The Tax Cuts and Jobs Act (TCJA) represents the most sweeping reform to the U.S. tax code in over 30 years. Signed into law by President Trump on Dec. 22, 2017, with $1.5 trillion in cuts, it is one of the largest tax cuts in history.
What started out as an effort to simplify the tax code, quickly morphed into an army of more than 6,000 registered lobbyists (11 for every 1 member of Congress) mobilized to represent and protect the economic interests of most of the Fortune 500 companies. The net effect is that most deductions and special tax breaks were preserved, or slightly reduced and modified.
As a result, the new law is still as complex for businesses, and high-income taxpayers, corporations, entrepreneurs and small businesses received the most benefits. The “simplification” primarily occurs because the new law limited the amount of many itemized deductions and almost doubled the standard deduction.
The number of Americans taking the standard deduction is expected to increase to 90 percent of taxpayers from 70 percent. That will make life easier for the vast majority of U.S. taxpayers and decrease the paperwork, regulation and oversight from the IRS. Overall taxes for most individual taxpayers will be slightly lower.
Most of the provisions took effect Jan. 1, 2018, however, a few significant changes can be applied back to Sept. 27, 2017, which could have a significant effect on your Dec. 31, 2017, business tax returns. Bring that to the attention of your tax advisor.
Here are some of the major changes:
Individuals
- The TCJA significantly increased the standard deduction, almost doubling it to $12,000 for single filers, $18,000 for head of households and $24,000 for married filing jointly.
- The seven tax brackets were lowered, with the top tax rate reduced from 39.6 percent to 37 percent (over $500,000 single, $600,000 joint).
- It caps state and local tax deductions (for real property, personal property and income or sales) to $10,000 maximum. (That provision hurts residents of states with high income taxes like New York, California and New Jersey.)
- It caps mortgage interest deductions to $750,000 of a mortgage, eliminates the deduction for interest expenses on home equity lines and second homes. Loans prior to Dec. 15, 2017, are grandfathered in.
- Eliminates deduction for employee business expenses, investment advisory fees, legal fees and tax preparation fees.
- It doubles the estate tax exemption for estates to over $11.2 million for individuals and $22.4 million for married taxpayers for decedents dying and gifts made from 2018 through 2025.
There are more changes to individual tax rates related to alimony payments, moving expenses, college savings, insurance, and even athletic tickets. Talk to your tax advisor if you think any of these might apply to you.
Here is a link to a tax calculator website — taxplancalculator.com — that may give individuals an idea of their 2018 taxes.
Business Taxation
- Corporations: The most significant tax benefit from the 2017 tax bill is the reduction of the top corporate tax rate from 35 percent to 21 percent. The argument that the U.S. had one of the highest corporate tax rates in the world was true for domestic corporations. However, multi-national corporations that can take advantage of various offshore foreign tax havens don’t have to pay nearly that amount. According to a report by The Institute of Taxation And Economic Policy, which studied taxes paid by Fortune 500 companies for the past eight years, the average corporate rate was 21.2 percent. However, this provision will be a significant benefit for companies that operate primarily in the U.S.
- “Pass-through” companies: (Sub S corps, LLC’s, partnerships, Sole Proprietorships) Code Section 199A: These entities don’t pay taxes at the company level, however the net earnings “flow through” to each individual shareholder, owner, or partner’s individual personal tax returns and are taxed at their respective individual tax rates. Effective for tax years beginning in 2018, most taxpayers with small businesses could receive a 20 percent tax deduction on “Qualified Business Income.” This computation is complex and generally phases out for taxpayers with income thresholds of between $315,000 to $415,000 for married taxpayers and $157,500 to $207,500 for single taxpayers. For professional services businesses, such as doctors, lawyers and accountants (excluding engineering/architects) the break fully phases out above these levels, however for other high earning taxpayers there are additional tests they must meet to get the full deduction.
- Bonus depreciation: Businesses may take 100 percent bonus depreciation (increased from 50 percent) on “qualified property” both acquired and placed in service after Sept. 27, 2018. Under the new law, qualified property is defined as new or used tangible personal property with a recovery period of 20 years or less. The law also liberalizes the depreciation life to 15 years for qualified improvements (currently only restaurants and retail spaces qualify) for interior improvements to all non-residential business buildings. Improvements may be eligible for 100 percent bonus depreciation; however, it may require a technical corrections amendment passed by Congress to apply this provision.
- Code Section 179 Expensing: The new law increases the maximum amount that may be expensed under Code Sec. 179 to $1 million. (Providing less than $2.5 million of total equipment is purchased) and now includes lodging personal property and various improvements to nonresidential property previously capitalized.
OTHER CHANGES:
- Alternative minimum tax for all corporations has been repealed for 2018.
- Luxury auto depreciation limits have been increased starting in 2018.
- The new law eliminates the 50 percent deduction for business-related entertainment expenses.
- Net Operating Loss (“NOL”) deduction is modified. Under the new law, generally, NOLs arising in tax years ending after 2017 can only be carried forward, not back and are limited to 80 percent of the loss.
IN CONCLUSION:
The $1.5 trillion TCJA is now the law of the land with $950 billion ($600 billion for corporations and $350 billion for “pass through” businesses) and $550 billion going to individuals (the majority to the top 10 percent).
Taking into consideration the estimated tax revenue from the anticipated economic growth, the CBO estimates it will add more than $1 trillion to the national debt, which is now over $20 trillion.
Will the tax cuts create more jobs, growth and opportunity by increasing capital expenditures? Depends on how the corporations spend the tax benefits. If the money goes to boosting CEO pay, increasing dividends, stock buybacks, or making big acquisitions, then growth will not result.
However, if corporations repatriate some of the money currently held overseas and invest in the U.S., their workers and innovation for their businesses, the tax cuts could be extremely beneficial for the country.
Regardless of the macroeconomic effects to the country, it is in our individual interests to capitalize on every tax benefit available for our businesses and us.
Deane Albright, CPA, is the senior partner of Albright & Associates, Ltd., based in Reno. Visit albrightcpas.com to learn more.
