In December 2017, President Trump signed the most comprehensive tax reform bill since 1986.
The Tax Cuts and Jobs Act of 2017 makes significant changes to the tax filings for individuals and businesses.
For personal filings, the individual maximum tax rate has been reduced to 37 percent from 39.6 percent. At the same time, personal exemptions have been eliminated and the standard deduction dramatically increased in an effort to simplify tax filings for most individuals.
On the business side, C Corporations have a new federal tax rate of 21 percent versus 35 percent, which will hopefully make U.S. Corporations more competitive in the global markets. Individuals operating businesses through pass through entities, such as Proprietorships, Partnerships or S Corporations will find that they benefit from the reduced maximum tax rate of 37 percent.
At the same time, the expensing of qualified assets has increased to 100 percent of cost to give immediate tax benefit for the acquisition of new equipment as compared with depreciation over a period of time.
There is a new deduction to reduce the effective tax rate on income from qualifying pass throughs. This deduction is quite complicated and is to a great degree based on the payroll of the business. The calculation results in the possibility of as much as 20 percent of the income from the pass through being deducted from taxable income in such a manner that the effective tax rate on the pass through income is 29.6 percent instead of the maximum 37 percent.
The calculation of this deduction is torturous and involves information that is going to significantly complicate the filing of tax returns for pass through businesses. This information will be needed by taxpayers to determine if they qualify for the pass through tax deduction at their individual levels.
As is typically the case, there is good news and bad news in the tax bill. There are now limitations on the use of 1031 Exchanges. They can only be used for real property, not personal property.
There are limitations on the use of net operating loss carryovers that can have a significant economic impact on taxpayers still trying to recover from the economic downturn.
There are limitations on the deductibility of business interest expense beginning in 2018.
There is a limitation on the personal deduction for state and local taxes of $10,000. This limitation is quite controversial and has resulted in the threat of lawsuits by states to overturn the limitation.
A new mortgage interest expense limitation is effective for financings beginning in 2018. This limits the deduction to the interest on $750,000 of home mortgage debt. Home equity line interest expense is no longer deductible.
At present there are no IRS regulations to explain and clarify many of the new law’s provisions.
Being proactive is key with these changes. Be sure to get in touch with your accountant if you have not done so already to examine how these changes will affect your business in 2018 and beyond.
And, if nothing else, at least we live in interesting times.
Curt Anderson, CPA is the CEO of Fair, Anderson & Langerman