President Trump signed the Tax Cuts and Jobs Act (“TCJA”) on December 22, 2017. This $1.4 trillion tax cut was expected to lower taxes for middle-class Americans, and bring back jobs to the United States. The jury is still out on the effectiveness of this Act. However, since this act was signed, US GDP has increased from a rate of 2.3% in Q4’17 to 3.5% in Q3’18. Furthermore, the US Unemployment Rate has decreased from 4.1% in December of 2017 to a low of 3.7% in October of 2018. There are many provisions in this legislation that will impact businesses and individuals in 2018. Here are a few of the key provisions you will want to be aware of:
C Corporation Tax Rate – the C Corporation tax rates will change to a flat rate of 21% for taxable years after December 31, 2017. This includes personal service corporations.
Taxable Income Tax Rate 2017 Tax Rate 2018
<$50,0000 15% 21%
$50,000 – $75,000 25% 21%
$75,000 – $10,000,000 34% 21%
>10,000,000 35% 21%
Qualified Business Income Deduction –beginning after December 31, 2017, in the case of a taxpayer other than a C Corporation there shall be a deduction with respect to any qualified trade of business of an amount equal to the lessor of:
1) 20% of the taxpayers qualified business income
2) The greater of:
a. 50% of the w-2 wages of the qualified business
b. The sum of 25% of the w-2 wages of the qualified business plus 2.5% of the unadjusted basis immediately after acquisition of qualified property
Please note that the w-2 limitation (2 above) does not apply to any taxpayer whose taxable income for the year does not exceed $315,000 MFJ and $157,500 single. The w-2 limit applies fully for a taxpayer whose taxable income is in excess of the threshold amount by $100,000 MFJ, $50,000 single.
Section 179 Expense Limitations and Modifications – beginning after December 31, 2017, the maximum amount a taxpayer can elect to expense under sections 179 is increased from $510,000 in 2017 to $1,000,000. Furthermore, the deduction limit or phase out begins at $2,030,000 in 2017, this limit is increased to $2,500,000 in 2018.
Bonus Depreciation – taxpayers are required to take and additional first year special depreciation allowance for certain qualified property. This deduction is calculated after taking any Section 179 and before any regular depreciation deduction. This additional depreciation taken on new property increased from 50% prior September 28, 2017 to 100% between September 28, 2017 and December 31, 2022. This increased deduction also applies to Longer Production Period Property and Certain Aircraft. After 2022, the deduction is reduced 20 percentage points each year until it reaches 0% for qualified property and 20% for Longer Production Period Property and Certain Aircraft in 2027.
Limitation of Business Interest Deduction – beginning after December 31, 2017, the deduction of business interest will be limited to the sum of:
1) Business interest income of the taxpayer for the tax year
2) 30% of the adjusted taxable income of the taxpayer for the tax year
3) The floor plan financing interest of the taxpayer for the tax year
The amount of any business interest not allowed as a deduction for any taxable year shall be treated as business interest paid or accrued in the succeeding taxable year. There is an exemption from this provision for certain small businesses with average annual gross receipts of less than $25 million for the proceeding 3 tax years.
Repeal of 2 Year Net Operating Loss Carryback and Limit of Carryovers – For losses arising in taxable years after December 31, 2017, the NOL deduction is limited to 80% of taxable income. Furthermore, the TCJA repeals the 2-year carryback provision except for farming businesses and property and casualty insurance companies.
Limitation of Excess Business Losses of Non-Corporate Taxpayer – beginning after December 31, 2017, any excess business losses of the taxpayer shall not be allowed. Where “excess business Loss” means the excess of aggregate deductions attributable to the business of the taxpayer over the sum of:
1) The aggregate business income/gain of the taxpayer
2) $250,000 single and $500,000 MFJ
Domestic Production Activities Deduction Repealed – beginning after December 31, 2017, for non-corporate taxpayers and after December 31, 2018 for C corporations, the deduction of an amount equal to 9% of the lessor of the following has been repealed:
1) Qualified production activities income of the taxpayer for the tax year or
2) Taxable Income for the taxable year
Research and Development Expenditures – currently taxpayers may elect to deduct certain expenses for research and development in the current year. Effective after December 31, 2021, research and development expenses will be required to be capitalized and amortized ratably over a 5-year period.
Business Meals and Entertainment Expenses – beginning after December 31, 2017, businesses may no longer deduct expenses generally considered to be entertainment, amusement or recreation, membership dues with respect to any club organized for business, pleasure, recreation or other social purpose or a facility used in connection with any of the above. Prior to December 31, 2017, these expenses were limited to a 50% deduction. There are specific exceptions to this provision including:
- Business meals with “Business Connection” 50% deduction
- Food and beverages for employees 50% deduction
- Recreational expenses for employee 100% deduction
- Employee, stockholder, agents, directors, business meetings 50% deduction
- Meetings of business leagues (501(c)(6) 100% deduction
Individual Income Tax Brackets – The seven individual income tax brackets will remain, however, beginning after December 31, 2017, individual income tax brackets will be changed as follows:
Income Tax Brackets for 2017 Income Tax Brackets for 2018
Beginning of the 15% Bracket Beginning of the 12% Bracket
(10% Below) (10% Below)
Married Filing Jointly $18,650 $19,050
Single $9,325 $9,525
Beginning of the 25% Bracket Beginning of the 22% Bracket
Married Filing Jointly $75,900 $77,400
Single $37,950 $38,700
Beginning of the 28% Bracket Beginning of the 24% Bracket
Married Filing Jointly $153,100 $165,000
Single $91,900 $82,500
Beginning of the 33% Bracket Beginning of the 32% Bracket
Married Filing Jointly $233,350 $315,000
Single $191,650 $157,500
Beginning of the 35% Bracket Beginning of the 35% Bracket
Married Filing Jointly $416,700 $400,000
Single $416,700 $200,000
Beginning of the 39.6% Bracket Beginning of the 37% Bracket
Married Filing Jointly $470,700 $600,000
Single $418,400 $500,000
The marriage penalty is removed in every bracket except 37% for 2018 – 2025.
Standard Deduction/Personal Exemption – beginning after December 31, 2017 through 2025, the standard deduction and personal exemption will change as follows:
Standard Deduction (Single) $6,350 $12,000
Standard Deduction (MFJ) $12,700 $24,000
Personal Exemption $4.050 $0
State and Local Taxes – beginning after December 31, 2017, an itemized deduction is allowed up to $10,000 for state and local income and property taxes, prior to this date this deduction was not limited.
Qualified Residence Interest – beginning after December 31, 2017 through 2025, the qualified residence interest deduction and home equity indebtedness deduction are limited as follows:
Acquisition Indebtedness Limit (MFJ) $1,000,000 $750,000
Home Equity Indebtedness Limit (MFJ) $100,000 $0
Miscellaneous Itemized Deductions – beginning after December 31, 2017 through 2025 these deductions are suspended.
Alternative Minimum Tax (“AMT”) – beginning after December 31, 2017, the AMT exemption amount increases from $84,500 to $109,400 MFJ, $54,300 to $70,300 Single. Furthermore, the phase out threshold for the exemption is increased from $160,900 to $1,000,000 MFJ, $120,700 to $500,000 Single.
Shared Responsibility Payment – beginning after December 31, 2017, the shared responsibility payment enacted as part of the Affordable Care Act is reduced from $272 per month (Single), $1,360 per month (family of five), to $0 for both categories.
Child Tax Credit Enhanced – beginning after December 31, 2017, this credit is increased from $1,000 per child to $2,000 per child. Furthermore, the phase out for the credit is increased from AGI of $110,000 MFJ, $75,000 Single, to AGI of $400,000 MFJ and $200,000 Single. There is also a $500 credit for qualifying dependents other than qualifying children.
President Trump signed the Tax Cuts and Jobs Act (“TCJA”) on December 22, 2017. This $1.4 trillion tax cut is one of the largest tax cuts in the history of the United States. There are many provisions in this legislation that will impact businesses and individuals in 2018. It is in your best interest to understand these changes in the tax law as they could impact both your business and personal bottom lines!
Please let us know if you have questions concerning the 2018 federal tax law changes or any other tax compliance or planning issues, we can be reached at (480) 980-3977!
Paul J. Beckert MBA, CPA