Key Highlights of Tax Cuts and Jobs Act for businesses

image2

Highlights of the Tax Cuts & Jobs Act for Businesses

The Tax Cuts and Jobs Act ushers in some significant tax changes for businesses which our CPA office has summarized below:

One of the key benefits of the TCJA for businesses is lower tax rates for C-corporations effective in the 2018 tax year. For businesses that are considered “pass-through” (such as partnerships, limited liability companies taxed as partnerships or S-corporations) may also see their tax bills cut.

  • The graduated “C-corporation” tax rates will range from 15% to 35% will be reduced to a flat 21% rate under the new law.
  • The corporate AMT is fully repealed beginning in 2018.
  • A new like-kind exchange rule limits exchanges to real estate not held primarily for sale.
  • The IRC section 179 deduction will double to $1 million, subject to phase-out thresholds.
  • Bonus depreciation will double to 100% and expand to include used property. The effective date is for assets acquired and placed in service after September 27, 2017 and before January 1, 2023.
  • Pass-through entities (e.g., partnerships, s corporations, and sole proprietorships) will be entitled to a 20% qualified business income deduction. The provision is applicable for business owners with income under $157,500 ($315,000 for married filing jointly). In addition, the benefit is subject to phase

New Net Operating Loss Rules for Corporations

What is a NOL and how do you know if you have one? A net operating loss, or NOL, is realized when a loss taken by a company in a certain period (usually a tax year) makes its allowable tax deductions greater than its taxable income. In this situation, the NOL has traditionally helped companies recover past tax payments with the carryforward rule in place. However, the treatment of NOL for corporations is changing starting this tax year, due to the effect of the following new provisions:

Tax Reform Update on Meal Deductions

Keep in mind, however, that expenses for entertainment, amusement, or recreation in the course of business are not deductible. For example, if you want to treat your client to dinner plus tickets to a show, only 50 percent of the meal expenses would be deductible.

You can deduct client meal expenses, but they have to be legitimate. As a refresher, here are the requirements for being able to take advantage of the meal expense deduction on your freelance business tax return:

  1. The meal expense must be reasonable and a necessary as part of your business operations.
  2. Either you, or an employee of your business, must be present when the meal is eaten.
  3. The food and beverages you are claiming must be provided to a current or potential business customer, client, consultant, or similar business contact.
  4. If food and beverages are provided during or at an entertainment activity (i.e. brats and beer at a baseball game) they must be purchased separately from the entertainment on one or more bills, invoices, or receipts.

Remember that you must have receipts to support your meal expense deductions (not just a credit card statement) so be sure to keep those filed with your other tax information. If you need assistance with 2018 tax planning and tax filing please us.

Key Highlights of Tax Cuts and Jobs Act for Individuals

Individual tax

TThere are several deductions that will be eliminated or reduced, which may or may not be offset by a larger standard deduction:

  • Individuals (as opposed to businesses) are only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes.
  • Under current rules, alimony payments generally are an above-the line deduction for the payer and included in the income of the payee. Under the new law, beginning in 2019, alimony payments aren’t deductible by the payer or included in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2018. For any divorce decree or separation agreement executed prior to 2019, the new law will apply if such agreement is modified after 2018 and the modification expressly provides that the new law applies to the modification.
  • The itemized deduction for charitable contributions is not eliminated, however, because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for you because you won’t be able to itemize deductions.
  • The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. It is important to be aware that that next year, many individuals will have to claim the standard deduction because many itemized deductions have been eliminated.
  • The principal residence mortgage interest deduction will be limited to interest on $750,000 of indebtedness, for loans after 2017.
  • The following personal exemptions will be eliminated: the deduction for home equity debt, miscellaneous itemized deductions subject to the 2% floor (e.g., investment advisory fees and tax preparation fees), the Pease rule (i.e., phase-out of itemized deductions), the deduction for casualty losses (except for federally declared disasters), and moving expenses (except for certain military personnel).
  • Estate, Gift and GST tax exemptions will double to $10 million (expected to be $11.2 million for 2018 with inflation indexing).  Thus, for a married couple the combined exemptions would be $22.4 million in 2018.

Notable items that are not changing for individuals include:  

  • The preferential top rate (i.e., 20%) on capital gains and qualified dividends.
  • Annual exclusion gifts ($15,000 for 2018).
  • The 3.8% net investment income tax is not changing, thus, net investment income (e.g., interest, dividends, capital gains, annuity income, rents, etc.) will be taxable to the extent it exceeds the applicable thresholds (e.g., single taxpayers $200,000, married filing jointly $250,000).
  • A taxpayer’s ability to sell specific lots of securities. The original tax reform bills in the House and Senate would have forced FIFO treatment for the sale of securities (e.g., stocks).
  • Stretch-out distributions for beneficiaries of IRAs and other qualified plans.
  • Rules for excluding gain on the sale of a principal residence.

Taxpayers should understand that a majority of these tax reform provisions are applicable only through 2025. We will continue to provide you with updates on the new changes in tax laws throughout the year. Please do not hesitate to contact us in regard to any questions you may have about the Tax Cuts and Jobs Act.

image3