Currently, there are two bills going through congress that could impact our tax laws in 2018 and beyond. The Tax Cut and Jobs Act which was recently approved by the House of Representatives on November 16th and the Senate version of the bill which was passed on December 2. Below is a list of some of the key differences between these bills as well as a few more tax law changes you may want to consider for 2017 and beyond.
Corporate Rate Delay. The House bill cuts the corporate tax rate from 35% to 20% effective in tax years after Dec. 31, 2017. The Senate bill also cuts the corporate tax rate to 20%, but delays the effective date until 2019.
Treatment of Pass-Through (i.e. Partnership and S-Corp) Income:
House Bill: Allows all passive income to be taxed at 25 percent, and, except for certain service businesses, allows businesses organized as pass-through entities to elect to have 30 percent of its income taxed at 25 percent as income from capital. Alternatively, pass-through entities and service entities with significant capital investments can elect to calculate the percentage of income earned on capital investments, and that percentage of their income would be subject to the 25 percent rate. Otherwise, personal service income is subject to individual income tax rates up to 39.6%
Senate Bill: Rather than adopting a lower tax rate on pass-through income, the Senate bill allows pass-through entities to deduct 17.4 percent of their pass-through income in determining taxable income. This deduction is limited to 50 percent of the wages paid to the owner by the business. Pass-through entities are still subject to ordinary income tax rates. The deduction is not available to specified service businesses including law, accounting and other businesses whose income is above $150,000 and whose principal assets are the reputation and skill of employees.
Expensing and Depreciation:
House Bill: Allows immediate expensing ("Bonus Depreciation") of qualified property, generally property not related to real estate business and that is depreciable over 20 years or less. The bill increases the limits under section 179, which allows small businesses to expense certain property (generally not subject to the immediate expensing rule above), from $500,000 to $5 million, and phases out the benefit where companies purchase more than $20 million of qualifying property.
Senate Bill: The Senate bill also provides for immediate expensing of qualified property. However, the Senate bill raises the expensing cap under section 179 to only $1 million and begins phasing out the benefit when purchases reach $2.5 million.
Tax Rates and Brackets:
House Bill: The House bill has four brackets, and individual rates from 12 percent to 39.6 percent.
Senate Bill: The Senate bill has seven tax brackets, from 10 percent to 38.5 percent.
State and Local Taxes and Mortgage Interest:
House Bill: The House bill eliminates the deduction for state and local taxes, but retains a deduction for local property taxes up to $10,000. The bill limits the mortgage interest deduction to the first $500,000 in mortgage value.
Senate Bill: The Senate bill completely eliminates the deduction for state and local taxes, but keeps the mortgage interest deduction for the first $1,000,000 in mortgage value. The bill eliminates the deduction for home equity loans.
Alternative Minimum Tax:
House Bill: Repeals both the corporate and individual AMT.
Senate Bill: Retains the corporate AMT and the indiv
idual AMT with higher exemption and phaseout threshholds
House Bill: Increases standard deduction from $13,000 for a joint return to $24,400 for a joint return
Senate Bill: Same as House Bill but sunsets after 2025
Personal and Dependent Exemptions were repealed in both the House and Senate bills
Tax Law Extended Through 2017
- Bonus Depreciation - Section 168(K) - where a 50% depreciation deduction was allowed for qualifying property acquired and placed in service after December 31, 2014 and before 2018. In addition, the $8,000 increase in first year depreciation limit for qualifying vehicles subject to the 280F passenger auto depreciation limitations (6000lbs or less)
- Bonus Depreciation - Section 168(K) - Substitution of "Qualified Improvement Property" ("QIP") for "Qualified Leasehold Improvement Property" as property qualifying for the Section 168(k) depreciation deduction, for property placed in service after 2015. QIP is defined as any improvement to the interior portion of a non-residential building where the improvement is (1) placed in service after the date the building was first placed in service, and (2) not attributable to the (a) enlargement of the building, (b) any elevator or escalator, or (c) the internal structural framework of the building. This could mean that items such as new HVAC system, electrical or plumbing systems, lighting fixtures, ceilings, floors, stairs, non-load bearing walls qualify.
- Bonus Depreciation - Section 168(k) - new property purchased for personal use and later converted to business use by the same owner is still new property and may qualify for Section 168 (k) property.
- FICA Wage base for wages and self-employment income subject to the 15.3% tax remained at $127,200 in 2017
- The maximum IRA contribution remained at $5,500 for 2017 and the maximum 401K contribution remained at $18,000 for 2017
- The maximum SEP contribution remained at $54,000 for 2017
- The Annual exclusion for gifts remained unchanged at $14,000 for 2017
- Student loan interest deduction remains at $2500 for 2017, AGI phase out begins at $65,000 for single taxpayer, $135,000 MFJ
- The child tax credit for qualified children under the age of 17 remained at $1000
- Additional .9% Medicare Surtax on earned income of higher income Individuals, If w-2 wages exceed $250,000 married filing jointly, $125,000 married filing separately, $200,000 for other individuals
- Additional 3.8% Medicare Surtax on net Investment Income of higher Income individuals, it is 3.8% of the lesser of 1) net investment income or 2) Modified AGI exceeding $250,000 married filing jointly, $125,000 married filing separately, $200,000 for other individuals
- Capital Gains and Dividend will be taxed at 0%, 15%, 20% depending on individual income tax bracket
In addition to being aware of the tax law changes listed above, cash based business owners should consider purchasing in 2017, those Items needed for the New Year. Accrual based business owners should consider ratably accruing certain prepaid service contracts as there is a tax code provision that provides these taxpayers with a safe harbor to treat economic performance as occurring on a ratable basis for certain 12-month service contracts that require upfront payment (up to 3 months of service) allowing them to recognize expenses in the prior year. This will allow you to realize the tax savings from the purchase in 2017 versus 12 months fro
These deductions can really add up, especially if you take advantage of the IRS Section 179 mentioned above. Provided the listed property is used 50% or more of the time for business. This produces an immediate write-off of capital assets. Some typical assets that qualify for Section 179 include: manufacturing and R&D equipment, some vehicles, cell phones, computers, off-the shelf software. For example, if you buy a $1,000 computer and use it for your business, you could deduct the full cost from your taxes. If you were in the 28% federal income tax bracket, this would save you $280 in income tax. At a 12% cost of capital, this translates into a 4% discount on your computer purchase!
Many business owners fail to take advantage of all the tax deductions available to their business. Here are a few of the more commonly overlooked tax deductions you should be aware of:
- Business travel expense
- Inventory shrinkage
- Accounting fees for tax preparation services
- Bank service charges
- Bad debt expense
- Business related books, magazines, seminars, association dues
- 50% of self-employment tax
- Appreciation on property donated to charity
- Trade or business tools with life of one year or less
Currently, there are two bills going through congress that could impact our tax laws in 2018 and beyond. The Tax Cut and Jobs Act which was recently approved by the House of Representatives on November 16th and the Senate version of the bill which was passed on December 2. It is in your best interest to be prepared for these current and proposed tax law changes. It could really impact your bottom line!
Please let us know if you have questions concerning the 2017 federal tax law changes or any other tax compliance or planning issues.
Paul J. Beckert MBA, CPA
Pinnacle Business Solutions
Source: Tax Policy Center, Internal Revenue Service
Note: The information contained in this material represents a general overview of tax regulations and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.