President Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017. The Act is arguably the most significant revision of the Internal Revenue Code since 1954.
Most of the press in the first days following enactment focused on prepayment of property taxes otherwise due in 2018, a reaction to the post-2017 $10,000 limitation on personal taxes as an itemized deduction. This ceiling will be of particular hardship to residents of the D.C. metropolitan area who pay high income and real property taxes.
Here are some of the other law changes affecting individuals effective 2018 unless otherwise noted:
- Cost of living adjustments will be smaller as a result of using a new method of indexing called chained CPI-U which assumes consumers look for substitute items rather than absorb rising process.
- Effective 2019, alimony will be nondeductible to the payor and tax-free to the recipient; however, the opposite tax treatment will be preserved for pre-2019 divorce or separation instruments including subsequent modifications which do not clearly opt to apply new law.
- Moving expenses (except for certain active duty military), theft and casualty losses (except in disaster areas) and miscellaneous itemized deductions are no longer deductible.
- The floor on medical expenses will be 7½ percent of adjusted gross income for all individuals for 2017 and 2018.
- The home mortgage interest deduction is capped to apply on acquisition indebtedness (including improvements) at $750,000 effective December 16, 2017, but existing acquisition indebtedness up to $1 million is protected.
- The standard deduction is almost doubled to $24,000, $18,000 and $12,000 for married filing jointly, head of household and unmarried respectively.
- The personal exemption is discontinued in favor of an enlarged child tax credit applicable only if one has dependents under age 17.
- The highest tax bracket is reduced from 39.6 percent to 37 percent.
- The individual alternative minimum tax exemption is increased such that, with the decrease in itemized deductions, it will no longer apply to large numbers of taxpayers.
- The individual mandate for health insurance coverage is repealed.
- The applicable estate, gift and generation-skipping tax exemption is doubled to $11.2 million (effectively protecting up to $22.4 million in the case of a married couple).
- Distributions are permitted of up to $10,000 per year for the elementary or secondary education of any child from one or more Section 529 plans.
Here are some of the law changes affecting businesses effective 2018 unless otherwise noted:
- Cash basis accounting and completed contract method on long-term contracts are permitted for all businesses with average gross receipts for the three preceding years under $25 million.
- The C corporation tax rate is reduced to a flat 21 percent rate.
- A new deduction is created for unincorporated businesses under which a non-C corporation business owner, subject to a limitation and (in the case of a personal service business) a phaseout, may be able to claim a 20 percent deduction against taxable income for “qualified business income” which apparently includes rental real estate.
- Business entertainment expenses cannot be deducted though the deduction for business meals remains (the distinction is unclear).
- The business interest deduction is limited to the sum of interest income plus 30 percent of adjusted taxable income in the case of businesses with prior three-year average revenues of greater than $25 million; floor-planning is not considered as interest for this purpose.
- All businesses will be able to write off all purchases of tangible personal property on acquisition through 2022 with the exception of vehicles (though they will get a faster cost recovery).
- Only farmers will be able to carry back a net operating loss while others will carry losses forward indefinitely to offset only 80 percent of taxable income; individuals in no event will be allowed to deduct business losses in excess of $250,000 ($500,000 on a joint return) and must use the excess loss in future years through an NOL.
With all tax law changes come planning opportunities. First and foremost, all businesses will want to review their choice of entity. Operating as a C corporation will be of increased interest to many businesses, particularly successful personal service businesses which may not be able to enjoy the new deduction for 20 percent of qualified business income.
Additionally, eligible accrual basis businesses may wish to change to cash basis accounting, particularly if their inventories and accounts receivable exceed accounts payable. Eligible contractors, previously required to use percentage of completion on their long-term contracts, may also wish a preapproved change to completed contract.
If you would like to learn the effect of the Tax Cuts and Jobs Act on you and/or your business, please contact one of our Stein Sperling tax attorneys.
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