Tax Cuts and Jobs Act
The Tax Cut and Jobs Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses.
With respect to individuals, the bill:
- replaces the seven existing tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) with four brackets (12%, 25%, 35%, and 39.6%),
- increases the standard deduction,
- repeals the deduction for personal exemptions,
- establishes a 25% maximum rate on the business income of individuals,
- increases the child tax credit and establishes a new family tax credit,
- repeals the overall limitation on certain itemized deductions,
- limits the mortgage interest deduction for debt incurred after November 2, 2017, to mortgages of up to $500,000 (currently $1 million),
- repeals the deduction for state and local income or sales taxes not paid or accrued in a trade or business,
- repeals the deduction for medical expenses,
- consolidates and repeals several education-related deductions and credits,
- repeals the alternative minimum tax, and
- repeals the estate and generation-skipping transfer taxes in six years.
- Ends Individual Health Insurance Mandate, penalty?
MAGI definition for Covered CA subsidies
IRS Website on Individuals & Tax Cut & Jobs Act
For businesses, the bill:
- reduces the corporate tax rate from a maximum of 35% to a flat 20% rate (25% for personal services corporations),
- allows increased expensing of the costs of certain property,
- limits the deductibility of net interest expenses to 30% of the business’s adjusted taxable income,
- repeals the work opportunity tax credit,
- terminates the exclusion for interest on private activity bonds,
- modifies or repeals various energy-related deductions and credits,
- modifies the taxation of foreign income, and
- imposes an excise tax on certain payments from domestic corporations to related foreign corporations.
The bill also repeals or modifies several additional credits and deductions for individuals and businesses.
IRS side-by-side comparison shows you what’s different for Businesses after the Tax Cuts and Jobs Act and can help you plan accordingly.
Summary from MY CPA
THE NEW TAX LAW MADE SIMPLE – BUSINESS
The new tax bill has many changes that are aimed toward the business community. Taxwise, some are favorable and some are unfavorable. If you run a business or just work in America, you should be aware of many of these changes. We will focus on the most salient points of the bill; but, because of the omnibus aspect of the bill, we will not address all.
The biggest part of the tax bill is the reduction of corporate tax rates from a top rate of 35% to a new flat rate of 21%. There are no interim tax rates. This is aimed toward larger corporations. This is all we will address on this point.
California Residents – As you know the government sometimes thinks it is running a separate country. The changes here as previously reported to you and that will change your personal tax returns may not conform to by the state of California. So keep your eyes open for when and if that happens.
Please be aware many of these clauses sunset after 2025. We will not further detail that since this is four Congresses and two presidential elections away and no one knows what will happen then.
Let’s get into the details:
Entertainment Expenses – These expenses are no longer deductible. That means your tickets to your favorite sports team or a concert of Bruno Mars (et al) or Broadway play or movie are no longer a tax deduction.
Your meals are still deductible at 50%. There is a change there. If an employer paid for meals while you were working, those used to be fully deductible as meals for the convenience of the employer. Those are now only deductible at a 50% rate. And remember your meals while traveling on business are treated just like any other meal and deductible at 50%.
If you are in the entertainment business, you may be able to deduct limited expenses for entertainment as research. Please check with us before you jump to any conclusions.
Parking Expense – Any expenses related to commuting to work are no longer deductible. That means two things. Those parking spaces at an office building are no longer deductible. If the company pays for metro fees (buses, trains etc.), those costs are no longer a deduction. If the company continues to pay the expense it is not income to the employee, but not a tax deduction for the employer.
If an employee pays for parking while visiting a customer or going to court (attorneys), that is still deductible for the employer if reimbursed.
Like-Kind Exchanges – These are often referred to by their code section – 1031 exchanges. These exchanges are most often those regarding exchanging real estate properties and deferring gains. Those rules remain the same. You still cannot do an exchange on a property developed for sale or that involves a property outside the United States
The bill eliminates the ability to do an exchange and defer your gain on anything else. The ones that particularly come to mind are on artwork and aircraft.
Net Operating Loss (NOL) – Many changes here. NOL carrybacks are eliminated except in limited circumstances. The carryforward period used to be limited. NOL carryforwards can be used in perpetuity.
The biggest change is you can only use a NOL to eliminate 80% of your income in any one year. Let’s say you have $100,000 of loss in 2018. Then you have a profit of $200,000 in 2019. You can only reduce your profit by 80% of the carryforward ($80,000). You would then have $120,000 of taxable income in 2019 and a NOL carryforward of $20,000 to 2020.
Sale of Stock – Congress eliminated the provision of the bill dictating which shares need to be used first in a sale to determine your gain. Thus, if you have shares in a company that you accumulated in various purchases you can still identify the ones you want to without the government setting the rules. You can identify the ones you paid more for if you need a smaller gain or the ones you paid less for if you need a gain to offset losses. Still your choice.
Corporate Alternative Minimum Tax (AMT) – This provision of the tax law is totally repealed. Now if they would have just done that for individuals the world would be a better place.
First Year Write-off of New Assets – This is another code section many taxpayers are familiar with — Section 179 Expense. This allows you to buy new equipment (tangible personal property) and expense it in the first year instead of depreciating it over five or seven years or more.
The amount you can deduct in the first year is increased from a maximum of $500,000 to $1,000,000. Also, what qualifies for expensing is expanded for certain items in nonresidential properties.
There are other provisions here so please check with us before making improvements or buying equipment.
Luxury Auto Depreciation – The amount of depreciation on automobiles over a certain cost was limited under previous law. What is defined as a luxury vehicle is questionable because this may also effect Fords or Hondas. It is still limited under the new law, but the limits are much higher.
For example, the first year depreciation under the old law was $3,160. It is now $10,000 (there is also a first-year bonus depreciation provision that is increased). It continues like that in subsequent years.
This might materially change a decision whether to lease or buy a passenger auto used for business purposes starting in 2018.
Pass-Through Entities – One of the more controversial areas of the new law and certainly the most complicated is a potential deduction of 20% of taxable income for what is referred to as pass-through entities. This also potentially effects millions of taxpayers.
This was put into the tax bill to provide a tax benefit for small businesses because most of them operate as one of these types of entities versus a regular corporation (C Corp) which is the form under which big businesses operate. If smaller businesses operate as C corporations, they generally zero out their income though salaries or pension contributions.
First, let’s define what is considered a pass-through entity for this act:
- 1. Sole proprietorships (Schedule C)
- 2. Single member LLCs
- 3. Multi-member LLCs
- 4. Partnerships (both general and limited)
- 5. S corporations
- 6. Trusts, Estates, REITS and qualified cooperatives.
At this time rental properties declared on Schedule E for tax purposes are in question as to whether they are included for this tax bill. There has been much discussion, but no definitive answer. As soon as we have acceptable guidance on this issue, we will clarify that for you.
Second, let’s define what benefit you are getting:
The taxpayer can take a deduction of 20% of what is referred to as their net qualified business income. In simple terms, that is your net income from your business including all gains and losses.
For example, you have $250,000 of net income on your schedule C. You can deduct $50,000 (20%) of that income from what is taxable on your return. If your marginal tax rate is 24% that is a $12,000 tax savings.
Third, not everybody gets this deduction:
If you make a product you get this deduction without limitation. For, example, if you produce websites or you produce screwdrivers, there is no limitation on your deduction. If you are in a service business, there are limitations how much deduction you can take.
Fourth, let’s define what a service business is for this act:
- 1. Doctors, attorneys, CPAs, consultants and any businesses like this that provide a service.
- 2. Athletes.
- 3. Anyone who works in the financial services or brokerage industry (real estate).
- 4. Performing artists on stage or studio.
- 5. Then there is the catch-all clause — Any trade or business where the principal asset is the reputation or skill of the owner. Think hairstylist or anybody above.
For an unknown reason engineers and architects are exempt from this limitation. Thus, an architect can make $1,000,000 and have 20% of their qualified business income deducted. God and Congress has blessed you engineers and architects.
Fifth, what is the limitation:
This is where matters get complicated and we will not delve too much into the weeds so as to not have your eyes rolling and reaching for some aspirin.
If you have qualified business income of $157, 500 for single taxpayers or $315,000 for married taxpayers, you can take full advantage of the 20% deduction. There are phase-out provisions: $207,500 for singles and $415,000 for marrieds.
Let’s say you are a married real estate agent and your income is $315,000 for this calculation. You can then deduct $63,000 of income at 28%; that would be a tax savings of $17,640.
That means if you are a sole proprietorship with no employees making $425,000 you will get no benefit from this clause.
This is where it gets into the weeds. The limitations are based not on only your income level, but on how much W-2 wages you pay. Your wages used for limitation are 50% of your total wages.
If you have a rental property you most likely have no wages. But if you have wages your deduction is limited to 25% of your W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of your rental property. That means you cannot include any improvements in the basis nor is your basis reduced for depreciation.
For example, you paid $1,000,000 for a property in 2005. You immediately made $100,000 of improvements and then another $200,000 along the way, but you have accumulated $400,000 of depreciation over the years. Your basis for this calculation will be the original $1,000,000.
This is where it gets really complicated so we will leave it at this and deal with matters on a case-by-case basis.
IRS Publication # 5307
Tax Cut & Jobs Act
Dave Ramsey on New Tax Bill