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Tax Reform on the Horizon

by Shelly A. Ashmore, CPA, MST, Partner

 

The Conference Committee recently reconciled the House and Senate versions of the tax reform bill and President Trump signed the Tax Cuts and Jobs Act (TCJA) into law December 22, 2017.  The law provides significant changes for both businesses and individuals.  A cornerstone is targeted reductions in business taxes, with the intent to spur on capital investments and job growth.  It also aims to provide tax benefits for individuals and families.  Most provisions are effective beginning January 1, 2018 and some of the highlights are discussed below.

 

The law reduces the corporate tax rate to a flat 21% and also provides a reduction in tax on pass-through income. This includes Sole Proprietors, S Corporations, Partnerships and LLCs.  There are various complexities in the new pass-through deduction.  In general, the law provides for a 20% deduction of Qualified Business Income (QBI) for certain taxpayers.   Service providers (other than engineers and architects) will generally be limited on benefits from these provisions unless taxable income is less than $315,000 (married) or $157,500 (single).

 

The law provides for a temporary increase in bonus depreciation to 100% on eligible property in service after Sep 27, 2017.  The law now also allows bonus depreciation to be taken on both new and used assets in service.  Previously bonus was allowed at 50% on new property only.  The Section 179 deduction has also been increased to $1 Million on eligible property with the phase out at $2.5Million.

 

The corporate AMT was eliminated while individual AMT remains now with higher income thresholds.  Like kind exchanges are now limited to real property only.  Deductions for business entertainment and DPAD were both eliminated.  Business interest expense will be limited to 30% of EBITDA for entities with average gross receipts in excess of $25 Million.

 

The prior tax law included seven individual rates from 10% - 39.6%.  The new law provides the same seven brackets now ranging from 10% - 37%, with the top bracket reduced and 4 of the middle brackets each getting a 3% - 4% rate reduction through 2025. 

 

The preferential tax on long term capital gains and qualified dividends of 0%, 15% and 20% remain unchanged.   However, short term capital gains which are taxed at ordinary income rates could be lower for many taxpayers under the new law.  

 

TCJA eliminates personal exemptions and many of the itemized deductions.  However, the law raises the standard deductions to $12,000 (Single) and $24,000 (Married).  Medical deductions are retained in excess of 7.5% of AGI.  Charitable deductions remain and the limit is increased to 60% of AGI for cash contributions.

 

State, local and real estate tax deductions on a combined basis are now limited to $10,000.  Mortgage interest on a qualifying residence is an allowable deduction on acquisition indebtedness but now limited to $750,000 (previously $1Million).  However, these reduced limitations will not apply to debt incurred on or before December 15, 2017. Additionally, refinancing will not affect the limits to the extent it doesn’t exceed the original debt.  Home equity interest will no longer be an allowable deduction.

 

Surprisingly, the exclusion of gain on the sale of a principal residence remained the same for homes used for 2 of the last 5 years.  Both the House and Senate bills had proposed to increase the usage requirement to 5 of 8 years.  However, the final bill left the law unchanged….an unexpected win for taxpayers.  

 

The individual mandate penalty under the Affordable Care Act will be repealed starting in 2019. The law also expands the child tax credit and eliminates the Pease limitation on itemized deductions, both taxpayer favorable.  However, it also repeals deductions for moving expenses, unreimbursed employee expenses, and miscellaneous itemized deductions. Personal casualty losses will now be limited to only those in federally declared disaster areas.

 

The estate tax exclusion has been doubled which means each taxpayer will have an exemption of $11.2 Million in 2018 indexed for inflation.  However, this provision will sunset and return to current levels in 2026 unless made permanent.  Both the step-up-in-basis and portability provisions remain unchanged under the new law.

 

There are numerous provisions and complexities not addressed here and forthcoming regulations will continue to clarify the application of the law.  Please contact our office if we can assist with further questions related to your particular situation.



Shelly A. Ashmore, CPA, MST, Partner