Article: Tax Reform – What You Should Know

| January 25, 2018 | ,

Business Income Tax Changes:

  • Corporate tax rates change from a progressive rate schedule with rates starting at 15% and maximizing at a 35% rate in 2017 to a flat rate of 21% for 2018 and beyond.
  • Like Kind Exchanges except for real estate are no longer permitted. (No vehicle or equipment “trade-ins” for tax purposes) Vehicles traded in will now generate a gain or loss for tax reporting purposes.
  • Business Entertainment expenses are no longer deductible including, for example, golf outings, sports events, corporate retreats, entertainment events. These items had previously been subject to a 50% deduction and are now nondeductible.
  • Meals provided to employees at the convenience of the employer are now subject to a 50% deduction. The previously 100% deductions for company meals, picnics, company training meals, and any other company promotions or functions with a meal provided are now limited to the meal expense at a 50% deduction.  All meals provided by a business are limited to a 50% deduction; no deductions are permitted for any entertainment components of company functions.
  • Pass through entities and sole proprietors will be permitted up to a 20% deduction of “qualified business income”.  The deduction has a phase out calculation that begins at taxable income of $315,000 on a married filing jointly return. Although the phase-out tops out at $415,000 (MFJ) of taxable income, there are additional calculations based on W-2 income and other factors to determine the deduction amount. Specified business services income (most professional services) are subject to the deduction phase-out beginning at taxable income of $315,000 and a completely phased out deduction above $415,000. Architectural and engineering services were not included in the other specified business services income classification subject to the complete phase-out.
  • Section 179 depreciation limits have been increased to permit expensing of asset purchases up to $1 million. The phase out amount of asset purchases for Section 179 deductions is increased to $ 2.5 million for 2018. Along with these new amounts in effect for 2018, the definitions of eligible property have been expanded with special advantages to nonresidential rental property owners.
  • Bonus Depreciation is reinstated at 100% for assets purchased after 9/27/17 and bonus depreciation is expanded to include new and used asset purchases.
  • Research and Development costs are now subject to amortization over a five (5) year period rather than being fully deductible in the year of the expense.
  • 2018 Depreciation expense maximum deductions for vehicles purchased in 2018 have been increased: Year 1 – $10,000; Year 2 – $16,000; Year 3 – $9,600 and Year 4 – $5,760 and vehicles purchased in 2018 are eligible for 100% bonus depreciation.
  • The Domestic Production Activity Deduction (DPAD) has expired and is not permitted in 2018 and future years.
  • C Corporation businesses with average gross receipts over $5 million, previously had to use an accrual method of accounting. And all businesses with inventories previously were subject to Uniform Capitalization rules if gross receipts exceeded $10 million. Now both of these requirements will move to average gross receipt thresholds of $25 million.
  • If you, as an employer, do not have an accountable plan for reimbursing employee expenses, your employees are not going to be able to deduct their business related expenses in 2018. To avoid this scenario, set up an accountable expense plan for reimbursing employee expenses in 2018.
  • Although the individual mandate for health insurance coverage under “Obamacare” has been repealed for 2019, the business and employer provisions remain in effect currently. This includes the provisions requiring employer provided health insurance coverage and reporting in 2017 and for future years.

Personal Income Tax Changes:

  • 2018 Tax rates are lower —the 2017 highest rate of 39.6 % becomes 37% in 2018.
  • There are no personal exemptions for 2018
  • In 2018 the standard deduction is increased to $12,000 for single filers, $18,000 for head of household filers and $24,000 for joint filers.
  • Itemized deductions change significantly in 2018
  • All miscellaneous itemized deductions, previously subject to the 2% of adjusted gross Income reduction, are now eliminated
  • No employee business expenses, no tax preparation expenses, no safe deposit box deduction, no investment advisory fees, no job hunting expenses, no moving expenses
  • Itemized deductions are no longer subject to any phase-out amounts based on adjusted gross income
  • State and local taxes, whether income taxes or sales taxes, and real estate taxes are subject to a maximum deduction of $10,000
  • Medical expenses are deductible to the extent expenses exceed adjusted gross income by 7.5 percent (effective for 2017 and 2018 ONLY) Then the deductible threshold returns to 10.0 percent.
  • Mortgage interest on new acquisition debt up to $750,000 is deductible. No deduction for home equity interest in 2018.
  •  Gambling losses remain an itemized deduction up to the amount of winnings.
  • Charitable contribution regulations remain unchanged, except the maximum contribution limit is moved to 60 % of adjusted gross income in 2018
  •  The Child Tax Credit is increased to $2,000 for each child under 17; the maximum refundable credit is $1,400 subject to other qualifications. A new $500 nonrefundable credit is available for other qualifying dependents that do not qualify as dependent children.
  •  Qualified dividends and capital gains tax rates remain unchanged as from 2017 and prior years’ law.
  • The Obamacare Individual HealthCare Mandate and penalty is repealed for 2019. NOTE, this tax provision remains in effect for 2017 and 2018. All employer provisions of the Obamacare regulations remain in effect.
  •  Alimony becomes nondeductible after 2018. Only divorce or separation decrees issued after December 31, 2018 are subject to the new rules.
  •  The alternative minimum tax remains in effect, but has increased exemption amounts that should benefit many taxpayers.
The new tax regulations are very detailed, technical and complex. This summary provides a synopsis of the provisions our office identified as most generally applicable. It should not be interpreted as an exhaustive explanation of the new tax regulations.  There may be other specific tax regulations that affect you or your business and are excluded from this detail.  If you would like to discuss the tax law changes to your specific tax situation, please give us a call. We’d be happy to prepare a tax projection of the effects of Tax Reform 2018 on your personal or business income tax. If you have any questions or need additional information, please contact our office at 412-826-8600.