Fulfilling his promise to give Americans “an incredible Christmas gift,” President Trump signed a $1.5 trillion tax bill on Dec. 22.
What this tax bill will mean to you and your company may take some help from your tax adviser. While one of the goals at the outset for this tax reform bill was to simplify the tax code, the bill may make things a bit more complex, especially for so-called “pass through” companies (sole proprietorships, partnerships, LLCs and S corporations). But your tax savings will help you pay for the extra accounting help you’ll need.
The first thing to hit employers as the new year begins is what the withholding rates should be for employee paychecks. The new law does away with personal exemptions, the current basis for determining withholding. The IRS has set February as its goal for issuing the new withholding guidance. If you have a third-party payroll company, it will be sure to figure it out in time for your first payroll in February.
Here is the rundown of the major provisions of the new tax bill. This list is based on an analysis of the tax bill done by AmericanHort, but any errors or omissions are strictly mine. Please realize that this is a broad summary of the 500-page bill. How it will affect your company’s or your personal tax liability will require the assistance of a tax professional.
Business Changes
C Corp Rates: The rate is reduced from 35 percent to 21 percent for C corps and personal service corps. This rate is effective for tax years after 2017 and is permanent.
Pass-Through Provisions: Here is where things get complicated. If the individual makes $157,500 or less (or $315,000 or less in the case of a joint return), indexed, the individual taxpayer would receive a 20 percent deduction on “qualified business income” from a partnership, S corporation or sole proprietorship.
If the individual makes more than $157,500 (or more than $315,000 in the case of a joint return), then the deduction from “qualified business income” is the greater of:
- the sum of 25 percent of the W-2 wages with respect to the trade or business plus 2.5 percent of the unadjusted basis, immediately after acquisition, of all “qualified property” or
- 50 percent of the W-2 wages with respect to the trade or business. Once the $157,500 (or $315,000) threshold is hit, a “qualified trade or business” does not include service businesses.
“Qualified business income” would not include reasonable compensation paid to the taxpayer by any qualified business for services rendered with respect to the business.
“Qualified property” is defined as tangible property subject to depreciation, held by a qualified trade or business and used in the production of qualified business income. It is the first alternative for calculating the wage limit, which is helping real estate businesses with large capital investments but few employees to qualify under the pass-through provisions. There is a phase-in of $50,000 for individuals or $100,000 for joint returns.
A specified service means those performing services in the fields of health, law, consulting, athletics, financial services, brokerage services or where the reputation or skill of one or more of its employees or owners or dealing with investing and investment management trading or dealing in securities, partnership interests or commodities. Note that this definition excludes engineers and architects.
The deduction would be allowed to nonitemizers as well as those that itemize. Trusts and estates would be eligible for the 20 percent deduction. These provisions would all sunset in 2025.
Bonus Depreciation: Companies can immediately write off the full cost of investments in their businesses, starting with assets purchased and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. Thereafter, the deduction will phase out by 20 percent each year through 2026.
Section 179: Section 179 deduction is increased from $500,000 to $1 million with an increased phase-out threshold at $2.5 million. These amounts are indexed for inflation starting in 2019. The definition of qualified real property is also expanded to include improvements made to nonresidential real property including roofs, heating and air-conditioning equipment.
Cash Accounting: The average gross receipts threshold for using the cash accounting method is permanently increased from $5 million to $25 million.
Credit for Family & Medical Leave Act (FMLA) Costs: A new credit would be added for 2018 and 2019 for wages paid to employees who are on family and medical leave if certain conditions are met.
Interest Deductibility: Businesses will be able to deduct net interest expenses up to 30 percent of their adjusted taxable income. For taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2022, adjusted taxable income is computed without regard to deductions allowable for depreciation, amortization or depletion or the Section 199 deduction (domestic manufacturing deduction, which is repealed in the bill). Businesses with annual gross receipts of $25 million or less would not be subject to the 30 percent limit.
Contributions to Capital: Capital contributions aren’t excludable from taxable income unless they are made by a shareholder, potential customer or government entity.
Individual Changes
Estate & Generation Skipping Transfer (GST) Tax: From 2018 through the end of 2025 estate and GST exemptions will double. In 2026, the exemptions revert to the current levels, indexed for inflation.
Gift Tax: From 2018 through the end of 2025 the gift tax exemption will double. In 2026, the exemption will revert to the current levels, indexed for inflation.
Affordable Care Act: The individual mandate and the tax penalty for not having health insurance is repealed.
Mortgage Interest Deduction: The deduction limit is reduced from $1 million to $750,000 and limited to debt incurred on the principal residence or a second home. Starting next year, no deduction will be allowed for interest on home equity loans. This could affect people’s willingness to use their home equity to invest in landscape projects. These provisions also may have a negative impact on home values. These changes would sunset in 2025. Taxpayers could continue to exclude sale proceeds from the sale of a principal residence as under current law.
Standard Deduction: It is increased to $24,000 for joint, $18,00 for unmarried with at least one child, and $12,00 for single filers. These increases would sunset at the end of 2025 and revert to current levels.
Personal Exemptions: The personal exemption of $4,050 per person has been eliminated starting in 2018 until 2025.
Child Tax Credit: Increased from $1,000 to $2,000 with an increased phase-out of up to $400,000 for married taxpayers. The amount of the credit that is refundable Increased from $1,000 to $1,400. These provisions will sunset at the end of 2025.
Tax Brackets and Top Rate: The number of tax brackets stays at seven. The top tax rate is lowered from 39.6 percent to 37 percent.
Changes that Apply to Businesses and Individuals
Alternative Minimum Tax (AMT): The corporate AMT is repealed. The individual AMT is retained with a higher AMT exemption (starting at $109,400 for joint and $70,300 for single) for the years 2018 through 2025. The phase-out of exemption amounts are increased to $1 million for married taxpayers filing jointly and $500,000 for single taxpayers. This means that the exemption amount is not phased out until the alternative minimum taxable income exceeds these phase-out amounts. The increase in the individual AMT exemption sunsets in 2025. The repeal of the corporate AMT is permanent.
State and Local Tax Deduction: Deduction for state and local income, sales and/or property taxes is capped at $10,000. This provision sunsets in 2025. It’s not clear if property taxes can be prepaid in 2017 for 2018. State and local tax deductions are maintained for corporations and pass-throughs. This provision will have a negative impact on housing values in some higher tax states.
It’s important that business owners sit down with their tax advisers early in 2018 to begin planning to make the most of these new tax provisions.
