Tag: Tax Cuts and Jobs Act

Posted on Jan 31, 2018

On January 11, the IRS released updated 2018 income tax withholding tables, which reflect   changes made by the new Tax Cuts and Jobs Act. This is the first in a series of steps that the IRS will take to help improve the accuracy of withholding following major changes made by the new tax law, the IRS stated.

The updated withholding information, shows the new rates for employers to use during 2018. Employers should begin using the 2018 withholding tables as soon as possible, but not later than February 15, 2018. They should continue to use the 2017 withholding tables until implementing the 2018 withholding tables.

To view the tables in Notice 1036, click here: https://www.irs.gov/pub/irs-pdf/n1036.pdf

Many employees will begin to see increases in their paychecks to reflect the new law in February. According to the IRS, “the time it will take for employees to see the changes in their paychecks will vary depending on how quickly the new tables are implemented by their employers and how often they are paid — generally weekly, biweekly or monthly.”

The new withholding tables are designed to work with the W-4 forms that workers have already filed with their employers to claim withholding allowances. This minimizes the burden on taxpayers and employers, the IRS stated. At this time, employees don’t have to do anything.

Why the Changes Are Needed

The new law makes a number of changes for 2018 that affect individual taxpayers. The new tables reflect:

  • An increase in the standard deduction,
  • A repeal of personal exemptions, and
  • Changes in tax rates and tax brackets.

For people with simpler tax situations, the new tables are designed to produce the correct amount of tax withholding. The revisions are also aimed at avoiding over- and under-withholding of tax as much as possible.

To help people determine their withholding, the IRS is also revising the withholding tax calculator on IRS.gov. The tax agency anticipates this calculator should be available by the end of February. Taxpayers are encouraged to use the calculator to adjust their withholding once it is released.

The IRS is also working on revising Form W-4. The revised Form W-4 and the revised calculator will reflect additional changes in the new law, such as:

  • Changes in available itemized deductions,
  • Increases in the child tax credit, the new dependent credit and repeal of dependent exemptions.

The calculator and new Form W-4 can be used by employees who wish to update their withholding in response to the new law or changes in their personal circumstances in 2018, and by workers starting a new job. Until a new Form W-4 is issued, employees and employers should continue to use the 2017 Form W-4.

In addition, the IRS announced it will help educate taxpayers about the new withholding guidelines and the calculator. The effort will be designed to help workers ensure that they aren’t having too much or too little withholding taken out of their pay so that when they file their tax returns they don’t get a surprise.

Some Expressing Concern

Two Democratic congressmen are questioning whether enough taxes will be taken out of the checks of employees under the IRS’s 2018 withholding tables. In letters sent to federal tax officials, Senator Ron Wyden (OR) and Representative Richard Neal (MA) expressed concern that the new withholding tables would “result in millions of taxpayers receiving larger after-tax paychecks this election year but ultimately owing federal income tax when they file in 2019.”

More Changes Next Year

For 2019, the IRS anticipates making further changes involving withholding. The IRS will work with the business and payroll community to encourage workers to file new Forms W-4 next year and share information on changes in the new tax law that impact withholding.

Acting IRS Commissioner David Kautter noted: “Payroll withholding can be complicated, and the needs of taxpayers vary based on their personal financial situation. In the weeks ahead, the IRS will be providing more information to help people understand and review these changes.”

If you have questions about whether you will have enough taxes taken out of your paycheck for 2018, consult with your Cornwell Jackson tax advisor.

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Posted on Jan 30, 2018

The Tax Cuts and Jobs Act (TCJA) provides businesses with more than just lower income tax rates and other provisions you may have heard about. Here’s an overview of some lesser-known, business-friendly changes under the new law, along with a few changes that could affect some businesses adversely.

Good News for New Business Tax Reforms

Many of the new law’s provisions will reduce the amount of taxes your business will owe, starting in 2018. Here are four examples that you might not be familiar with:

1. Faster Depreciation for Certain Real Property

For property placed in service after December 31, 2017, the separate definitions of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are eliminated. Under the TCJA, those items are now lumped together under the description of qualified improvement property, which can be depreciated straight-line over 15 years.

2. Faster Depreciation for New Farming Machinery and Equipment

The TCJA shortens the depreciation period from seven years to five years for new machinery and equipment that is placed in service after December 31, 2017, and used in a farming business (other than grain bins, cotton ginning assets, fences or other land improvements). In addition, the faster double-declining balance method can be used to calculate annual depreciation deductions for these types of machinery and equipment.

3. New Credit for Employer-Paid Family and Medical Leave

For wages paid tax years beginning after December 31, 2017, and before January 1, 2020, the TCJA allows employers to claim a general business tax credit equal to 12.5% of wages paid to qualifying employees while they’re on family or medical leave. There’s a hitch: You must pay the employee at least 50% of his or her normal wage while on leave.

Additionally, the credit rate increases by 0.25% for each percentage point that the wage rate paid while on leave exceeds 50% of the normal rate. However, the maximum credit rate is 25%. For example, if you pay an employee 60% of her normal wage rate while on leave, you could qualify for a general business credit equal to 15% (12.5% + (10 x 0.25%)), if all other conditions are met.

Important: To be eligible for the credit, the employer must provide all qualifying full-time employees at least two weeks of annual paid family and medical leave. Part-time employees must be given proportional leave time.

4. Accounting Change for Long-Term Construction Contracts

Under prior law, construction companies were generally required to use the less-favorable percentage-of-completion method (PCM) to calculate annual taxable income from long-term contracts for the construction or improvement of real property. However, construction companies with average annual gross receipts of $10 million or less in the preceding three tax years were exempt from this requirement.

The TCJA expands this exemption to cover contracts for the construction or improvement of real property if they:

  • Are expected to be completed within two years, and
  • Are performed by a taxpayer with average annual gross receipts of $25 million or less for the preceding three tax years.

This beneficial change is effective for contracts entered into in 2018 and beyond.

Bad News for New Business Tax Reforms

The tax breaks provided by the TCJA will cost the federal government a significant amount of revenue. As a result, the bill needed to raise revenue through other tax law changes. Here are two examples:

1. Less Favorable Treatment of Carried Interests

Historically, private equity funds and hedge funds have been structured as limited partnerships. Under prior law, carried interest arrangements allowed private equity fund and hedge fund managers to give up their right to receive current fees for their services and, instead, receive an interest in future profits from the private equity/hedge fund partnership. These arrangements are called “carried interests” because a private equity/hedge fund manager doesn’t pay anything for the partnership profits interest. To add to the appeal, the private equity/hedge fund manager isn’t taxed on the receipt of the carried interest (because it’s not considered to be a taxable event).

The tax planning objective of carried interest arrangements is to trade current fee income for partnership profits interest. Current fee income would be treated as high-taxed ordinary income and subject to federal employment taxes. But a partnership profits interest is expected to generate future long-term capital gains that will be taxed at lower rates.

For tax years beginning after 2017, carried interest arrangements face a major hurdle: The TCJA imposes a three-year holding period requirement in order for profits from certain partnership interests received in exchange for the performance of services to be treated as low-taxed, long-term capital gains.

2. Self-Created Intangible Assets No Longer Treated as Capital Assets

Effective for dispositions in 2018 and beyond, the TCJA stipulates that certain intangible assets can no longer be treated as favorably-taxed capital gain assets. This change affects:

  • Inventions,
  • Models and designs (whether or not patented), and
  • Secret formulas.

The change will cover the above types of intangibles that are 1) created by the taxpayer, or 2) acquired from the creating taxpayer with the new owner’s basis in the intangible determined by the creating taxpayer’s basis. The latter situation could happen if the creating taxpayer gifts an intangible to another individual or contributes an intangible to another taxable entity, such as a corporation or partnership.

Need Help?

If you’re feeling overwhelmed by the new tax law, you’re not alone. The TCJA is expected to have far-reaching effects on business taxpayers. Contact your Cornwell Jackson tax advisor to review the substance of the bill and how your company can manage the impact.

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Posted on Jan 30, 2018

Congress enacted the so-called “kiddie tax” rules to prevent parents and grandparents in high tax brackets from shifting income (especially from investments) to children in lower tax brackets. Congress recently revamped this tax under the Tax Cuts and Jobs Act (TCJA).

Trust and Estate Tax Rates for 2018

Use the following tax rates to compute the kiddie tax for 2018 to 2025:

2018 Ordinary Income Tax Rates for Trusts and Estates

10% tax bracket $0 – $2,550
24% tax bracket $2,551 – $9,150
35% tax bracket $9,151 – $12,500
37% tax bracket $12,501 and above

2018 Long Term Capital Gains and Qualified Dividends Tax Rates for Trusts and Estates

0% tax bracket $0 – $2,600
15% tax bracket $2,601 – $12,700
20% tax bracket $12,701 and above

What changed? The TCJA only revises the kiddie tax rate structure. The rest of the kiddie tax rules are the same as before. Here’s what you need to know about how this tax can come into play under the new law.

Important note: For simplicity, throughout this article we use the terms  “child” and “children” to apply to both children and young adults under age 24 who may be subject to the kiddie tax.

Kiddie Tax Basics

For 2018 through 2025, the TCJA revises the kiddie tax rules to tax a portion of a child’s net unearned income at the rates paid by trusts and estates. These rates can be as high as 37% for ordinary income or, for long-term capital gains and qualified dividends, as high as 20%. (See “Trust and Estate Tax Rates for 2018,” at right.)

The trust and estate tax rate structure is unfavorable because the rate brackets are compressed compared to the brackets for single individuals. In other words, the kiddie tax rules can override the lower rates that would otherwise apply to an affected child’s unearned income.

By comparison, under prior law, the kiddie tax rules taxed a portion of an affected child’s unearned income at the parent’s marginal tax rate if that rate was higher than the child’s rate. For 2017, the parent’s rate could be as high as 39.6% for ordinary income or, for long-term capital gains and dividends, as high as 20%.

Important note: For purposes of the kiddie tax rules, the term “unearned income” refers to income other than wages, salaries, professional fees and other amounts received as compensation for personal services rendered. Examples of unearned income include capital gains, dividends and interest. Earned income from a job or self-employment isn’t subject to the kiddie tax.

In calculating the federal income tax bill for a child who’s subject to the kiddie tax, the child is allowed to deduct his or her standard deduction. For 2018, if the TCJA hadn’t passed, the standard deduction for a child for whom a dependent exemption deduction would have been allowed under prior law is the greater of:

  • $1,050, or
  • Earned income plus $350, not to exceed $12,000.

For 2018, the kiddie tax potentially affects children who don’t provide over half of their own support in 2018 and who live with their parents for more than half of the year.

The Age Factor

The kiddie tax can potentially apply until the year that a child turns age 24. More specifically, the kiddie tax applies when all four of the following requirements are met for the tax year in question:

1. The child doesn’t file a joint return for the year.

2. One or both of the child’s parents are alive at the end of the year.

3. The child’s net unearned income for the year exceeds the threshold for that year, and the child has positive taxable income after subtracting any applicable deductions, such as the standard deduction. The unearned income threshold for 2018 is $2,100. If the unearned income threshold isn’t exceeded, the kiddie tax doesn’t apply. If the threshold is exceeded, only unearned income in excess of the threshold is hit with the kiddie tax.

4. The child falls under one of the following age-related rules:

Rule 1. The child is 17 or younger at year end.

Rule 2. The child is 18 at year end and doesn’t have earned income that exceeds half of his or her support. (Support doesn’t include amounts received as scholarships.)

Rule 3. The child is age 19 to 23 at year end and 1) is a student, and 2) doesn’t have earned income that exceeds half of his or her support. A child is considered to be a student if he or she attends school full-time for at least five months during the year. (Again, support doesn’t include amounts received as scholarships.)

Kiddie Tax in the Real World

Here are several examples to help you understand who could be hit with the kiddie tax after the changes made by the TCJA:

Adam will be 17 on December 31, 2018. So, he falls under Rule 1 (above). For 2018, he will be subject to the kiddie tax if the other three requirements are also met.

Beth will be 19 on December 31, 2018. She doesn’t have any earned income for the year, and she’s a full-time student for the entire year. She falls under Rule 3. For 2018, she will be subject to the kiddie tax if the other three requirements are also met.

Claire is 19 on December 31, 2018. She’s not a student for 2018, so Claire is exempt from the kiddie tax for 2018.

Dennis will be 21 on December 31, 2018, and he graduates from college in May 2018. He qualifies as a full-time student, because he’s enrolled for the first five months of the year. Dennis couldn’t find a job after graduation, so he doesn’t provide over half of his own support for the year. Therefore, he’s subject to the kiddie tax for 2018 under Rule 3, if the other three requirements are also met.

Ellie will be 24 on December 31, 2018. Even though Ellie is still enrolled in college, she’s exempt from the kiddie tax for 2018 and all subsequent years, because none of the age-related rules apply to her.

The Mechanics

There are four steps when calculating the federal income tax bill under the kiddie tax rules.

1. Add up the child’s net earned income and net unearned income.

2. Subtract the child’s standard deduction to arrive at taxable income.

3. Compute tax for the portion of taxable income that consists of net earned income using the regular rates for a single taxpayer. (See “Computing Tax on a Child’s Earned Income,” below.)

4. The kiddie tax will be assessed on the portion of taxable income that consists of net unearned income and that exceeds the unearned income threshold. (That threshold is $2,100 for 2018.) Compute kiddie tax for this amount using the rates that apply to trusts and estates. (See “Trust and Estate Tax Rates for 2018,” above.)

To illustrate how to calculate a child’s federal tax bill, let’s look at one of the previous examples.  Adam (age 17) has $2,000 of earned income from delivering newspapers and $7,000 of unearned ordinary income. His standard deduction is $2,350 ($2,000 of earned income + $350).

Adam’s taxable income is $6,650 ($2,000 + $7,000 − $2,350). The entire $6,650 is treated as unearned income because his $2,350 standard deduction offsets all of his earned income plus the first $350 of his unearned income.

The first $2,100 (the amount up to the kiddie tax unearned income threshold) is taxed at 10% under the regular rates for single taxpayers, resulting in $210 of tax.

The remaining $4,550 of taxable income ($6,650 – $2,100) falls under the kiddie tax rules and is, therefore, taxed at the rates for trusts and estates as follows:

    • The first $2,550 is taxed at 10%, resulting in $255 of tax.
  • The remaining $2,000 ($4,550 – $2,550) is taxed at 24%, resulting in $480 of tax.

So Adam’s tax bill is $945 ($210 + $255 + $480).

Important note: Without the kiddie tax, all of Adam’s $6,650 of taxable income would have been taxed at 10% under the regular rates for single taxpayers, resulting in only $665 of tax.

Contact Us

The kiddie tax is somewhat easier to calculate under the TCJA. But it can still be confusing. Depending on your circumstances, your children or grandchildren may be hit even harder by the kiddie tax under the new rules. If your child or grandchild has significant unearned income, contact your Cornwell Jackson tax advisor to identify strategies that will help reduce the kiddie tax for 2018 and beyond.

Computing Tax on a Child’s Earned Income

2018 Ordinary Income Tax Rates for Single Taxpayers

10% tax bracket $0 – $9,525
12% tax bracket $9,526 – $38,700
22% tax bracket $38,701 – $82,500
24% tax bracket $82,501 – $157,500
32% tax bracket $157,501 – $200,000
35% tax bracket $200,001 – $500,000
37% tax bracket $500,001 and above

2018 Long Term Capital Gains and Qualified Dividends Tax Rates for Single Taxpayers

0% tax bracket $0 – $38,599
15% tax bracket $38,600 – $425,800
20% tax bracket $425,801 and above

Standard Deductions

For dependents with only unearned income, the standard deduction is $1,050.

For dependents with earned income, the standard deduction is the greater of: 1) $1,050, or 2) earned income plus $350, not to exceed $12,000.

For nondependent single taxpayers, the standard deduction is $12,000.

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Posted on Jan 29, 2018

Will pass-through entities still be popular under the Tax Cuts and Jobs Act (TCJA)? The tax rules for pass-through entities, including S corporations, limited liability companies (LLCs), partnerships and sole proprietorships, have generally become more beneficial — but also more confusing under the new law.

So which type of entity is best for your business? The answers depend on several factors, which are explained in this article.

New Deduction for Pass-Through Business Income

Under prior law, net taxable income from so-called pass-through business entities (meaning sole proprietorships, partnerships, LLCs that are treated as sole proprietorships or as partnerships for tax purposes, and S corporations) was simply passed through to owners and taxed at the owner level at standard rates.

For tax years beginning after 2017, the TCJA establishes a new deduction based on a noncorporate owner’s qualified business income (QBI). This break is available to eligible individuals, estates and trusts. The deduction generally equals 20% of QBI, subject to restrictions that can apply at higher income levels. The QBI deduction isn’t allowed in calculating the noncorporate owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it is treated the same as an allowable itemized deduction.

This break is subject to the following restrictions:

W-2 Wage Limitation. The QBI deduction generally can’t exceed the greater of the noncorporate owner’s share of: 1) 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or 2) the sum of 25% of W-2 wages plus 2.5% of the cost of qualified property. Qualified property means depreciable tangible property (including real estate) owned by a qualified business as of the tax year end and used by the business at any point during the tax year for the production of qualified business income. In addition, the QBI deduction can’t exceed 20% of the taxpayer’s taxable income exclusive of net long term capital gains and qualified dividends.

Under an exception, the W-2 wage limitation doesn’t apply until an individual owner’s taxable income exceeds $157,500, or $315,000 for a married joint filer. Above those income levels, the W-2 wage limitation is phased in over a $50,000 phase-in range or a $100,000 range for married joint filers.

Service Business Limitation. The QBI deduction is generally not available for income from specified service businesses, such as most professional practices. Under an exception, the service business limitation does apply until an individual owner’s taxable income exceeds $157,500, or $315,000 for a married joint filer. Above those income levels, the W-2 wage limitation is phased in over a $50,000 phase-in range or a $100,000 range for married joint filers.

Important note: The W-2 wage limitation and the service business limitation don’t apply as long as taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.

New Rule on Distributions after Converting from S to C Corp Status

In general, distributions by a C corporation to its shareholders are treated as taxable dividends to the extent of the corporation’s earnings and profits (E&P). However, a special “posttermination transition period” rule provides relief to shareholders of a corporation that changes from S corporation status to C corporation status.

During this period, any distribution of money by the corporation to its shareholders is first applied to reduce the basis of the shareholder’s stock to the extent the distribution doesn’t exceed the accumulated adjustments account (AAA) balance that was generated during the company’s life as an S corporation. Such distributions of AAA amounts are tax-free to recipient shareholders.

The TCJA modifies the posttermination transition period relief rule for C corporations that:

  • Operated as S corporations before December 22, 2017,
  • Revoke their S corporation status during the two-year period beginning on that date, and
  • Have the same owners on December 22, 2017, and the revocation date.

Distributions from such corporations are treated as paid pro-rata from AAA and E&P. This can result in more of a distribution being treated as a taxable dividend and less being treated as a tax-free distribution of AAA. This change is intended to discourage the tax planning strategy of converting S corporations to C corporation status in order to take advantage of the new flat 21% federal income tax rate on C corporation income.

New Rule for ESBT Beneficiaries

As a general rule, trusts cannot be S corporation shareholders. However, an exception allows electing small business trusts (ESBTs) to be S corporation shareholders. Under prior law, an ESBT couldn’t have a current beneficiary who was a nonresident alien individual.

Thanks to a change included in the new law, such individuals can now be ESBT beneficiaries. This change is effective for 2018 and beyond.

“Technical Termination Rule” Repealed for Partnerships and LLCs

Under prior law, a partnership (or an LLC that’s treated as a partnership for tax purposes) is considered to terminate for tax purposes if, within a 12-month period, there’s a sale or exchange of 50% or more of the entity’s capital and profits interests. This so-called “technical termination rule” is generally unfavorable.

Why? First, the rule can require the filing of two short-period tax returns for the tax year in which the technical termination occurs. It also restarts depreciation periods for the entity’s depreciable assets. In addition, it terminates favorable tax elections that were made by the entity.

The TCJA repeals the technical termination rule for tax years beginning in 2018 and beyond.

Substantial Built-in Loss Rule Expanded

In general, a partnership (or an LLC that’s treated as a partnership for tax purposes) must reduce the tax basis of its assets upon the transfer of an ownership interest if the entity has a substantial built-in loss. (A built-in loss happens when the fair market value of the assets is less than their tax basis.)

This rule is unfavorable, because the basis reduction can result in lower depreciation and amortization deductions. Under prior law, a substantial built-in loss exists if the entity’s adjusted basis in its assets exceeds their fair market value by more than $250,000.

Under the TCJA, a substantial built-in loss also exists if, immediately after the transfer of an interest, the recipient of the transferred interest would be allocated a net loss in excess of $250,000 upon a hypothetical taxable sale of all of the entity’s assets for proceeds equal to fair market value. This unfavorable expansion of the built-in loss rule applies to ownership interest transfers in 2018 and beyond.

Loss Limitation Reductions for Charitable Donations and Foreign Taxes

Under a loss limitation rule, a partner (or an LLC member that’s treated as a partner for tax purposes) can’t deduct losses in excess of the tax basis in the partnership or LLC interest.

The new law changes the rules for charitable gifts and foreign taxes. For tax years beginning after December 31, 2017, an owner’s share of a partnership’s (or LLC’s) deductible charitable donations and paid or accrued foreign taxes reduces the owner’s basis in the interest for purposes of applying the loss limitation rule. This change can reduce the amount of losses that can be currently deducted.

However, for charitable donations of appreciated property (where the fair market value is higher than the tax basis), the owner’s basis isn’t reduced by the excess amount for purposes of applying the loss limitation rule. In other words, the owner’s tax basis in the interest is reduced only by the owner’s share of the basis of the donated appreciated property for purposes of applying the loss limitation rule.

Get Professional Help

As you can see, the tax landscape for various business entities has changed considerably under the new tax law. The type of entity that’s best for you depends on the industry you’re in, your income and many other factors. Consult with your tax advisor and attorney to determine the most tax-wise way to proceed.

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Posted on Jan 26, 2018

As you’ve heard by now, the Tax Cuts and Jobs Act (TCJA) includes a number of changes that will affect individual taxpayers in 2018 and beyond. Significant attention has been given to the reduced tax rates for most individuals and the new limit on deducting state and local taxes. But there is more to the story. Here’s a summary of some of the lesser-known provisions in the new law.

Repeal of the ACA Penalty for Individuals

The Affordable Care Act (ACA) requires individuals to pay a penalty if they aren’t covered by a health plan that provides at least minimum essential coverage. That penalty is also known as the “shared responsibility payment.” Unless an exception applies, the penalty is imposed for any month that an individual doesn’t have minimum essential coverage in effect.

The new tax law permanently repeals the ACA penalty for individuals for months beginning in 2019. But the penalty is still in force for all of 2018. The new tax law doesn’t change the ACA mandate for employers, however.

Revamped “Kiddie Tax”

Under prior law (in effect before the TCJA), unearned income of children above an annual threshold was taxed at their parents’ rates if those rates were higher. This so-called “kiddie tax” is imposed on individuals up to age 24 if they’re full-time students. For 2017, the unearned income threshold was $2,100. Unearned income beneath the threshold was taxed at the children’s rates. Earned income was also taxed at the children’s rates.

For 2018 through 2025, the TCJA stipulates that a child’s earned income is taxed at the standard rates for single taxpayers while unearned income is taxed using the rates and brackets that apply to trusts and estates. This change will make the kiddie tax much easier to calculate.

Restriction on Casualty and Theft Loss Deductions

For 2018 through 2025, the TCJA eliminates deductions for personal casualty and theft losses. However, it provides an exception for losses incurred in federally-declared disasters.

Another exception for losses, which aren’t due to federally-declared disasters, allows deductions for personal casualty and theft losses if the taxpayer has personal casualty gains. That happens when insurance proceeds exceed the basis of the damaged, destroyed or stolen property. In this situation, personal casualty and theft losses are allowed up to the amount of the taxpayer’s personal casualty gains.

Itemized Deduction Phase-Out Rule Eliminated

Under prior law, individuals with high levels of income were subject to a phase-out rule that could eliminate up to 80% of the most common itemized deductions, including the tax breaks for mortgage interest, property taxes and charitable donations.

For 2018 through 2025, the TCJA eliminates the itemized deduction phase-out rule. But some of the itemized deduction rules are changed (and limited) by other provisions in the new law. For example, the TCJA limits the deduction for state and local income and property taxes to a combined total of $10,000 ($5,000 for married people who file separately).

Changes to Charitable Deduction Rules

The TCJA also increases the charitable deduction limit for some gifts. Under prior law, the deduction for cash contributions to public charities and certain private foundations was limited to 50% of your adjusted gross income (AGI).

For 2018 and beyond, the new law increases the deduction limit to 60% of AGI. Deductions that are disallowed by the 60% rule can generally be carried forward for five years.

But not all changes to the charitable deduction rules are taxpayer friendly. The TCJA also eliminates deductions for donations to obtain seating rights at college athletic events, for 2018 and beyond.

Under prior law, you could treat 80% of such payments as a charitable donation if:

  • The payment was to or for the benefit of a college, and
  • The payment would be treated as a deductible charitable donation except for the fact that the payment entitled you to receive (directly or indirectly) the right to buy tickets to athletic events of the college.

Restrictions on Deducting Gambling-Related Expenses

For 2018 through 2025, the TCJA limits deductions for a year’s out-of-pocket gambling-related expenses and gambling losses (combined) to that year’s gambling winnings.

Under prior law, a professional gambler could deduct out-of-pocket gambling-related expenses as a business expense. Only deductions for actual gambling losses were limited to gambling winnings.

Sweeping Changes

The TCJA is the biggest piece of tax reform legislation that’s been enacted since the landmark Tax Reform Act of 1986. It’s expected to have a major impact on individual taxpayers in 2018. Want to learn more? Consult with your tax advisor; it’s never too soon to plan for this year and beyond.

New Law Eliminates Miscellaneous Itemized Deductions

The new tax law eliminates most itemized deductions, starting in 2018. Under prior law, the following deductions were deductible if they exceeded 2% of your adjusted gross income. For 2018 through 2025, this change eliminates deductions for a wide variety of expenses, such as:

Tax-Related Expenses

  • Tax preparation expenses,
  • Tax advice fees, and
  • Other fees and expenses incurred in connection with the determination, collection, or refund of any tax.

Expenses Related to Taxable Investments

  • Investment advisory fees and expenses,
  • Clerical help and office rent for office used to manage investments,
  • Expenses for home office used to manage investments,
  • Depreciation of computer and electronics used to manage investments,
  • Fees to collect interest and dividends,
  • Your share of investment expenses passed through to you from partnership, limited liability company or S corporation,
  • Safe deposit box rental fee for box used to store investment items and documents, and
  • Other investment-related fees and expenses.

Expenses Related to Production of Taxable Income

  • Hobby expenses (limited to hobby income),
  • IRA trustee/custodian fees if separately billed to you and paid by you as the account owner,
  • Loss on liquidation of traditional IRAs or Roth IRAs,
  • Bad debt loss for uncollectible loan made to employer to preserve your job, and
  • Damages paid to former employer for breach of employment contract.

Unreimbursed Employee Business Expenses

  • Education expenses related to your work as an employee,
  • Travel expenses related to your work as an employee,
  • Passport fees for business trips,
  • Professional society dues,
  • Professional license fees,
  • Subscriptions to professional journals and trade publications,
  • Home office used regularly and exclusively in your work as an employee and for the convenience of your employer,
  • Depreciation of a computer that your employer requires you to use,
  • Tools and supplies used in your work as an employee,
  • Union dues and expenses,
  • Work clothes and uniforms if required for your work and not suitable for everyday use,
  • Legal fees related to your work as an employee, and
  • Job search expenses to seek new employment in your current profession or occupation.

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Posted on Jan 15, 2018

The most immediate concrete change the Tax Cuts and Jobs Act (TCJA) will bring about for employers is new payroll tax withholding rates. Here’s the latest word from the IRS: “We anticipate issuing the initial withholding guidance in January reflecting the new legislation, which would allow taxpayers to begin seeing the benefits of the change as early as February. The IRS will be working closely with the nation’s payroll and tax professional community during this process.”

Under the new law, the tax rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%. Under prior law, the tax rates were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%

Sexual Harassment Subject to Nondisclosure Agreement

Under the new law, effective for amounts  paid or incurred after December 22, 2017, no tax deduction is allowed for settlements, payouts, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement.

In general, a taxpayer generally is allowed a deduction for ordinary and necessary expenses paid or incurred in carrying on a trade or business. However, among other exceptions, there’s no deduction for: illegal bribes, illegal kickbacks or other illegal payments; certain lobbying and political expenses; fines or similar penalties paid to a government for the violation of any law; and two-thirds of treble damage payments under the antitrust laws.

Family and Medical Leave

Another change involves tax incentives to encourage employers to pay employees — though not necessarily their full salaries — when they’re absent due to their own sickness or that of a family member. (Employers in several areas are already required to do so by  their own state laws.)

To receive a general business tax credit in 2018 and 2019, employers must grant full-time employees a minimum of two weeks of annual family and medical leave during which they receive at least half of their normal wages. Ordinary paid leave that employees are already entitled to, such as vacation or personal leave, or any form of leave already required by state and local laws, doesn’t qualify for the tax credit.

Employees whose paid family and medical leave is covered by this provision must have worked for the employer for a year or more, and not had pay in the preceding year exceeding 60% of the highly compensated employee threshold, set at $120,000 for 2018 (which works out to $72,000).

The minimum credit equals 12.5% of the eligible employee’s wages paid during that leave, up to a maximum of 25%. Within that range, the amount of the credit rises as employees are paid more than the minimum of half their normal compensation during their leave period. Employers that qualify may claim the tax credit for a maximum of 12 days per year of family and medical leave.

Save the Savings?

While most authors of the TCJA are probably hoping employees who will see a higher paycheck will use the difference to stimulate the economy by spending it immediately, there’s another scenario employers might consider: Employers that are concerned their employees aren’t saving enough for retirement could suggest that some might elect to “bank” their tax cut “raise” in the form of an increased 401(k) contribution.

One tool for motivating employees to save more for the future is to provide some illustrations of the long-term impact of a higher savings rate. For example, a $50 increase in 401(k) savings deducted from a biweekly paycheck would accumulate around $50,000 in greater savings over a 20-year period, assuming a 6% annual growth rate.

It’s also noteworthy that early versions of the TCJA would have drastically reduced employee opportunities to save for retirement in a 401(k) using pre-tax dollars. One proposal that would’ve hit many taxpayers hard would have limited contributions by requiring them to combine participation in multiple plans, including mandatory employee contributions to defined benefit pensions.

Those ideas were dropped.

401(k) Loan Rule Change

The TCJA did, however, make some technical changes in the retirement plan arena. Most notable is that the new law gives a break to plan participants that have outstanding 401(k) loan  balances when they leave their employers. Under current law, a participant with such a loan who fails to make timely payments due to his or her separation from the employer is deemed to have received a distribution in the amount of that outstanding balance, triggering adverse tax consequences. The participant, however, is permitted to roll that amount — assuming he or she has sufficient funds available — into an IRA without tax penalty if he or she does so within 60 days.

Under the new law, former employees in that situation have until the due date of their tax returns to move funds equal to the outstanding loan balances into IRAs without penalty. The same opportunity would apply if they were unable to repay their loans due to their plans’ termination.

Taxing Employee Awards

Some TCJA provisions affecting employee benefits seek to recoup tax relief granted in other parts of the law. For example, the TCJA tightens up the definition of employee achievement awards eligible for tax deductions on the part of employers, and exclusion from income taxation for the employees.

“Tangible” achievement awards still qualify, but the following award categories are no longer considered tangible: cash and cash equivalents, gift cards, gift coupons, gift certificates, vacations, meals, lodging, tickets to theater or sporting events, stocks and bonds.

The Inflation Effect and Other Changes

Another section of the law alters the inflation index used to periodically adjust the limits on contributions to health flexible spending accounts, health savings accounts, and the threshold for the value of health benefits subject to the 40% “Cadillac tax” (currently scheduled to take effect in 2020).

Instead of using the regular consumer price index (also known as the CPI-U), annual limit adjustments will be set using the “chained CPI-U.” That “chained” version tends to rise at a slower rate than the unchained index. The same formula change was made applicable to IRA contribution limits.

Finally, here are three other changes affecting employee benefits:

  • Employees’ ability to exclude the value of employer-provided reimbursements for moving expenses has been taken away. (An exception is made for active-duty military personnel, however.)
  • Employers can no longer deduct the cost of qualified transportation fringe benefits granted to employees, such as reimbursement for commuting expenses. And, similarly:
  • Employers can no longer deduct payments to employees who commute to work by bicycle.

When you add it all up, many employers and employees are likely to be happy with the overall effects of the TCJA. The task of digesting all the changes might cause a few headaches in the short run, however.

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Posted on Jan 12, 2018

Most U.S. businesses will receive a big tax cut starting with their 2018 tax years, thanks to the new law that was enacted on December 22. But some industries (such as retail, hospitality and banking) generally expect to reap more benefits than others (such as certain professional practices).

The provisions in the law — known as the Tax Cuts and Jobs Act (TCJA) — are generally effective for tax years beginning after December 31, 2017 (except where noted otherwise). And, unlike the provisions for individual taxpayers, many of these provisions are permanent.

Here’s an overview of some of the changes that affect businesses.

Tax Breaks for Pass-Through Businesses

Under prior law, net taxable income from pass-through business entities — including sole proprietorships, S corporations, partnerships and limited liability companies (LLCs) that are treated as sole proprietorships or as partnerships for tax purposes — was simply passed through to owners and taxed at the owners’ rates.

For tax years beginning after December 31, 2017, the new tax law establishes a new deduction based on a noncorporate owner’s share of a pass-through entity’s qualified business income (QBI). This break is available to eligible individuals, estates and trusts. The deduction generally equals 20% of QBI, subject to restrictions that can apply at higher income levels.

The QBI deduction isn’t allowed in calculating the noncorporate owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction.

Limitation on W-2 Wages

For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the noncorporate owner’s share of:

50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.
“Qualified property” means depreciable tangible property (including real estate) owned by a qualified business as of the tax year end and used by the business at any point during the tax year for the production of QBI.

Under an exception, the W-2 wage limitation doesn’t apply until an individual owner’s taxable income exceeds $157,500 or $315,000 for a married individual who files jointly. Above those income levels, the W-2 wage limitation is phased in over a $50,000 range or over a $100,000 range for married individuals who file jointly.

Limitation on Service Business Income

The QBI deduction generally isn’t available for income from specified service businesses, such as most professional practices. Under an exception, however, the service business limitation does apply until an individual owner’s taxable income exceeds $157,500 or $315,000 for a married individual who files jointly. Above those income levels, the service business limitation is phased in over a $50,000 range or over a $100,000 range for married joint-filers.

Important note: The W-2 wage limitation and the service business limitation don’t apply as long as taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.

Corporate Tax Cut

Under prior law, C corporations paid graduated federal income tax rates of 15%, 25%, 34% and 35% on taxable income over $10 million. Personal service corporations (PSCs) paid a flat 35% rate.

For tax years beginning after December 31, 2017, the TCJA establishes a flat 21% corporate rate. That reduced rate also applies to PSCs.

Elimination of Corporate Alternative Minimum Tax (AMT)

Under prior law, the corporate AMT was imposed at a 20% rate. However, corporations with average annual gross receipts of less than $7.5 million for the preceding three tax years were exempt. For tax years beginning after December 31, 2017, the TCJA repeals the corporate AMT.

Capital Asset Expensing and Depreciation Provisions

In general, businesses will be able to deduct more for capital expenditures in the first year they’re placed in service, and in some cases depreciate any remaining amounts over shorter time periods. Two key tax breaks allow for accelerated expensing:

1. Expanded Section 179 deductions.  Under the TCJA, for qualifying property placed in service in tax years beginning after December 31, 2017, the maximum Sec. 179 deduction increases to $1 million (up from $510,000 for tax years beginning in 2017) and the Sec. 179 deduction phaseout threshold increases to $2.5 million (up from $2.03 million for tax years beginning in 2017).

The TCJA also expands the definition of eligible property to include certain depreciable tangible personal property used predominantly to furnish lodging. The definition of qualified real property eligible for the Sec. 179 deduction is also expanded to include qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property.

2. More generous first-year bonus depreciation. Under the TCJA, for qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage is increased to 100% (up from 50% in 2017). The 100% deduction is allowed for both newand used qualifying property.

In later years, the first-year bonus depreciation deduction is scheduled to be reduced as follows:

  • 80% for property placed in service in calendar year 2023,
  • 60% for property placed in service in calendar year 2024,
  • 40% for property placed in service in calendar year 2025, and
  • 20% for property placed in service in calendar year 2026.

Important note: For certain property with longer production periods, the preceding cutbacks are delayed by one year. For example, the 80% deduction rate will apply to property with long production periods that are placed in service in 2024.

Deductions for Passenger Vehicles Used for Business

For new or used passenger vehicles that are placed in service after December 31, 2017, and used over 50% for business, the maximum annual depreciation deductions allowed under the TCJA are:

  • $10,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for the fourth and subsequent years until the vehicle is fully depreciated.

For 2017, the limits under the prior law for passenger cars are:

  • $11,160 for the first year for a new car or $3,160 for a used car,
  • $5,100 for the second year,
  • $3,050 for the third year, and
  • $1,875 for the fourth and subsequent years.

Slightly higher limits apply to light trucks and light vans.

Limits on Business Interest Deductions

Prior law generally allowed full deductions for interest paid or accrued by a business (subject to some restrictions and exceptions). Under the TCJA, affected corporate and noncorporate businesses generally can’t deduct interest expense in excess of 30% of “adjusted taxable income,” starting with tax years beginning after December 31, 2017.

For S corporations, partnerships, and LLCs that are treated as partnerships for tax purposes, this limit applies at the entity level, rather than at the owner level.

For tax years beginning in 2018 through 2021, you must calculate adjusted taxable income by adding back allowable deductions for depreciation, amortization and depletion. After 2021, these amounts aren’t added back when calculating adjusted taxable income.

Business interest expense that’s disallowed under this limitation is treated as business interest arising in the following taxable year. Amounts that can’t be deducted in the current year can generally be carried forward indefinitely.

Important note: Some taxpayers are exempt from the interest deduction limitation, including:

  • Taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the three previous tax years,
  • Real property businesses that elect to use a slower depreciation method for their real property, and
  • Farming businesses that elect to use a slower depreciation method for farming property with a normal depreciation period of 10 years or longer.

Another exemption applies to interest expense from dealer floor plan financing. For example, this exemption applies to dealers that finance purchases or leases of motor vehicles, boats or farm machinery.

Deductions for Business Entertainment and Certain Employee Fringe Benefits

Under prior law, taxpayers could generally deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee. Various other employer-provided fringe benefits were also deductible by the employer and tax-free to the recipient employee.

Under the TCJA, deductions for business-related entertainment expenses are completely disallowed for amounts paid or incurred after December 31, 2017. Though meals purchased while traveling on business are still 50% deductible, the 50% disallowance rule also now applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises won’t be deductible.

In addition, the TCJA disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety. And the new law eliminates deductions by employers for the cost of providing qualified employee transportation fringe benefits (for example, parking allowances, mass transit passes, and van pooling). However, those benefits are still tax-free to recipient employees.

Foreign Tax Provisions

The TCJA includes many changes that will affect business taxpayers with foreign operations. In conjunction with the new 21% corporate tax rate, these changes are intended to encourage multinational companies to conduct more operations in the U.S., with the resulting increased investments and job creation in this country.

More Provisions

Other noteworthy provisions of the TCJA that might affect your business include:

Cash method accounting. The new law liberalizes the eligibility requirements for electing the more-flexible cash method of accounting, making that method available to many more medium-size businesses. Also, eligible businesses are excused from the chore of doing inventory accounting for tax purposes.

Net operating losses (NOLs). For NOLs that arise in tax years ending after December 31, 2017, the maximum amount of taxable income for a year that can be offset with NOL deductions is generally reduced from 100% to 80%. In addition, NOLs incurred in those years can no longer be carried back to an earlier tax year (except for certain farming losses). Affected NOLs can be carried forward indefinitely.

Excess business losses. A new limitation applies to deductions for “excess business losses” incurred by noncorporate taxpayers. Losses that are disallowed under this rule are carried forward to later tax years, and then they can be deducted under the rules that apply to NOLs. This new limitation applies after applying the passive activity loss rules. However, it only applies to an individual taxpayer if the excess business loss exceeds the applicable threshold.

Like-kind exchanges. The Section 1031 rules that allow tax-deferred exchanges of appreciated like-kind property are allowed for only real estate for exchanges completed after December 31, 2017. Under the TCJA, like-kind exchanges of personal property assets aren’t permitted. However, prior law applies if one leg of an exchange was completed as of December 31, 2017, but another leg of the exchange remained open on that date.

Officers’ compensation. Deductions for compensation paid to principal executive officers generally can’t exceed $1 million a year. A transition rule applies to amounts paid under binding contracts that were in effect as of November 2, 2017.

R&D expenses. Under prior law, eligible research and development expenses can be deducted in the current period. Starting with tax years beginning after December 31, 2021, specified R&D expenses must be capitalized and amortized over five years, or 15 years if the R&D is conducted outside the U.S.

Rehab credits. For amounts paid or incurred after December 31, 2017, the TCJA repeals the 10% rehabilitation credit for expenditures on pre-1936 buildings. The new law continues the 20% credit for qualified expenditures on certified historic structures, but the credit must be spread over five years. Certain transition rules apply.

Domestic production activities deduction (DPAD). The DPAD, which could be up to 9% of eligible income, is eliminated for tax years beginning after December 31, 2017.

Lobbying expenses. The deduction for local lobbying expenses is eliminated.

Contact Your Tax Pro

The TCJA is almost 500 pages long and covers a wide range of topics. We’ve summarized only the highlights here. For more detailed information, contact your tax advisor for insight into how the changes will impact your specific business.

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Posted on Jan 9, 2018

As you’ve heard by now, the Tax Cuts and Jobs Act (TCJA) includes a number of changes that will affect individual taxpayers in 2018 and beyond. Significant attention has been given to the reduced tax rates for most individuals and the new limit on deducting state and local taxes. But there is more to the story. Here’s a summary of some of the lesser-known provisions in the new law.

Repeal of the ACA Penalty for Individuals

The Affordable Care Act (ACA) requires individuals to pay a penalty if they aren’t covered by a health plan that provides at least minimum essential coverage. That penalty is also known as the “shared responsibility payment.” Unless an exception applies, the penalty is imposed for any month that an individual doesn’t have minimum essential coverage in effect.

The new tax law permanently repeals the ACA penalty for individuals for months beginning in 2019. But the penalty is still in force for all of 2018. The new tax law doesn’t change the ACA mandate for employers, however.

Revamped “Kiddie Tax”

Under prior law (in effect before the TCJA), unearned income of children above an annual threshold was taxed at their parents’ rates if those rates were higher. This so-called “kiddie tax” is imposed on individuals up to age 24 if they’re full-time students. For 2017, the unearned income threshold was $2,100. Unearned income beneath the threshold was taxed at the children’s rates. Earned income was also taxed at the children’s rates.

For 2018 through 2025, the TCJA stipulates that a child’s earned income is taxed at the standard rates for single taxpayers while unearned income is taxed using the rates and brackets that apply to trusts and estates. This change will make the kiddie tax much easier to calculate.

Restriction on Casualty and Theft Loss Deductions

For 2018 through 2025, the TCJA eliminates deductions for personal casualty and theft losses. However, it provides an exception for losses incurred in federally-declared disasters.

Another exception for losses, which aren’t due to federally-declared disasters, allows deductions for personal casualty and theft losses if the taxpayer has personal casualty gains. That happens when insurance proceeds exceed the basis of the damaged, destroyed or stolen property. In this situation, personal casualty and theft losses are allowed up to the amount of the taxpayer’s personal casualty gains.

Itemized Deduction Phase-Out Rule Eliminated

Under prior law, individuals with high levels of income were subject to a phase-out rule that could eliminate up to 80% of the most common itemized deductions, including the tax breaks for mortgage interest, property taxes and charitable donations.

For 2018 through 2025, the TCJA eliminates the itemized deduction phase-out rule. But some of the itemized deduction rules are changed (and limited) by other provisions in the new law. For example, the TCJA limits the deduction for state and local income and property taxes to a combined total of $10,000 ($5,000 for married people who file separately).

Changes to Charitable Deduction Rules

The TCJA also increases the charitable deduction limit for some gifts. Under prior law, the deduction for cash contributions to public charities and certain private foundations was limited to 50% of your adjusted gross income (AGI).

For 2018 and beyond, the new law increases the deduction limit to 60% of AGI. Deductions that are disallowed by the 60% rule can generally be carried forward for five years.

But not all changes to the charitable deduction rules are taxpayer friendly. The TCJA also eliminates deductions for donations to obtain seating rights at college athletic events, for 2018 and beyond.

Under prior law, you could treat 80% of such payments as a charitable donation if:

    • The payment was to or for the benefit of a college, and
    • The payment would be treated as a deductible charitable donation except for the fact that the payment entitled you to receive (directly or indirectly) the right to buy tickets to athletic events of the college.

Restrictions on Deducting Gambling-Related Expenses

For 2018 through 2025, the TCJA limits deductions for a year’s out-of-pocket gambling-related expenses and gambling losses (combined) to that year’s gambling winnings.

Under prior law, a professional gambler could deduct out-of-pocket gambling-related expenses as a business expense. Only deductions for actual gambling losses were limited to gambling winnings.

Sweeping Changes

The TCJA is the biggest piece of tax reform legislation that’s been enacted since the landmark Tax Reform Act of 1986. It’s expected to have a major impact on individual taxpayers in 2018. Want to learn more? Consult with your tax advisor; it’s never too soon to plan for this year and beyond.

New Law Eliminates Miscellaneous Itemized Deductions

The new tax law eliminates most itemized deductions, starting in 2018. Under prior law, the following deductions were deductible if they exceeded 2% of your adjusted gross income. For 2018 through 2025, this change eliminates deductions for a wide variety of expenses, such as:

Tax-Related Expenses

  • Tax preparation expenses,
  • Tax advice fees, and
  • Other fees and expenses incurred in connection with the determination, collection, or refund of any tax.

Expenses Related to Taxable Investments

  • Investment advisory fees and expenses,
  • Clerical help and office rent for office used to manage investments,
  • Expenses for home office used to manage investments,
  • Depreciation of computer and electronics used to manage investments,
  • Fees to collect interest and dividends,
  • Your share of investment expenses passed through to you from partnership, limited liability company or S corporation,
  • Safe deposit box rental fee for box used to store investment items and documents, and
  • Other investment-related fees and expenses.

Expenses Related to Production of Taxable Income

  • Hobby expenses (limited to hobby income),
  • IRA trustee/custodian fees if separately billed to you and paid by you as the account owner,
  • Loss on liquidation of traditional IRAs or Roth IRAs,
  • Bad debt loss for uncollectible loan made to employer to preserve your job, and
  • Damages paid to former employer for breach of employment contract.

Unreimbursed Employee Business Expenses

  • Education expenses related to your work as an employee,
  • Travel expenses related to your work as an employee,
  • Passport fees for business trips,
  • Professional society dues,
  • Professional license fees,
  • Subscriptions to professional journals and trade publications,
  • Home office used regularly and exclusively in your work as an employee and for the convenience of your employer,
  • Depreciation of a computer that your employer requires you to use,
  • Tools and supplies used in your work as an employee,
  • Union dues and expenses,
  • Work clothes and uniforms if required for your work and not suitable for everyday use,
  • Legal fees related to your work as an employee, and
  • Job search expenses to seek new employment in your current profession or occupation.

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Posted on Dec 21, 2017

Tax Reform Law – Significant Changes Affecting Business

The new tax reform law, commonly called the “Tax Cuts and Jobs Act” (TCJA), is the biggest federal tax law overhaul in 31 years, and it has both good and bad news for taxpayers.

Below are highlights of some of the most significant changes affecting business. Except where noted, these changes are effective for tax years beginning after December 31, 2017.

Tax Cuts and Jobs Act

  • Replacement of graduated C-corporation tax rates ranging from 15% to 35% with a flat rate of 21%
  • Repeal of AMT for C-corporations.
  • New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025. This is a highly complex provision with many limitations and nuances.  Individuals and trusts with an ownership interest in any non-C corporation business should meet with their tax advisor soon to make sure their business is situated to maximize the deduction for 2018.
  • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
  • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
  • Other enhancements to depreciation-related deductions
  • New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply). This is another new provision that has traps for the unwary.  Business that are highly leveraged should meet with their tax advisor to understand how this provision may affect their tax liability.
  • New limits on net operating loss (NOL) deductions.
  • Excess business losses for trusts and individuals are no longer available to offset non-business income and are treated as net operating losses.
  • Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C-corporation taxpayers
  • Changes the revenue threshold from average gross receipts for the three previous tax years of $10 million to $25 million:
    • Businesses are required to use the accrual method of accounting;
    • Businesses are required to capitalize certain non-direct costs under Section 263A;
    • Businesses with long-term contracts are required to use the percentage of completion;
  • New rule limiting like-kind exchanges to real property that is not held primarily for sale.
  • New tax credit for employer-paid family and medical leave — through 2019
  • New limitations on excessive employee compensation
  • New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

More to consider

This is just a brief overview of some of the most significant TCJA provisions. There are additional rules and limits that apply, and the law includes many additional provisions. Contact your Cornwell Jackson tax advisor to learn more about how these and other tax law changes will affect you in 2018 and beyond.

 

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries, and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

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