December 28, 2017
The Tax Cuts and Jobs Act, which was passed in both houses of Congress earlier this week, was signed into law by President Trump on December 22, 2017. The majority of the provisions contained in the sweeping reform legislation go into effect as of January 1, 2018. Read on for a few year-end tax moves to discuss with your tax professional before the end of 2017 followed by an overview of various items included in the act.
Discuss with your tax professional before year end:
For Individuals –
- Payment of 2017 state income taxes before December 31, 2017.
- Prepayment of 2017 and/or 2018 personal property taxes before December 31, 2017.
- Accelerating your charitable contributions into 2017.
- Prepay 2% itemized deductions (such as employee business expenses, investment advisory fees, tax preparation fees, professional licenses, etc.) before December 31, 2017.
- Prepare for additional estate gifting beginning January 1, 2018.
For Businesses –
- Accelerating equipment purchases for immediate write-offs before December 31, 2017.
- Closing 1031 exchanges on personal property before December 31, 2017.
- Timing of terminated partnerships—technical termination rules go away in 2018.
- 2018 change of accounting methods for business below $25MM to a cash basis method or completed contract accounting (as opposed to percentage of completion)
- 2018 choice of business entity.
Items Effecting Individuals beginning in 2018:
Tax Rates – The act keeps the seven tax brackets but reduces the rates for five of them. The new bracket rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The maximum rate is for income above $600,000 married filing jointly and $500,000 for singles.
Standard Deduction and Personal Exemptions – The standard deduction is increased to $24,000 for married filing jointly and $12,000 for singles. Personal exemptions are repealed.
Mortgage Interest – The mortgage interest deduction is capped at interest on $750,000 of mortgage debt each for a principal residence and a second home. The deduction for interest on home equity lines of credit is repealed.
Taxes – The act puts a $10,000 cap on deductions in connection with state and local income, property, and sales taxes. It also provides that no deduction will be allowed in 2017 for prepayment of state or local income taxes for years beginning after December 31, 2017.
Medical Expenses – The threshold for deducting medical expenses is temporarily reduced from 10% to 7.5% (for the 2017 and 2018 tax years only).
Child Tax Credit – The per-child tax credit is doubled, rising from $1,000 to $2,000 per qualifying child. The phase out threshold is increased to $400,000 for married filing jointly and $200,000 for those filing singly.
Credit for Non-Child Dependents – The act temporarily allows taxpayers to take a $500 credit for each non-child dependent whom they support, such as a child under 19 (or student under24), an ailing elderly parent, or an adult child with a disability.
Pass-Through Income – The act includes a 20% deduction on Qualified Business Income from sole proprietors, S-Corporations, LLCS, and partnerships (subject to limitations).
Alternative Minimum Tax – The act reduces the number of filers who would be hit by this tax by raising the income exemption levels to $70,300 for singles and $109,400 for married filing jointly.
Affordable Care Act Individual Mandate – The individual mandate is repealed as of 2019.
College Athletic Fund Contributions – These contributions, made in exchange for preferential seating, are no longer deductible.
Alimony Deduction – This is repealed after 2018.
Estate Tax – This tax remains at 40% but the exemption is doubled to approximately $11.2 million per individual in 2018.
Miscellaneous Tax Breaks – The act preserves some smaller, but popular, tax breaks, including deductions for student loan interest and classroom supplies bought with a teacher’s own money. It also keeps the tax-free status of tuition waivers for graduate students.
Items Effecting Businesses in 2017:
Full Expensing for Certain Business Assets – The bill provides 100% expensing of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023.
Items Effecting Businesses for tax years beginning after December 31, 2017:
Corporate Tax Rate – The corporate tax rate is reduced from a top graduated rate of 35% to a flat 21%.
Corporate Alternative Minimum Tax – The act repeals this tax.
Full Expensing for Certain Business Assets – The bill provides 100% expensing of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. For property placed in service in tax years beginning after December 31, 2017, it also increases the Sec. 179 expensing limitation ceiling and phase out threshold to $1 million and $2.5 million, respectively, both indexed for inflation.
Interest Expense – Every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. An exemption from these rules applies for taxpayers with average annual gross receipts for the three-tax year period ending with the prior tax year that do not exceed $25 million
Net Operating Losses (NOL) – For NOLS arising in tax years ending after December 31, 2017, the two-year carryback and the special carryback provisions are repealed, so losses can only be carried forward.
Foreign Provisions – The act includes several international tax changes including a repatriation provision—US shareholders owning at least 10% of a foreign subsidiary generally must include in income, for the subsidiary’s last tax year beginning before 2018, the shareholder’s pro-rata share of the accumulated post-1986 historical earnings and profits (E&P) of the foreign subsidiary as of the “measurement date” to the extent that E&P has not been previously subject to US tax. The “measurement date” is Nov. 2, 2017, or Dec. 31, 2017, whichever date produces a greater result. The portion of E&P attributable to cash or cash equivalents is taxed at a reduced rate of 15.5%, while any remaining E&P is taxed at a reduced rate of 8%. At the election of the US shareholder, the tax liability is payable over a period of up to eight years.
Cash Method of Accounting – The act increases the cash accounting method applicability threshold for most business up to a $25 million gross receipts test, regardless of whether they purchase, production, or sale of merchandise is an income-producing factor.
Accounting for Long-Term Contracts – For contracts entered into after December 31, 2017 in tax years ending after that date, the exception for small construction contracts from the requirement to use the Percentage of Completion Method is expanded to apply to contracts for the construction or improvement of real property if the contract: (1) is expected (at the time such contract is entered into) to be completed within two years of commencement of the contract and (2) is performed by a taxpayer that (for the tax year in which the contract was entered into) meets the $25 million gross receipts test.
Deduction for Entertainment – For amounts incurred or paid after December 31, 2017, this deduction is disallowed; previously entertainment was 50% deductible.
Domestic Production Activities Deduction – The act repeals this deduction.
Technical Termination of Partnership Rules – The act repeals Code Section 708(b)(1)(B) rule providing for technical termination of a partnership.