changes discussed below.
Businesses meeting the $25 million threshold discussed above also become eligible for tax years beginning after December 31, 2017 to account for inventories as non-incidental materials and supplies or conform to financial statement reporting treatment.
UNICAP (IRC 263A)
Additionally, businesses meeting the above new $25 million threshold would also be exempt for tax years beginning after December 31, 2017 from required uniform capitalization rules on both personal and real property and for both manufacturers/producers and resellers.
Also, businesses that meet the above new $25 million threshold will be eligible for contracts entered into after December 31, 2017 to use the completed contract method (or another permissible exempt contract method) in lieu of the percent-complete method of accounting for long-term contracts. No IRC 481(a) adjustment or voluntary change would be deemed effective for contracts entered into after December 31, 2017.
This document and the attachments linked herein are intended only as a general summary of certain elements of proposed tax legislation. Please consult your tax advisor for assistance with your specific tax situation, as taxpayer-specific factors can substantially impact these provisions.