President Trump’s signature tax law overhaul, the Tax Cuts and Jobs Act of 2017 (TCJA), went into effect in 2018, marking the largest overhaul of the tax code since 1986.
A summary of some of the major changes to businesses, individuals, and estates follows:
Corporate Tax Rate
For tax years beginning in 2018, the corporate tax rate structure has been modified and reduced to a flat 21% rate on all taxable income. In addition, the new law repealed the corporate AMT.
To account for this reduced rate, the new law also reduces the 70% dividends received deduction to 50%, and the 80% deduction to 60%.
New Passthrough Business Deduction
Perhaps one of the most high-profile changes to the tax code introduced by the new tax law is the addition of Code Sec. 199A, which provides taxpayers who own passthrough businesses (partnerships, S corporations, sole proprietorships, and trusts) with a deduction of up to 20% of the business income passed through to them.
The amount of the deduction taxpayers can take is limited by their personal taxable income and by the type of businesses from which the income is received. Taxpayers with taxable income below $315,000 ($157,500 if filing single) can generally receive the full 20% deduction for their business income – taxpayers with income above those amounts receive a reduced deduction based in part on the total amount of wages the business pays.
Taxpayers with taxable income above $415,000 are ineligible to take a deduction for income received from a “Specified Service Trade or Business” (SSTB), which generally includes businesses whose primary function is the performance of services, such as doctors, lawyers, accountants, consultants, or investment managers.
Early planning techniques suggested spinning off the non-SSTB functions into separate entities, but proposed regulations issued by the IRS nixed idea by treating as an SSTB entities that shared close business or ownership arrangements with an SSTB.
For tax years after 2017, tax free like-kind exchanges are only available for real property; all other forms of tangible or intangible property are no longer eligible for like-kind exchange treatment.
Bonus Depreciation and Section 179 Expensing
For qualified property placed in service beginning September 27, 2017, the new tax law increased the bonus depreciation deduction allowed to 100% of the cost of such property, up from 50% of the cost for prior years. Beginning in 2023, the deduction will be reduced by 20% each year, ending with 20% bonus depreciation for property placed in service in 2026 and beyond.
For taxpayer claiming bonus depreciation on “luxury” automobiles (generally passenger vehicles weighing less than 6,000lbs), the new law increases the allowable depreciation deduction to $18,000 for the first year the property is placed in service, $16,000 for the second, $9,600 for the third, and $5,760 for each year thereafter.
Additionally, the new law allows for bonus depreciation to be taken on used property, provided the property was not acquired from a related party, and expands eligibility for the deduction to qualified film, theater, and television productions.
Beginning in 2018, the new law allows businesses to immediately expense up to $1,000,000 of qualifying Section 179 property and increases the phase-out threshold to $2,500,000 (up from $510,000 and $2,030,000, respectively, for 2017). The definition of qualifying property was also expanded to include all qualified improvement property and certain improvements – such as HVAC property, security systems, and roofing – to nonresidential real property.
Accounting Method Changes
The new tax law increased the gross receipts threshold below which businesses can use the cash method of accounting. Under prior law, corporations and partnerships with corporate partners were required to use the accrual method of accounting if their annual gross receipts averaged more than $5,000,000 over the prior three years.
For tax years beginning in 2018, businesses with average annual gross receipts of $25,000,000 or less over the prior three years are eligible to use the cash method of accounting.
In addition, beginning in 2018 taxpayers below this gross receipt threshold are eligible to account for inventories under the cash method and treat inventory as non-incidental materials and supplies. Under prior law, only business with average annual gross receipts under $10,000,000 ($1,000,000 for certain other industries) were eligible to use cash method accounting.
Businesses now eligible to use the cash method of accounting under the new law will need to file Form 3115 to effect a change from accrual to cash account and will need to take into account certain adjustments to their income to reflect the change.
Additional Changes Affecting Businesses
Other changes to business taxation brought about by the new tax law include:
- Eliminating the ability for businesses to deduct half the cost of entertainment provided to clients;
- Limiting the deduction for business interest expenses to 30% of the business’s AGI plus its interest income (an exception is provided for businesses with less than $25,000,000 average annual gross receipts);
- Limiting NOLs created after Dec. 31, 2017 to 80% of taxable income, and eliminating NOL carrybacks but allowing for unlimited carryforwards
South Dakota v. Wayfair’s Effect on Online Retailers
Although not a part of the TCJA, the Supreme Court’s June decision in South Dakota v. Wayfair has major implications for businesses with large online sales volumes. In that case, the Supreme Court ruled that states can require sellers to collect sales tax on sales within that state, even if the seller has no physical presence there.
In the wake of the decision, many states have added new “remote retailer” laws generally requiring out-of-state sellers with more than $100,000 in gross revenue from sales within the state or 200 separate sales transactions within that state (measured during the previous or current calendar year) to begin collecting sales tax. Each state’s laws differ, and some states have yet to enact these laws, so please contact your tax professional to see if your business is affected.
Income Tax Brackets
For individuals, the biggest change brought by the new tax law was the modification of the income tax rates and tax brackets. For 2018, the tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, compared to the 2017 tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
The AMT exemption amounts were also increased. For 2018, the new exemption amounts are $109,400 for taxpayers married filing jointly and $70,300 for taxpayers filing single (up from $84,500 and $54,300, respectively, for 2017).
The new law also updates the “Kiddie Tax” rates for the net unearned income of a child. The tax on such income is no longer based on the child’s parents or any unearned income of siblings and instead is simply taxed at the rates applicable to trusts and estates.
Capital gains tax rates and brackets remain the same for 2018 and 2019 as they had in prior years.
Personal Exemptions, Standard Deductions, & Child Tax Credits
Beginning in 2018, the new tax law increased the standard deduction amounts while simultaneously eliminating the deduction for personal and dependency exemptions. For 2019, the standard deductions are $24,400 for taxpayers filing jointly, $12,200 for taxpayers filing single, and $18,350 for heads of households (up from $24,000, $12,000, and $18,000 for 2018).
The new law also temporarily expanded the child tax credit by doubling the amount from $1,000 to $2,000 for each qualifying child, increasing the phaseout threshold to $400,000 ($200,000 if filing single), and adding a $500 credit for certain other dependents.
Individual Income Tax Deductions
For tax years 2018 through 2025, the new law makes significant changes to deductions taxpayers can take on their individual returns.
Most notably, the new law eliminates miscellaneous itemized deductions. These include deductions such as home office expenses, unreimbursed employee expenses, and investment advisory fees. However, the overall limitation on itemized deductions for taxpayers with AGI over certain thresholds has been temporarily repealed.
The new law also caps the deduction taxpayers can take for state and local income and property taxes to $10,000 ($5,000 if filing single). Early attempts by state legislature to provide tax credits to assist taxpayers affect by this cap have been preempted by the IRS.
Taxpayers are also now limited to deducting mortgage interest on up to $750,000 of acquisition debt (down from $1,000,000) for debt acquired after Dec. 15, 2017, and can now only deduct interest on home equity loans if such loans are used to buy, build, or substantially improve the home.
Other changes to deductions include:
- A 7.5% of AGI threshold for claiming medical expense deductions in 2018 (returns to 10% for 2019);
- Limiting theft and casualty losses to losses incurred in Federally declared disaster areas;
- Increasing the charitable contribution limit to 60% of AGI (up from 50%).
- Elimination of deduction for alimony paid (and the corresponding inclusion in income for alimony received) for divorce agreements entered into or modified after 2018.
Roth IRA Conversions
Although converting a traditional IRA to a Roth creates a taxable event, doing so can be a smart planning move if the taxpayer is in a lower income bracket one year – the conversion would be taxed at low rates and would then grow tax-free in a Roth account. If the taxpayer’s situation changed and such a conversion no longer made sense, they could generally reverse the conversion by Oct. 15 of the year following the conversion.
However, beginning in 2018 taxpayers are no longer eligible to reverse a conversion from a traditional to Roth IRA once complete.
Investing in Opportunity Zone Funds
Effective for tax year 2018, The TCJA added the Qualified Opportunity Zone Fund (QOF), a tax advantaged investment vehicle designed to spur investment in low-income areas. Such funds are self-certifying partnerships or corporations that invest in property located in “Opportunity Zones,” economically distressed areas that have been nominated as such by each state.
Individuals or businesses who invest capital gains in a QOF within 180 days of a realization event (e.g. the sale of low-basis securities) can elect to defer recognizing those gains in income until 2026, or when the investment is sold, whichever is earlier. In addition, investors who hold their QOF investments for five years reduce the amount of deferred gain recognized by 10% (or 15% reduction if held for seven years); if the investment is held for at least ten years, any appreciation after that period will be tax free.
Trusts and Estates
Trust, Estate and Gift Tax Rates
For 2018, the trust and estate tax rates have been reduced to 10%, 24%, 35%, and 37% for ordinary income. For capital gains tax, the trust and estate rates remain at 0%, 15%, and 20%, but the thresholds have been adjusted to $0-$2,600, $2,601 – $12,700, and over $12,000, respectively.
Beginning in 2018, the new tax law increased the federal estate and gift tax unified credit basic exclusion amount to $10,000,000 (to be adjust for inflation each year). For 2018, the inflation adjusted exclusion amount is $11,180,000 per taxpayer.
No changes were made to the annual gift tax exclusion amount; for 2018, the exclusion amount is $15,000.
Trust and Estate Income Tax Changes
Because the income of a trust or estate is computed in the same manner as that of an individual, many of the new law’s changes to individual taxation will affect the calculation of trust and estate income tax. Notably, these changes mean trusts and estates will be subject to the $10,000 cap on deductions for state and local taxes paid and can no longer take miscellaneous itemized deductions subject to the 2% AGI floor (such as investment fees and expenses, or unreimbursed business expenses).
The new law retains personal exemptions for trusts and estates; for 2018, the estate income tax exemption is $600, $300 for trusts required to distribute income currently, and $100 for all other trusts.
Sources: Pub. L. No. 115-97 (Dec. 22, 2017); Bloomberg Tax, Tax Reform Roadmap (2018); South Dakota v. Wayfair, Inc., 585 U.S. __ (2018); 26 U.S. Code §1400Z-2; The Tax Adviser, “Income Taxation of Trusts and Estates After Tax Reform” (May 1, 2018).
The statements contained herein are not intended to constitute written tax advice within the meaning of IRS Circular 230 §10.37. These statements are solely intended to communicate general information for discussion purposes and should not be interpreted as written tax advice nor should they be relied on as such. If you would like to speak with someone in our office regarding the content in this article, please contact ARGI CPAs & Advisors at 502-753-0609 and we will be happy to assist you.
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