The verdict is still out on the effectiveness of the Tax Cut and Jobs Act (“TCJA”) with increasing GDP, lower unemployment and increasing wages offset by increases in our nation’s deficit and debt (105% of GDP in 2018). That being said, there are several provisions of the TCJA that will impact businesses and individuals in 2019. Here are a few of the key provisions you will want to be aware of.
C Corporation Tax Rate
The C Corporation tax rates changed to a flat rate of 21% effective January 1, 2018. This includes personal service corporations.
|Taxable Income||Tax Rate 2019/2020|
|Less than $50,0000||21%|
|$50,000 – $75,000||21%|
|$75,000 – $10,000,000||21%|
|Greater than $10,000,000||21%|
Qualified Business Income Deduction
Effective January 1, 2018, 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:
- 20% of the taxpayers qualified business income
- 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 $321,400 MFJ and $160,700 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. Also, note that if your business is a Specified Service Trade or Business (i.e. Health, Law, Accounting, Financial Services) and your taxable income exceeds $421,400 MFJ and $210,700 single, you no longer qualify for the deduction.
Section 179 Expense Limitations and Modifications
The maximum amount a taxpayer can elect to expense under sections 179 is increased from $1,000,000 in 2018 to $1,020,000 Furthermore, the deduction limit or phase out began at $2,500,000 in 2018, this limit is increased to $2,550,000 in 2019. The Section 179 limit for SUVs, Trucks, Vans over 6000 pounds GVWR is $25,000. A truck or van that is a qualified non-personal use vehicle is not subject to the annual depreciation limit.
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 or used property is held at 100% from 2018 to 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. The additional first year bonus depreciation for vehicles purchased after 9/27/17 remained at $8,000 for 2019.
Qualified Opportunity Funds
This new tax provision provides an effective deferral mechanism for short and long-term capital gains from current investments in nearly all asset classes including stocks and other securities. Unlike Section 1031 “like-kind” deferral, qualified opportunity zones will provide: (i) the ability to invest only the gain rather than the entire current investment, (ii) a broader range of investments eligible for the deferral, (iii) a potential basis step-up of 15 percent of the initial deferred amount of investment, and (iv) an opportunity to abate all taxation on capital gains post-investment.
The new provision allows taxpayers to defer the short term or long-term capital gains tax due upon a sale or disposition of property if the capital gain portion of the sale or disposition is reinvested within 180 days in a “qualified opportunity fund”. A “Qualified Opportunity Zone Fund” is a corporation or partnership that invests at least 90 percent of its assets in qualified opportunity zone property. A Qualified Opportunity Zone is a population census tract that is a low-income community that is designated as a qualified opportunity zone. The governor of each state and the US Treasury Department certify the qualified opportunity zones within a state. In Arizona portions of Phoenix, Scottsdale, Glendale, Tempe and Mesa have been designated as Opportunity Zones.
Limitation of Business Interest Deduction
Effective January 1, 2018, the deduction of business interest will be limited to the sum of:
- Business interest income of the taxpayer for the tax year
- 30% of the adjusted taxable income of the taxpayer for the tax year
- 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 Tax Cuts and Jobs Act 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
Effective January 1, 2018, 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:
- The aggregate business income/gain of the taxpayer
- $250,000 single and $500,000 MFJ
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
Effective January 1, 2018, 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. Taxpayers may continue to deduct 50% of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact. Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.
The seven Individual Income Tax Brackets will remain as follows:
Income Tax Brackets for 2019
|(10% Below)||Married Filed Jointly||Single|
|Beginning of the 12% Bracket||$19,400||$9,700|
|Beginning of the 22% Bracket||$78,950||$39,475|
|Beginning of the 24% Bracket||$168,400||$84,200|
|Beginning of the 32% Bracket||$321,450||$160,725|
|Beginning of the 35% Bracket||$408,200||$204,100|
|Beginning of the 37% Bracket||$612,350||$510,300|
The marriage penalty is removed in every bracket except 37% for 2018 – 2025.
Standard Deduction/Personal Exemption
Effective January 1, 2018 through 2025, the standard deduction and personal exemption will change as follows:
|Standard Deduction (Single)||$12,200|
|Standard Deduction (MFJ)||$24,400|
Capital Gains and Qualified Dividend Rates for 2019 are as follows:
|Taxable Income (MFJ)||Taxable Income (Single)||Tax Rate|
|Less than $78,750||Less than $39,375||0%|
|Less than $488,450||Less than $434,550||15%|
|Greater than $488,850||Greater than $434,550||20%|
Net Investment Income Tax
This rate remains at 3.8% for 2019 and applies to modified AGI above $250,000 MFJ and $125,000 Single. An individual is subject to the net investment income tax on the lessor of net investment income (i.e. gross income from interest, dividends, annuities, royalties, rents, gain on disposition of property) for the year or or modified adjusted gross income for the year exceeding the threshold amount.
Additional Medicare Tax
This rate remains at .9% for 2019 and applies to wages and self employment income in excess of $250,000 MFJ, $125,000 Single.
State and Local Taxes
Effective January 1, 2018, 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
Effective January 1, 2018 through 2025, the qualified residence interest deduction and home equity indebtedness deduction are limited as follows:
|Acquisition Indebtedness Limit (MFJ)||$750,000|
|Home Equity Indebtedness Limit (MFJ)||$0|
Miscellaneous Itemized Deductions
Effective January 1, 2018 through 2025 these deductions are suspended.
Alternative Minimum Tax (“AMT”)
The AMT exemption amount increases from $109,400 in 2018 to $111,700 in 2019 MFJ, $70,300 in 2018 to $71,700 in 2019 Single. Furthermore, the phase out threshold for the exemption is increased from from $1,000,000 in 2018 to $1,020,600 in 2019 MFJ, $500,000 in 2018 to $510,300 in 2019 Single.
Shared Responsibility Payment
Effective January 1, 2018, 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
This credit was held flat at $2,000 per child from 2018 to 2019. The phase out for the credit was held flat at AGI of $400,000 MFJ and $200,000 Single from 2018 to 2019. There is also a $500 credit for qualifying dependents other than qualifying children.
There are many provisions in the Tax Cuts and Jobs Act legislation that will impact businesses and individuals in 2019. 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 2019 federal tax law changes or any other tax compliance or planning issues, we can be reached at (480) 980-3977!