John Kammerer, CPA
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This article was originally written in October 2020. It has been updated with new references and information.
November 19, 2017 — On Friday, December 15, 2017, the Conference Committee released a reconciled version of the "Tax Cuts and Jobs Act". The House and Senate have since voted it into law.
Below is a summary of some of the major provisions of the bill.
Changes Impacting Individual Taxpayers
Tax Brackets and Rates *
Standard Deduction*
Other Individual Provisions
- Personal exemptions are suspended . *
- Child tax credit increased from $1,000 to $2,000 with the phase-out increased to $400,000 for married taxpayers ($200,000 for other taxpayers) . The refundable portion is increased to $1,400 per qualifying child. *
- Deduction for the combination of state and local property and income taxes (or sales taxes in lieu of income taxes) is limited to $10,000 . *
- The new law would limit the deduction for state income taxes on the 2017 tax return to the amount of state taxes due during the 2017 year. This has the impact of eliminating the benefit of prepaying taxes for 2018 in anticipation of the proposed $10,000 cap .
- Mortgage interest deduction limited to mortgages of $750,000 with no deduction permitted for home equity indebtedness.* (Debt incurred before December 15, 2017 is subject to the current $1,000,000 cap)
- The current overall limitation on itemized deductions ("Pease" limitation) is suspended .*
- Miscellaneous itemized deductions suspended. *
- The Obamacare individual shared responsibility payment (i.e. penalty) is reduced to zero .
- The alternative minimum tax exemption amounts are increased to $109,400 with the phase-out beginning at $1,000,000 for married taxpayers filing a joint return . The exemption is $70,300 with the phase-out beginning at $500,000 for single taxpayers.
The above changes marked with an asterisk apply to years beginning after December 31, 2017 and before January 1, 2026 . After that date the current changes will sunset and return to current law.
Estate Tax Changes
The Act doubles the base estate and gift tax exemption amounts to $10,000,000 as indexed for inflation. This above change would apply to the estates of decedents dying, as well as gifts made, after December 31, 2017 and before January 1, 2026 .
Business Income of Individuals
For years beginning after December 31, 2017 and before January 1, 2026, the Act will allow non-corporate owners of pass-through entities (partnerships, S corporations, and sole proprietorships) a deduction equal to 20% of qualified business income . Qualified business income for the year is the net amount of domestic income from a qualified business that is not a "specified service business" . Architects and engineers were specifically excluded from the definition of a "specified service business" . Qualified business income doesn't include certain investment items or reasonable compensation paid to the taxpayer by a qualified trade or business . The deduction is limited to the greater of:
- 50% of the taxpayer's share of company W-2 wages, or
- the sum of 25% of the taxpayer's share of company W-2 wages plus 2.5% of the unadjusted basis of all "qualified property".
The above limitation as well as the "specified service business" limitation do not apply if the taxpayer's taxable income is less than $315,000 for a married taxpayer ($157,500 for all other taxpayers) . The limitation is completely phased in at $415,000 ($207,500 for all other taxpayers).
The bill contains a new limitation on the taxpayer's ability to deduct losses from pass-through entities . Taxpayers can't deduct losses in excess of $500,000 for married taxpayers and $250,000 for other taxpayers . Any loss disallowed is treated as an NOL in future years. This provision applies to years beginning before January 1, 2026 and after December 31, 2017 .
Changes Impacting Businesses Taxpayers
- C corporation tax rate is reduced to 21%.
- Corporate AMT is repealed .
- IRC 179 expensing increases to $1,000,000 with the phase-out threshold increased to $2,500,000.
- "Bonus depreciation" is increased to 100% for qualifying property placed in service after September 27, 2017 and before January 1, 2023 . This will phase down 20% per year and be phased out for years beginning after December 31, 2026. The definition of qualified property was modified to include "used" property.
- Interest expense is limited to 30% of adjusted taxable income. There is an exemption for businesses with less than $25 million in average gross receipts. The definition of adjusted taxable income is computed without regard to depreciation or amortization before January 1, 2022.
- The net operating loss rules were modified to eliminate the two-year carry-back (other than certain losses incurred in the trade or business of farming) and limit the carry-forward deduction to 80% of taxable income .
- The domestic production deduction is repealed .
- Smaller businesses can use the cash method of accounting, be exempt from the requirement to use the percentage of completion method on most long-term contracts, and be exempt from the uniform capitalization rules for inventory at higher gross receipt levels .
These changes will significantly impact our current tax system so individuals and business owners need to consider the potential impact on their business and decisions they make between now and the end of the year .
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