On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” bringing about numerous changes to the current tax law. The Act dramatically changes many tax provisions for individual and business taxpayers, including reducing tax rates, reducing or eliminating some deductions, while increasing or adding others, and changes to various credits and the alternative minimum tax (AMT). The following is a recap of some of those changes.

Individuals – most changes take effect beginning January 1, 2018

  • The tax brackets have been compressed and the top rate is set at 37%, down from 39.6%.

  • Personal exemptions are eliminated.
  • The standard deduction is increased to $24,000 for MFJ taxpayers, $18,000 for HOH and $12,000 for all others.
  • Itemized Deductions have been simplified (i.e. some are limited or outright eliminated).

Simplification of Deductions

2018
SALT Deduction $10,000 maximum deduction for income taxes, property taxes, sales taxes, and DMV fees.
Mortgage Interest Deduction Limited to interest on up to $750,000 for new acquisition indebtedness; Repeals deduction for home equity indebtedness not used to improve your home.
Charitable Contributions Percentage Limit increased from 50% to 60% (for cash).
Personal Casualty Losses Repealed, except for declared disasters.
Medical Expenses Expanded for two years by setting the deduction threshold to 7.5% of AGI for all taxpayers.
Job Expenses & Miscellaneous
Deductions
Miscellaneous itemized deductions repealed, including employee business expenses, union dues, tax preparation fees, investment advisory fees.
Alimony Paid Repealed for any divorce or separate instrument executed after 12/31/18.
Moving Expenses Repealed.
  • The Child Care Credit has been expanded.
  • The AMT exemption increased from $86,200 to $109,400 for MFJ taxpayers, but is subject to phase-out at higher income levels.
  • The Obamacare “shared responsibility payment” is eliminated for taxpayers who do not have health insurance after 2017.
  • For divorce agreements finalized after December 31, 2018, alimony is no longer deductible by the payer or taxable to the recipient.
  • Section 529 Educational Plans may be used for elementary and high school qualifying expenses, including those for homeschool up to $10,000 per year.

Estate and gift taxes

  • The estate and gift tax exclusion is doubled from the original $5,000,000 to $10,000,000, indexed for inflation.

  • The annual gift tax exclusion is raised to $15,000 beginning in 2018. The maximum gift tax rate is 35%.

Other items

  • The Act expands the list of assets not eligible to receive capital gain treatment. These include patents, inventions, models or designs and secret formulas or processes which are held by the taxpayer who created the property.
  • There is a new deduction for non-corporate taxpayers for qualified business income (QBI) related to the “business pass-though deduction”.

Business Pass-Through Deduction

  • Deduction equal to 20% of domestic “qualified business income” (QBI) from a pass-through entity.
  • Basically, provides an effective top marginal rate of 29.6%.
  • Applies to trusts & estates.

  • For those with taxable income in excess of $415,000 (MFJ) the deduction is limited to the greater of:
    • 50% of W-2 Wages.
    • 25% of W-2 Wages plus 2.5% of unadjusted cost basis of assets.
  • Unavailable to Specified Service Business owner’s taxable income in excess of $415,000 (MFJ).
  • Limitations phased-in from $315,000 – $415,000 (MFJ) of taxable income.
  • Specified Service Business – defined in §1202(e)(3)(A):

“any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.”

  • The final version includes new statutory language to exclude architects and engineers from the §199A Specified Service Business definition.
  • Farmers receiving income from cooperative can get a deduction of 20% of the total income received from the cooperative, limited in some situations.
  • “Carried interests” (certain partnership interests acquired for service) must now be held for three years to receive long-term capital gain treatment.

 

If you have any specific questions about these provisions of the Act, or any other questions, please contact us at Bowman & Company, LLP (209) 473-1040.

On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” bringing about numerous changes to the current tax law. The Act dramatically changes many tax provisions for individual and business taxpayers, including reducing tax rates, reducing or eliminating some deductions, while increasing or adding others, and changes to various credits and the alternative minimum tax (AMT). The following is a recap of some of those changes.

Business – most changes take effect beginning January 1, 2018

    • Beginning in 2018 the corporate tax rate for C-corporations is a flat 21% rate, down from an effective top rate of 35%.
    • The ‘dividends-received-deduction’ for dividends from another corporation is reduced to 50% (from 70%) and 65% (from 80%) when the receiving corporation owns at least 20% of the paying corporation.
    • The corporation alternative minimum tax is repealed.
    • There is a new deduction for non-corporate taxpayers for qualified business income (QBI). Known as the “pass-through deduction”, the deduction is generally 20% of QBI, but there are thresholds that may limit the 20% deduction, as well as additional calculations to arrive at QBI.
    • Farmers receiving income from a cooperative can get a deduction of 20% of the total income received from the cooperative, limited in some situations.
    • The Section 179 deduction for purchased business assets is increased from $500,000 to $1,000,000 (and the threshold for phase out is increased to $2,500,000). Property eligible for this deduction is expanded to include certain rental property previously excluded from eligibility for deduction under Section 179, as well as certain additions to existing commercial properties.
    • 100% bonus depreciation is allowed for qualifying business assets purchased after Sep. 27, 2017. Qualifying assets are expanded to include used property. The 100% deduction is scheduled to phase out over a four year period beginning in 2023. Taxpayers can elect to use 50% as a deduction in lieu of the 100% deduction.
    • Annual depreciation deduction limits for so-called “luxury” automobiles have been increased.
    • For most new farm equipment, the depreciation life has been shortened from 7 years to 5 years, and calculated using the 200% declining balance method as opposed to the previous 150% declining balance method.
    • For property placed in service after Dec. 31, 2017, the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated. A general 15-year recovery period and straight-line depreciation method are provided for qualified improvement property, and a 20-year ADS recovery period is provided for such property. Thus, qualified improvement property placed in service after Dec. 31, 2017, is generally depreciable over 15 years using the straight-line method and half-year convention, without regard to whether the improvements are property subject to a lease, placed in service more than three years after the date the building was first placed in service, or made to a restaurant building.
    • There is a new limitation on the deduction of business interest expense.

Business Interest Deduction

  • Businesses with average gross receipts that do not exceed $25,000,000 are exempt (test on a affiliated basis).
  • The proposal would disallow interest expense in excess of 30% of a business’s “adjusted taxable income”.
  • “Adjusted taxable income” is computed without regard to deductions allowable for depreciation, amortization, or depletion.
  • Any interest disallowed would be carried forward indefinitely.
  • Determined at the tax-filer level (e.g. the partnership not the partners would be subject to testing), but it is determined at the consolidated return level for affiliated corporations.
  • At the taxpayer’s election, certain real property and construction businesses and farms are exempt (but must use ADS).
  • The cash basis of accounting is expanded for taxpayers with gross receipts under $25,000,000 that were previously excluded from utilizing the cash method of accounting due to having inventories as a significant part of their business.
  • Generally, non-farm net operating losses will only be carried forward and can be applied to reduce only 80% of the current year taxable income. Farm NOLs can be carried back 2 years.
  • The domestic production activities deduction is repealed.
  • Like-kind (Section 1031) exchanges will only apply to real property.
  • Deductions for entertainment expenses are disallowed, but 50% of business meals expense is retained.
  • The law adds that no deduction is allowed for any settlement, payout, or attorney fees related to a sexual harassment or sexual abuse matter that is subject to a nondisclosure agreement.
  • A new tax credit is created for an employer’s payment of family and medical leave.
  • “Carried interests” (certain partnership interests acquired for services) must now be held for three years to receive long-term capital gain treatment.
  • The application of the uniform capitalization rules has been eliminated for producers and resellers that have less than $25,000,000 in gross receipts.

 

If you have any specific questions about these provisions of the Act, or any other questions, please contact us at Bowman & Company, LLP (209) 473-1040.