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. Passed by the House on Tuesday, the Bill underwent a few technical adjustments before being passed in the Senate on Wednesday morning; it then returned to the House for a final vote on Wednesday afternoon. The majority of the provisions contained in the sweeping reform legislation go into effect as of January 1, 2018. Read on for a few recommendations on actions to be taken before the end of 2017 followed by an overview of items included in the act.
For Individuals –
- Pay state income taxes due before December 31, 2017 if not subject to alternative minimum tax.
- Accelerate your charitable contributions into 2017 since all brackets will benefit.
- If you make charitable contributions to the athletic department of your favorite university in order to be entitled to purchase tickets to athletic events, definitely make those contributions before December 31, 2017.
- Prepay 2% itemized deductions due (such as investment advisory fees, tax preparation fees, professional licenses, etc.) before December 31, 2017.
- Prepare for additional estate gifting beginning January 1, 2018.
For Businesses –
- Consider a change of accounting methods for business below $25MM to a cash basis method or completed contract accounting (as opposed to percentage of completion)
- Consider accelerating equipment purchases for immediate write-offs
- Close 1031 exchanges on personal property before 12-31-17
- Pay for business entertainment in 2017
- Pay for R&D expenditures in 2017
- Consider timing of terminated partnerships—technical termination rules go away in 2018
- Consider choice of business entity
Items Affecting Individuals:
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 $300,000 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 Personal exemptions are repealed.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 – Mortgage interest will still be deductible, but only on balances less than $750,000 for loans beginning after December 15, 2017. For mortgage loans prior to this date, the cap of $1,000,000 of acquisition indebtedness for calculating the mortgage interest deduction. The deduction for interest on a home equity line of credit is repealed.
State and Local 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 and local income tax 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 parents to take a $500 credit for each non-child dependent whom they support, such as a child 17 or older, 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.
Section 529 Plans – This has been amended to allow tax-free distributions of up to $10,000 per year for K-12 private school tuition and expenses.
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 $10.98 million per individual.
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 Affecting Businesses:
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. It also increases (tenfold) the Sec. 179 expensing limitation ceiling and phase out threshold to $5 million and $20 million, respectively, both indexed for inflation.
Interest Expense – For tax years beginning after December 31, 2017, 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. Farming businesses can elect out of these rules if they use ADS to depreciate any property used in the farming business with a recovery period of ten years or more.
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. However, a two-year carryback applies in the case of certain losses incurred in the trade or business of farming.
Foreign Provisions – The act includes several international tax changes including a repatriation provision—US shareholders owning at least 10% of a foreign subsidiary will include in income the share of the post-1986 historical earnings and profits (E&P) of the foreign subsidiary, to the extent that E&P have not been previously subject to US tax. The portion of E&P attributable to cash or cash equivalents would be taxes at a 12% rate and the remainder would be taxed at a 5% rate.
Section 179 – Threshold limits for annual expensing and investments will increase to $1 million and $2.5 million for property placed in service after 2017.
Farms Property – For property placed in service after December 31, 2017, in tax years ending after that date, the cost recovery period is shortened from seven years to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which commences with the taxpayer. Additionally, the required use of the 150% declining balance depreciation method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property) is repealed. The 150% declining balance method continues to apply to any 15-year or 20-year property used in the farming business to which the straight-line method does not apply, and to property for which the taxpayer elects the use of the 150% declining balance method.
New Property Category – The act adds a new category for 15-year improvement property
Cash Method of Accounting – The act increases the cash accounting method applicability threshold for most business up to $25 million in revenue, including businesses with inventory.
Percentage of Completion Requirements – The act increases the percentage-of-completion method applicability threshold to business with average revenue of $25 million or more.
30% Interest Expense Limitation – This limitation is without regard to depreciation and amortization. Real estate businesses can elect out. ADS depreciation is required for real-estate trade or business.
Like Kind Exchanges – 1031 exchanges are now only available for real property.
DPAD Deduction – The act repeals this deduction.
Deduction for Entertainment – This deduction is repealed; previously entertainment was 50% deductible.
Research and Development Expenses – Must be capitalized and amortized over five years.
Technical Termination of Partnership Rules – The act repeals these rules.