On December 20, 2017 Congress passed the Tax Cuts and Jobs Act. This is a significant piece of legislation that changes the tax landscape for many of our clients. Here are highlights of some of the most significant changes:
For Business Clients:
New 20% deduction for passthrough income
There is now a 20% deduction for Qualified Business Income from a passthrough entity (S-Corps, Partnerships) and Sole Proprietorship on your personal return (Form 1040). The calculation has potential limitations with complex calculations.
Corporate tax rate is reduced to a flat 21%
The corporate tax rate is a flat 21%; reduced from the highest rate of 35% in 2017. This is a significant change for C-Corporations.
Cash basis reporting requirements have changed
The legislation changed the requirements for filing as a cash basis taxpayer. The threshold increased to $25 million of average gross receipts from $5 million.
Meals and Entertainment expense deduction severely scaled back
The deduction for M&E (typically 50%) is scaled back. Expenses for entertainment (such as sporting events) are no longer deductible, however meals continue to be deductible at 50%.
Active loss limitation of $500,000
There is now a limitation on losses from pass through businesses (S-Corps, Partnerships) and Sole Proprietorships. $250,000 (or $500,000 for joint filers) is the maximum allowed loss per tax return per year. Excess losses will create a net operating loss (NOL) subject to new NOL rules (see below).
Interest Expense Limitation
Business interest expense deductions are now limited to 30% of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) if the average annual gross receipts (in the last three-year period) are greater than $25 million for the controlled group. Any excess interest expense not allowed in the current year is deferred and carried forward as a regular NOL.
Net Operating Losses (NOL’s) carrybacks are no longer allowed
A change in NOL’s generated after 2017 will allow them to only be carried forward and limited to offset up to 80% of income. Pre-2018 NOL’s will be allowed the old 100% income offset.
Immediate expensing expanded
Bonus depreciation is 100% until 2022, and applies to new and used assets with lives of 20 years or less. Section 179 expensing is expanded; the maximum amount eligible for expensing now is $1 million.
For Individual Clients:
Decrease in tax rates
There has been an across the board cut in the individual rates, with the top rate reduced from 39.6% to 37%.
The standard deduction increased, almost double the current standard deduction
The standard deduction for single taxpayers is increasing to $12,000 ($24,000 for joint filers). The standard deduction is increased for taxpayers 65 years of age or blind.
The personal exemption is eliminated
The personal exemption has been repealed going forward.
State and local taxes are capped
The maximum you can deduct on state and local taxes (including property taxes) is now $10,000. This will limit your deduction on Schedule A and may make taking the standard deduction more advantageous, and lead to other tax planning opportunities.
Increase in child tax credit
The child tax credit increased from $1,000 to $2,000 ($1,400 refundable) with a significant increase to the phaseout limitation.
Additional $500 credit for qualifying dependents
There is a new $500 credit for qualifying dependents who do not qualify for the child tax credit.
Mortgage Interest deduction limited
Mortgage interest on new loans will now be limited to $750,000 of principal residence and second homes. Old mortgages are grandfathered in at the $1,000,000 limit.
Home Equity Loans
The deduction for home equity loan interest has been eliminated, except if the loan proceeds were used to buy, build, improve, or maintain your residence.
Other Itemized deductions
2% Miscellaneous Itemized deductions are eliminated. These include, among others, unreimbursed employee expenses and investment advisory expenses.
This list is not an exhaustive list of changes. If you have questions concerning the new tax law provisions and how they may affect your business please reach out to your DSWD advisor.