January 7, 2018
New Tax Law Changes
As you’re likely aware, the tax landscape has changed dramatically with the passing of the Tax Cuts and Jobs Act (TCJA). The TCJA was signed into law in December 2017 and is the most significant tax legislation of the past 30 years. The IRS continues to issue guidance on how the new law will actually work.
The guidance issued so far is in “proposed” form, which means it’s subject to change and leaves many unanswered questions. Significant uncertainty still exists for the application and implementation of the TCJA.
The majority of changes under the TCJA will first be effective for the 2018 tax year. As a result, this year will be a year of significant change for all taxpayers — individuals and businesses alike.
This article highlights some of the recent changes but does not address many of the nuances, detailed calculations, and rules of the TCJA that must be carefully evaluated before implementing any highlighted provision.
We anticipate this information may raise some questions and spark some ideas. It will also serve as a starting point from which to identify and explore opportunities with your GC tax advisor as part of your personal tax plan.
Key Business Tax Changes under TCJA
- Graduated tax rates with a top corporate rate of 35% were replaced with a significantly reduced flat corporate tax rate of 21%.
- Repealed corporate Alternative Minimum Tax (AMT) repealed beginning in 2018 and any minimum tax credit carryovers were made refundable for 2018-2021.
- Disallowed meals and entertainment expenses - deductions for entertainment, amusement or recreation activities (think season tickets to your favorite sports team) are no longer allowed under TCJA; however, 50% of meals are still deductible.
- Under prior law, Net Operating Losses were carried back 2 years and forward 20 years. After 12/31/17, losses can no longer be carried back and have to be carried forward, but with no expiration. Losses carried forward can now only be used up to 80% each year with the remaining 20% being carried forward to the following year. (Note: special rules apply to Farm NOLs so ask your accountant if this applies to you.)
- Increased depreciation limits:
- 50% “bonus” depreciation was increased to 100% effective for purchases after 9/27/17 through 12/31/22.
- Sec. 179 expensing increased to $1 million beginning in 2018 with a phase-out amount of $2.5 million on purchases.
- Limited net business interest expense deduction is now limited for larger businesses (those that don’t meet the $25 million gross receipts test). Deductible interest for affected businesses is now limited to the sum of interest income plus 30% of taxable income. Any disallowed interest will carry forward indefinitely.
- Small taxpayers (those meeting the $25 million gross receipts test) now have expanded availability to use the cash method.
KEY INDIVIDUAL TAX CHANGES UNDER TCJA
- Reduced tax rates on ordinary income; the top rate of 39.6% reduced to 37% as well as all other rates reduced.
- Created the Qualified Business Income Deduction (QBI/Sec. 199A), which provides a 20% deduction on domestic QBI to individuals, trusts and estates for 2018-2025 tax years.
- Increased the Alternative Minimum Tax (AMT) exemption and phase-outs. Should mean fewer people will be subject to the AMT.
- Consolidated standard deduction and personal exemptions in an attempt to simplify tax returns. New standard deduction is $24,000 (Married Filing Joint) or $12,000 (Single)
- Enhanced Child Tax Credit to $2,000 per qualifying child.
- Changed the Net Operating Loss (NOL) provision by eliminating NOL carrybacks and reducing the amount of NOL carryovers able to be utilized to 80% with the other 20% carrying over to the following tax year.
- Changes to itemized deductions:
- Medical and dental expenses limited to 7.5% of Adjusted Gross Income (AGI) for 2017 and 10% for 2019 – 2025.
- State, local, real estate, and personal property tax expense limited to maximum of $10,000.
- Charitable contribution limitation increased to 60% of AGI. Repealed the 80% deduction of the amount paid to colleges for the right to purchase tickets for athletic events.
- Repealed the deduction for miscellaneous itemized deductions (e.g. unreimbursed employee business expenses, investment management fees and tax preparation fees). Note: These items are still deductible for CA purposes.
At GC we strive to help you achieve your goals. We realize that your tax situation is unique and as such you deserve a personalized approach to planning. We are here to help.