On December 20, 2017, Congress completed passage of the largest federal tax reform law in more than 30 years. The “Tax Cuts and Jobs Act” (TCJA) includes a multitude of provisions that will have a major impact on businesses and also means substantial changes for individual taxpayers. The following is an overview of some of the most significant provisions for businesses and individual taxpayers.
Individuals
These changes are effective for tax years beginning after December 31, 2017, and before January 1, 2026, except where noted:
- Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
- Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately)
- Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit
- New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers)
- Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year — permanent
- AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers
- Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing)
- Reduction of:
- the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018
- the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions
- Elimination of:
- personal exemptions
- the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018, and permanent
- the deduction for interest on home equity debt
- the personal casualty and theft loss deduction (with an exception for federally declared disasters)
- miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses)
- the AGI-based reduction of certain itemized deductions
- the moving expense deduction (with an exception for members of the military in certain circumstances)
20% QBI Deduction: Individuals, estates and trusts that own interests in noncorporate “pass-through” entities may see some major (albeit temporary) relief under the Tax Cuts and Jobs Act (TCJA) in the form of a new deduction for a portion of qualified business income (QBI). For tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, owners of entities such as sole proprietorships, partnerships, S corporations and LLCs can deduct 20% of QBI, subject to limitations. Certain restrictions can apply if taxable income exceeds the applicable threshold — $157,500 or, if married filing jointly, $315,000. The QBI deduction isn’t allowed in calculating the owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction. Additional rules and limits apply to the QBI deduction, and careful planning will be necessary to gain maximum benefit.
Business
These changes generally apply to tax years beginning after December 31, 2017, except where noted:
- Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
- Repeal of the 20% corporate alternative minimum tax (AMT)
- New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
- Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
- Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
- Other enhancements to depreciation-related deductions
- New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
- New limits on net operating loss (NOL) deductions
- Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction (DPAD) or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
- New rule limiting like-kind exchanges to real property that is not held primarily for sale
- New tax credit for employer-paid family and medical leave — through 2019
- New limitations on excessive employee compensation
- New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation
Keep in mind that additional rules and limitations apply to what we’ve covered here, and there are other TCJA provisions that may affect you and/or your business. For more details and to discuss how you might be affected in light of these changes, contact AP Group Inc at (916) 400-0022 or by emailing angie@apcpagroup.com.