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Summary of the Reconciled and signed Tax Cuts and Jobs Act

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Summary of the Reconciled and signed Tax Cuts and Jobs Act

This summary does not address every provision of the recently passed tax reform legislation, however, we have included those provisions likely to affect the most individuals and small businesses. Please contact us if you have specific questions that are not answered by this summary.

Individual Tax Reforms

Most reports estimate that approximately 80% of taxpayers will see a reduced tax burden in 2018. A large increase in the standard deduction, as well as an increased child tax credit provide the greatest relief to taxpayers, even for many who currently itemize. The other 20% will see some type of tax increase, the magnitude of which will depend on many factors. Some common factors that could contribute to a higher tax bill in 2018 are:
o Families with more than two (2) children, as the tax reform bill has been designed around a family of four (4).
o Purchasing a new home with a mortgage in excess of $750k after December 15, 2017
o Taxpayers incurring home equity debt after December 15, 2017
o Resident of a high property tax state or county
o Resident of a state with higher income tax rates
o Taxpayers with significant unreimbursed job-related expenses, broker fees, or investment interest expense.
There are many other factors that may contribute to a higher tax bill in 2018, but these are the items likely to affect the most taxpayers.

Adjusted Tax Brackets and Rates

Married filing joint and surviving spouses (Divide threshold by 2 for married filing separately)
Old rate structure
Income Threshold

0 – 10%

18,650 – 15%

75,900 – 25%

153,100 – 28%

233,350 – 33%

416,700 – 35%

470,700 – 39.6%

New rate structure
Income Threshold

0 – 10%
19,050 – 12%

77,400 – 22%

165,000 – 24%

315,000 – 32%

400,000 – 35%

600,000 – 37%

Head of Household
Old rate structure
Income Threshold

0 – 10%
13,350 – 15%

50,800 – 25%

131,200 – 28%

212,500 – 33%

416,700 – 35%

444,500 – 39.6%

New rate structure
Income Threshold

0 – 10%
13,600 – 12%

51,800 – 22%

82,500 – 24%

157,000 – 32%

200,000 – 35%

500,000 – 37%

Individuals filing Single

Old rate structure
Income Threshold

0 – 10%
9,325 – 15%

37,950 – 25%

91,900 – 28%

191,650 – 33%

416,400 – 35%

418,400 – 39.6%

New rate structure
Income Threshold

0 – 10%
9,525 – 12%

38,700 – 22%

82,500 – 24%

157,500 – 32%

200,000 – 35%

500,000 – 37%

Estates and Trusts

Old rate structure
Income Threshold

0 – 15%

2,550 – 25%

5,950 – 28%

9,050 – 33%

12,400 – 39.6%

New rate structure
Income Threshold

0 – 10%

2,550 – 24%

9,150 – 35%

12,500 – 37%

Adjusted Standard Deductions
Filing Status

Single and Married Filing Separate

 

Old – 6,350

New – 12,000

Married Filing Joint

 

Old – 12,700

New – 24,000

Head of Household

Old – 9,350

New – 18,000

Changes to Individual Deductions and Credits

• The following items have not been affected and will continue as they are, including all applicable limitations, phaseouts, and sunsetting provisions.
o Student Loan Interest Deduction
o Credit for Plug-in Electric Drive Vehicles
o No Changes to the Earned Income Tax Credit
o American Opportunity and Lifetime Learning Credits
o Tuition and Fees Deduction
o Grad Student Tuition Reduction still excluded from income
o Exclusion of Savings bond interest used for higher education expenses
o Employer Educational Assistance program payments remain non-taxable
o Deduction for out of Pocket educator expenses
o Exclusion of gain from sale of personal residence
• Excess business losses convert to NOL
o Excess Passive activity and farming losses will carryforward as NOL to future tax years.
• No Deduction for alimony payments
o The deduction of alimony payments will be eliminated beginning 1/1/2019.
o Recipients of alimony will no longer include alimony received as income
• No deduction for moving expenses
o The deduction for moving expenses has been discontinued for all but active duty members of the armed forces.
• 529 Education Savings account Changes
o Taxpayers may now distribute up to $10k per year per account to fund elementary or secondary education in addition to qualified college expenses.

Changes to Schedule A, Itemized Deductions

o Overall Limitation of Itemized Deductions
 The Overall Limitation has been eliminated.
o Medical Expense deduction threshold
 The threshold has been decreased from 10% to 7.5%
o State and Local income or sales tax and property taxes
 There is now an aggregate limit of $10,000 on schedule A deductible taxes.
o Home Mortgage Interest Deduction
 Deduction allowed on up to $750k of acquisition indebtedness
 No deduction allowed for home equity indebtedness
o Charitable Deduction changes
 The income percentage limitation has been increased from 50% to 60%
 Rights to purchase seats for athletic events are not deductible
o Personal Casualty Losses
 Only deductible to the extent caused by a declared federal emergency
o Miscellaneous Itemized deductions subject to 2% limitation
 ALL of these items have been suspended and will not be deductible in 2018.
• Personal Exemptions have been eliminated
• Increase to Child Tax Credit
o The Child tax credit has been increased to $2,000, $1,400 of which is refundable. There is also an additional $500 credit for non-child dependents.
o The Phaseout thresholds have been increased to $400k for joint filers, and $200k for all other filers.

ACA Shared Responsibility Payment

Also known as the individual mandate, this has been repealed, and there will no longer be a penalty for not having qualified health insurance coverage.

Business Tax Reform

Corporate Tax Rate
The corporate tax rate will be a flat 21%.

Flow Through Entities

Certain pass-through businesses will be allowed the lesser of 20% of qualified business income or 50% of gross wages, on the owners’ personal Forms 1040. Joint filers below $315,000 and other filers below $157,000 can claim the full deduction. This provision would expire December 31, 2025. Please contact us if you have questions regarding your individual circumstances.

Accounting Method Simplification

• Eligibility for cash accounting method
o A corporation or partnership may now use the cash method of accounting if their 3-year average of gross receipts does not exceed $25,000,000. This also applies to entities engaged in Farming.
• Capitalization of costs to inventory
o Corporations and partnerships will also be exempt from the inventory capitalization rules of 263A if they are under the gross receipts threshold above. For individuals, each activity in which they are involved shall be treated as its own “entity” for the purpose of calculating the gross receipts threshold.
• Percentage completion for long term contracts
o Corporations and partnerships will also be exempt from the requirement to use the percentage completion method for long term contracts if they are under the gross receipts threshold above. For individuals, each activity in which they are involved shall be treated as its own “entity” for the purpose of calculating the gross receipts threshold.

Changes to Depreciation and Fixed Asset Accounting for Tax Purposes

• Section 179 Deduction
o The total Section 179 deduction limit has been increased to $1,000,000, and the placed-in-service limitation increased from $2,000,000 to $2,500,000. Qualified Real Property now specifically includes the following items for non-residential real property
 Roofs
 Heating, Ventilation, & Air Conditioning
 Fire Protection and Alarm Systems
 Security Systems
• Bonus Depreciation
o Bonus depreciation will be increased from 50% to 100% for tax years 2018-2022.
o Bonus depreciation will be 80% for tax year 2023.
o Bonus depreciation will be 60% for tax year 2024.
o Bonus depreciation will be 40% for tax year 2025.
o Bonus depreciation will be 20% for tax year 2026.
 These rates apply to new and used personal property, as well as plants bearing fruits and nuts. Lesser percentages may be elected by the taxpayer for specified tax years.
• Changes to qualified property
o The following categories of assets have been eliminated:
 Qualified leasehold improvements
 Qualified Restaurant Improvements
 Qualified Retail Improvement Property
• Research and Development Expenses – Beginning Tax Year 2022
o Research and Development costs must be capitalized and amortized over 5 years, 15 years for foreign R&D expenses. No Deduction shall be allowed for any such capitalized expenses that are disposed, retired, or abandoned.
• Certain Self-Created Property not treated as a capital asset
o Patents, inventions, Models or designs, secret formulas or processes are to be treated as ordinary income items if sold.
• Like-Kind-Exchanges
o Section 1031 will no longer apply to personal property, only real property.
• Depreciation Limitations on Passenger Autos

Year in Service:

1st

Old – 2,560

New – 10,000

2nd

Old – 4,100

New – 16,000

3rd

Old – 2,450

New – 9,600

4th

Old – 1,475

New – 5,760

Changes to Depreciation for Farms
• Depreciable Life and Depreciation Methods
o Any Machinery and Equipment used in farming (excluding grain bins, cotton ginning assets, fencing, or other land improvements) may be depreciated over 5 years.
o Farms are no longer required to use the 150% Declining Balance method to depreciate personal property.

Changes to Other Business Related Exclusions and Deductions
• Limitation of Business interest deduction
o Business interest may be deducted, but is limited to 30% of adjusted taxable income (Taxable income before deducting any interest. Disallowed interest may carry forward to the following year indefinitely.
o Businesses meeting the $25,000,000 gross receipts test mentioned previously are exempt and have no limitation.
o Indebtedness incurred by a business used to finance the acquisition of motor vehicles for sale or lease is excluded.
• Net Operating Loss Deductions
o Net Operating Losses shall no longer be carried backward. However, they may now be carried forward indefinitely.
o Net operating loss deduction shall be limited to 80% of taxable income for a given year.
o Farm Exclusion: Farms will still be eligible for the 2-year carryback period.
o Insurance Company Exclusion: Insurance Companies, other than life insurance, will be eligible for the 2-year carryback, but be limited to a 20 year carryforward. These companies are not subject to the 80% income limitation.
• Domestic Production Activities Deduction
o The Domestic Production Activities Deduction has been eliminated.
• Limitations on deductions for certain Fringe Benefits
o No deduction shall be allowed for entertainment provided to employees.
o No deduction shall be allowed for transportation and commuting benefits provided to employees.
o No Deduction shall be allowed for meals provided to employees for the convenience of the employer.
• Deductions for local lobbying expenses
o These expenses are no longer deductible
• Employee Achievement Awards
o Non-Taxable employee achievement awards may not include Cash, Gift Cards, or other non-tangible personal property such as vacations, lodging, theater or sporting event tickets, stocks, bonds, securities, or other similar items.

Business Taxes and Credits
• Rehabilitation Credit
o Limited to certified historical structures
• Employer Credit for Paid Family and Medical Leave
o 12.5% of amounts paid for family and medical leave.
 This percentage increases by .25% for each percentage of compensation paid above 50%
 Applies to 12 weeks of total leave per employee

• Excise tax on Beer
o For Large Producers: Tax decreased from $18 to $16/barrel for the first 6,000,000 barrels
o For Small Producers: Tax decreased from $7 to $3.50/barrel for the first 60,000 barrels.
• Excise tax on Wine
o Alcohol Content threshold for lowest excise tax tier has increased from 14% to 16%.
o Excise Tax credits are now available to wine producers and importers of all sizes.
• Excise Tax on Distilled Spirits
o Excise tax on first 100,000 proof gallons lowered to $2.70 from $13.50.

Alternative Minimum Tax

There is no longer a minimum tax calculation for corporations. If you have questions regarding the minimum tax for individual taxpayers please contact us.

Taxability of Contributions of Capital from Governmental/civic organizations

The following must be treated as revenues, rather than as a contribution to capital. (1) any contribution in aid of construction or any other contribution as a customer or potential customer, and (2) any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such)

Technical Termination of Partnerships

Partnerships will no longer automatically terminate so long as any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership.

Reduction in Corporate Dividends Received Deduction

The amount of dividends allowed to be excluded from income has been decreased to coincide with a lower corporate income tax rate. If you have questions regarding this section, please contact us for an individualized consult.

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