Tax Cuts and Jobs Act – December 22, 2017
Business Tax Changes:
For business net operating losses (NOLs) that arise in tax years ending after December 31, 2017, the maximum amount of taxable income that can be offset with NOL deductions is generally reduced from 100% to 80%. In addition, NOLs incurred in those years can no longer be carried back to an earlier tax year but can be carried forward indefinitely.
More generous business asset expensing and depreciation tax breaks are available. The maximum Section 179 deduction increases to $1 million, and the phase-out threshold amount is increased to $2.5 million (from $510,000 and $2.03 million respectively). There are also much more liberal first-year bonus depreciation rules, including allowing used property to qualify for bonus depreciation.
The Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction, is eliminated for tax years beginning after December 31, 2017.
The Section 1031 rules that allow tax-deferred exchanges of like-kind property is allowed only for real estate in exchanges completed after December 31, 2017. Beginning in 2018, there are no more like-kind exchanges for personal property assets. However, the prior-law rules still apply if one leg of an exchange has been completed as of December 31, 2017, but one leg remains open on that date.
Specified R&D expenses must be capitalized and amortized over five years, or 15 years if the R&D is conducted outside the United States instead of being deducted currently. This begins with tax years beginning after December 31, 2021. The R&D credit remains available for qualifying expenditures.
Entertainment expenses that previously were 50% deductible are no longer deductible. Employer provided meals are reduced from a 100% deduction to 50%. The 50% deductible “business meal’ is not affected.
All the above have virtually no effect on the small business owner under $2 million in sales who is not in manufacturing or a related business, or heavy on entertainment expenses.
20% business income deduction for all business; except that for accountants, health care professionals and other ‘personal service’ income types, the deduction phases out between $315,000 and $415,000 taxable income.
Big winners for the above are all businesses whose owners have taxable income under $315,000
21% flat rate for C corporations replaces the prior bracketed rates of 15% up to $50,000, 25% for the next $25,000, and so on up to 35%
Most smaller biz with C corps will lose. Some strategy to use a regular C corporation still exists for S Corporation owners whose taxable income is over around $350,000.
The big winners are public corporations.
New vehicle purchases will depreciate more favorably - $10,000 in the first year plus $8000 bonus (versus $3,160 previously plus $8000 bonus); $16,000 in the 2nd year (versus about $6,000 previously); and $9,600 in the third year (versus about $5,000 or so previously)
Certain property in a rental will be considered personal property and receive a greater depreciation rate
Leasehold improvements: It’s a mess. Improvements between September 17 and December 31, 2017 are 100% deductible. The intent I think is that leasehold improvements after January 1, 2018 will be 100% deductible and that % reduced over time. Until a technical change to the law is written, the leasehold improvement deduction goes back to a 39 year life.
Generally, it is expected that the leasehold improvement issue will be amended by Congress to a 15 year life, with a 100% bonus depreciation option.
Claims that the United States’ corporate tax rate is uniquely burdensome to U.S. business when compared with the corporate tax rates of its industrial peers are incorrect. While the United States has one of the highest statutory corporate income-tax rates among advanced countries (up to a 35% bracket), the effective corporate income-tax rate (27.7 percent) is quite close to the average of rich countries (27.2 percent, weighted by GDP).
The U.S. corporate income-tax rate is also not high by historic standards. The statutory corporate tax rate has gradually been reduced from over 50 percent in the 1950s to its current 35 percent.
The current U.S. corporate tax rate does not appear to be impeding corporate profits. Both before-tax and after-tax corporate profits as a percentage of national income are at post–World War II highs; they were 13.6 percent and 11.4 percent, respectively, in 2012.
Lowering the corporate income-tax rate would not spur economic growth. The analysis finds no evidence that high corporate tax rates have a negative impact on economic growth (i.e., it finds no evidence that changes in either the statutory corporate tax rate or the effective marginal tax rate on capital income are correlated with economic growth).
How the December 2017 New Tax Law Affects Individual Taxes:
For Individual Tax Rate Changes Only. Other than the 10% and 35% tax brackets remaining the same, all of the other individual tax brackets have been lowered. So that’s people or couples with taxable income over $77,000 but under $315,000. Definitely a middle class tax reduction. Here’s the amounts you’ll save:
Taxable income up to about $77,000 was 15%, now 12% - $1,710 less
Taxable income up to about $160,000 was 25%, now 22% = $2,490 less
Taxable income up to about $240,000 was 28%, now 24% = $3,200 less
Taxable income up to about $315,000 was 33%, now 24% = $6,750 less
Taxable income up to about $400,000 was 33%, now 32% = $850 less
Due to the brackets and phase-out of the 20% business deduction, couples with taxable income $365,000 to about $480,000 have no tax change for the income in that range.
Taxable income above $480,000 enjoys a 2.6% decrease in tax rate.
However, these rates go back to the 2017 tax brackets in 2026.
For the above, you win for 8 years, then go back to where we were.
Child Tax Credit. The child tax credit is double what it was in 2017 at $2,000 per child (under 17 years of age), with $1,400 of this refundable for families who have no income tax liability. This credit phases out starting at $400,000 for married couples instead of around $180,000, and reverts back to the old way of $1,000 in 2026, based on less than $180K income.
Everyone wins on this one for 8 years; thereafter most business owners won’t get the credit due to their income level.
Standard Deduction and Personal Exemptions. In an attempt to reduce the number of taxpayers who itemize their tax returns, the new bill increases the standard deduction, but eliminates exemptions – about $4000 per person. For the average couple with two children, the loss of personal exemptions eliminates about $16,000 of deductions. Under the new code, it’s $12,000 for individuals and $24,000 for married couples. This too goes back to the 2017 rates of $6,350 for individuals and $12,700 for married couples in 2026.
Some people win, some people lose on this one above.
Property Taxes and Mortgage Interest. If you’re in a state with an income tax, the new bill caps the aggregate of personal state and local income taxes, property taxes, etc., to $10,000. “The property taxes for rental property continue to be fully deductible,”. Homes purchased after Dec. 15, 2017, are only subject to a mortgage interest deduction for principal up to $750,000.
No one in a taxable state wins on this one. Everyone in a higher priced real estate market loses on this one.
Final summary: All in all, for the middle class individual who is not in business = a small tax decrease, mostly $3,000-$6,000, more in some cases.
For the middle class business owner = a moderate tax decrease; depending on several factors, could be $5000 up to $10-12,000 annually on the lower end, and $30,000-$50,000 or more for business owners with taxable income approaching $300,000.