Tax Cuts and Jobs Act: Impact on Businesses

The Tax Cuts and Jobs Act, a $1.5 trillion tax cut package, was signed into law on December 22, 2017. The centerpiece of the legislation is a permanent reduction of the corporate income tax rate. The corporate rate change and some of the other major provisions that affect businesses and business income are summarized below. Provisions take effect in tax year 2018 unless otherwise stated.

Corporate tax rates

  • Instead of the previous graduated corporate tax structure with four rate brackets (15%, 25%, 34%, and 35%), the new legislation establishes a single flat corporate rate of 21%.
  • The Act reduces the dividends-received deduction (corporations are allowed a deduction for dividends received from other domestic corporations) from 70% to 50%. If the corporation owns 20% or more of the company paying the dividend, the percentage is now 65%, down from 80%.
  • The Act permanently repeals the corporate alternative minimum tax (AMT).

Pass-through business income deduction

Individuals who receive business income from pass-through entities (e.g., sole proprietors, partners) generally report that business income on their individual income tax returns, paying tax at individual rates.

For tax years 2018 through 2025, a new deduction is available equal to 20% of qualified business income from partnerships, S corporations, and sole proprietorships.

For those with taxable incomes exceeding certain thresholds, the deduction may be limited or phased out altogether, depending on two broad factors:

  • The deduction is generally limited to the greater of 50% of the W-2 wages reported by the business, or 25% of the W-2 wages plus 2.5% of the value of qualifying depreciable property held and used by the business to produce income.
  • The deduction is not allowed for certain businesses that involve the performance of services in fields including health, law, accounting, actuarial science, performing arts, consulting, athletics, and financial services.

For those with taxable incomes not exceeding $157,500 ($315,000 if married filing jointly), neither of the two factors above will apply (i.e., the full deduction amount can be claimed). Those with taxable incomes between $157,500 and $207,500 (between $315,000 and $415,000 if married filing jointly) may be able to claim a partial deduction.

“Bonus” depreciation

The cost of tangible property used in a trade or business, or held for the production of income, generally  must be recovered over time through annual depreciation deductions. For most qualified property acquired and placed in service before 2020, special rules allowed an up-front additional “bonus” amount to be deducted. For property placed in service in 2017, the additional first-year depreciation amount was 50% of the adjusted basis of the property (40% for property placed in service in 2018, 30% if placed in service in 2019).

The Act extends and expands first-year additional (“bonus”) depreciation rules. Bonus depreciation is extended to cover qualified property placed in service before January 1, 2027. For qualified property that’s both acquired and placed in service after September 27, 2017, 100% of the adjusted basis of the property can be deducted in the year the property is first placed in service. The first-year 100% bonus depreciation percentage amount is reduced by 20% each year starting in 2023 (i.e., the first-year bonus percentage amount will be 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026) until bonus depreciation is eliminated altogether beginning in 2027.

For qualified property acquired before September 28, 2017, prior bonus depreciation limits apply — if placed in service in 2017, a 50% limit applies; the limit drops to 40% if the property is placed in service in 2018, and to 30% if placed in service in 2019.

Note that the timelines and percentages are slightly different for certain aircraft and property with longer production periods.

Internal Revenue Code (IRC) Section 179 expensing

Small businesses may elect under IRC Section 179 to expense the cost of qualified property, rather than recover such costs through depreciation deductions. The Tax Cuts and Jobs Act increases the maximum amount that can be expensed in 2018 from $520,000 to $1,000,000,  and the threshold at which the maximum deduction begins to phase out from $2,070,000 to $2,500,000. Both the $1,000,000 and $2,500,000 amounts will be increased to reflect inflation in years after 2018. The new law also expands the range of property eligible for expensing.

Foreign income

Under pre-existing corporate tax rules, U.S. companies were taxed on worldwide profits, with a credit available for foreign taxes paid. If a U.S. corporation earned profit through a foreign subsidiary, however, no U.S. tax was typically due until the earnings were returned to the United States, generally in the form of dividends paid. This system contributed to  some domestic corporations moving production overseas, and may have led some multinational companies to keep profits outside the United States.

The new law fundamentally  changes the way multinational companies are taxed, making a shift from worldwide taxation of income to a more territorial approach.  Under the new rules, qualifying dividends from foreign subsidiaries are effectively exempted from U.S. tax.  This is accomplished by allowing domestic C corporations that own 10% or more of a foreign corporation to claim a 100% deduction for dividends received from that foreign corporation, to the extent the dividends are considered to represent foreign earnings.

The new law also forces corporations to pay U.S. tax on prior-year foreign earnings that have accumulated  outside the United States in foreign subsidiaries, through a one-time “deemed repatriation” of the accumulated foreign earnings. U.S. shareholders owning at least 10% of a specified foreign corporation* may be subject to a one-time tax on their share of accumulated untaxed deferred foreign income; deferred income that represents cash will be taxed at an effective rate of 15.5%, other earnings at an effective rate of 8%; the resulting tax can be paid in installments. The tax applies for the foreign corporation’s  last tax year that begins before 2018. The one-time tax is also not limited to C corporations; it can apply to all U.S. shareholders, including individuals (special rules apply to S corporations and REITs). After paying the one-time deemed repatriation payment, foreign earnings can be brought back to the United States without paying any additional tax.

*Includes controlled foreign corporations (CFCs) and non-CFC  foreign corporations (other than passive foreign investment companies, or PFICs) if there is at least one 10% shareholder that is a U.S. corporation.

Copyright 2018 Broadridge Investor Communication Solutions, Inc. All rights reserved.

Tax Cuts and Jobs Act: Impact on Individuals

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, a sweeping $1.5 trillion tax-cut package that fundamentally changes the individual and business tax landscape. While many of the provisions in the new legislation are permanent, others (including most of the tax cuts that apply to individuals) will expire in eight years. Some of the major changes included in the legislation that affect individuals are summarized below; unless otherwise noted, the provisions are effective for tax years 2018 through 2025.

Individual income tax rates

The legislation replaces most of the seven current marginal income tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) with corresponding lower rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The legislation also establishes new marginal income tax brackets for estates and trusts, and replaces existing “kiddie tax” provisions (under which a child’s unearned income is taxed at his or her parents’ tax rate) by effectively taxing a child’s unearned income using the estate and trust rates.

Single
If taxable income is: Then income tax equals:
Not over $9,525 10% of the taxable income
Over $9,525 but not over $38,700 $952.50 plus 12% of the excess over $9,525
Over $38,700 but not over $82,500 $4,453.50 plus 22% of the excess over $38,700
Over $82,500 but not over $157,500 $14,089.50 plus 24% of the excess over $82,500
Over $157,500 but not over $200,000 $32,089.50 plus 32% of the excess over $157,500
Over $200,000 but not over $500,000 $45,689.50 plus 35% of the excess over $200,000
Over $500,000 $150,689.50 plus 37% of the excess over $500,000

 

Head of Household
If taxable income is: Then income tax equals:
Not over $13,600 10% of the taxable income
Over $13,600 but not over $51,800 $1,360 plus 12% of the excess over $13,600
Over $51,800 but not over $82,500 $5,944 plus 22% of the excess over $51,800
Over $82,500 but not over $157,500 $12,698 plus 24% of the excess over $82,500
Over $157,500 but not over $200,000 $30,698 plus 32% of the excess over $157,500
Over $200,000 but not over $500,000 $44,298 plus 35% of the excess over $200,000
Over $500,000 $149,298 plus 37% of the excess over $500,000

 

Married Individuals Filing Joint Returns
If taxable income is: Then income tax equals:
Not over $19,050 10% of the taxable income
Over $19,050 but not over $77,400 $1,905 plus 12% of the excess over $19,050
Over $77,400 but not over $165,000 $8,907 plus 22% of the excess over $77,400
Over $165,000 but not over $315,000 $28,179 plus 24% of the excess over $165,000
Over $315,000 but not over $400,000 $64,179 plus 32% of the excess over $315,000
Over $400,000 but not over $600,000 $91,379 plus 35% of the excess over $400,000
Over $600,000 $161,379 plus 37% of the excess over $600,000

 

Married Individuals Filing Separate Returns
If taxable income is: Then income tax equals:
Not over $9,525 10% of the taxable income
Over $9,525 but not over $38,700 $952.50 plus 12% of the excess over $9,525
Over $38,700 but not over $82,500 $4,453.50 plus 22% of the excess over $38,700
Over $82,500 but not over $157,500 $14,089.50 plus 24% of the excess over $82,500
Over $157,500 but not over $200,000 $32,089.50 plus 32% of the excess over $157,500
Over $200,000 but not over $300,000 $45,689.50 plus 35% of the excess over $200,000
Over $300,000 $80,689.50 plus 37% of the excess over $300,000

 

Standard deduction and personal exemptions

The legislation roughly doubles existing standard deduction amounts, but repeals the deduction for personal exemptions. Additional standard deduction amounts allowed for the elderly and the blind are not affected by the legislation and will remain available for those who qualify. Higher standard deduction amounts will generally mean that fewer taxpayers will itemize deductions going forward.

2018 Standard Deduction Amounts

Filing Status Before Tax Cuts and Jobs Act After Tax Cuts and Jobs Act
Single or Married Filing Separately $6,500 $12,000
Head of Household $9,550 $18,000
Married Filing Jointly $13,000 $24,000

 

Itemized deductions

The overall limit on itemized deductions that applied to higher-income taxpayers (commonly known as the “Pease limitation”) is repealed, and the following changes are made to individual deductions:

  • State and local taxes — Individuals are only able to claim an itemized deduction of up to $10,000 ($5,000 if married filing a separate return) for state and local property taxes and state and local income taxes (or sales taxes in lieu of income).
  • Home mortgage interest deduction — Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married individuals filing separately) of qualifying mortgage debt. For mortgage debt incurred prior to December 16, 2017, the prior $1 million limit will continue to apply. No deduction is allowed for interest on home equity indebtedness.
  • Medical expenses — The adjusted gross income (AGI) threshold for deducting unreimbursed medical expenses is retroactively reduced from 10% to 7.5% for tax years 2017 and 2018, after which it returns to 10%. The 7.5% AGI threshold applies for purposes of calculating the alternative minimum tax (AMT) for the two years as well.
  • Charitable contributions — The top adjusted gross income (AGI) limitation percentage that applies to deducting certain cash gifts is increased from 50% to 60%.
  • Casualty and theft losses — The deduction for personal casualty and theft losses is eliminated, except for casualty losses suffered in a federal disaster area.
  • Miscellaneous itemized deductions — Miscellaneous itemized deductions that would be subject to the 2% AGI threshold, including tax-preparation expenses and unreimbursed employee business expenses, are no longer deductible.

Child tax credit

The child tax credit is doubled from $1,000 to $2,000 for each qualifying child under the age of 17. The maximum amount of the credit that may be refunded is $1,400 per qualifying child, and the earned income threshold for refundability falls from $3,000 to $2,500 (allowing those with lower earned incomes to receive more of the refundable credit). The income level at which the credit begins to phase out is significantly increased to $400,000 for married couples filing jointly and $200,000 for all other filers. The credit will not be allowed unless a Social Security number is provided for each qualifying child.

A new $500 nonrefundable credit is available for qualifying dependents who are not qualifying children under age 17.

Alternative minimum tax (AMT)

The AMT is essentially a separate, parallel federal income tax system with its own rates and rules — for example, the AMT effectively disallows a number of itemized deductions, as well as the standard deduction. The legislation significantly narrows the application of the AMT by increasing AMT exemption amounts and dramatically increasing the income threshold at which the exemptions begin to phase out.

2018 AMT Exemption Amounts

Filing Status Before Tax Cuts and Jobs Act After Tax Cuts and Jobs Act
Single or Head of Household $55,400 $70,300
Married Filing Jointly $86,200 $109,400
Married Filing Separately $43,100 $54,700

 

2018 AMT Exemption Phaseout Thresholds

Filing Status Before Tax Cuts and Jobs Act After  Tax Cuts and Jobs Act
Single or Head of Household $123,100 $500,000
Married Filing Jointly $164,100 $1,000,000
Married Filing Separately $82,050 $500,000

 

Other noteworthy changes

  • The Affordable Care Act individual responsibility payment (the penalty for failing to have adequate health insurance coverage) is permanently repealed starting in 2019.
  • Application of the federal estate and gift tax is narrowed by doubling the estate and gift tax exemption amount to about $11.2 million in 2018, with inflation adjustments in following years.
  • In a permanent change that starts in 2018, Roth conversions cannot be reversed by recharacterizing the conversion as a traditional IRA contribution by the return due date.
  • For divorce or separation agreements executed after December 31, 2018 (or modified after that date to specifically apply this provision), alimony and separate maintenance payments are not deductible by the paying spouse, and are not included in the income of the recipient. This is also a permanent change.

Copyright 2017 Broadridge Investor Communication Solutions, Inc. All rights reserved.

THE TAX IMPLICATIONS IN TRUMP’S CONTRACT WITH THE AMERICAN VOTER

Donald Trump’s Contract with the American Voter


Included among measures to clean up the corruption and special interest collusion in Washington, DC
• A hiring freeze on all federal employees to reduce the federal workforce through attrition (exempting military, public safety, and public health).
• A requirement that for every new federal regulation, two existing regulations must be eliminated.
Middle Class Tax Relief and Simplification Act
• An economic plan designed to grow the economy 4% per year and create at least 25 million new jobs through massive tax reduction and simplification, in combination with trade reform, regulatory relief and lifting the restrictions on American energy.
• The largest tax reductions are for the middle class. A middle-class family with two children will get a 35% tax cut. The current number of brackets will be reduced from seven to three, and tax forms will likewise be greatly simplified. The business rate will be lowered from 35% to 15%, and the trillions of dollars of American corporate money overseas can now be brought back at a 10% rate.
End the Offshoring Act
• Establishes tariffs to discourage companies from laying off their workers in order to relocate in other countries and ship their products back to the U.S. tax-free.
American Energy and Infrastructure Act
• Leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over ten years. It is revenue neutral.
Repeal and Replace Obamacare Act
• Fully repeals Obamacare and replaces it with Health Savings Accounts, the ability to purchase health insurance across state lines and lets states manage Medicaid funds.
Affordable Childcare and Eldercare Act
• Allows Americans to deduct childcare and eldercare from their taxes, incentivizes employers to provide on-site childcare services and creates tax-free dependent care savings accounts for both young and elderly dependents, with matching contributions for low-income families.

Does tax software prepare your returns?

I believe that if you go through the software’s interview process then the software is preparing your return.

However remember that the software is preparing your return based on what you told it. Therefore it’s important to review returns before you send them out just as you would if some tax professional was preparing your returns.

From what I’ve seen from IRS audits the software’s artificial intelligence is not the same as the intelligence of a thinking human being. For example it keeps on asking you questions and you keep on entering the same amounts at different places until the IRS finds them for you. That’s why it’s important to look over the tax return before you send it out or e-file it.

The Tax Court still looks at errors in self prepared returns as (GIGO) garbage in, garbage out. I believe however that as artificial intelligence evolves, in time, software developers will have to take the moral and ethical responsibilities for what they’re doing. You’re seeing this already with self driving cars and drones and robotics.

Even if eventually tax software developers will be penalized as preparers nevertheless you as a taxpayer still remain responsible for any taxes and penalties and interest.

The biggest hurdle in coming into tax compliance

It seems to me that the biggest hurdle in coming into tax compliance is readjusting our living expenses, balancing our budget, so that we are able to live off of net income versus gross income.  This is especially the case where we have not been filing tax returns or paying taxes for quite a while.

The IRS understands this somewhat and is willing sometimes to give us some time to readjust our living expenses.  It’s not exactly cold turkey but there will be some withdrawal pains in the process.

In the other extreme if we really can’t pay our ordinary living expenses, or we have extraordinary circumstances such as huge medical bills then the IRS will give us time to recuperate and put our accounts on currently not collectible status.

When looking for someone to represent you before the IRS make sure that they have some financial planning skills besides the skills necessary to deal with the IRS.  You still have to make the decision and the choices but it helps to have someone who understands how to guide you in the process.

A Massive Loss and a Huge Rebuke for the IRS from the Tax Court in Altera Decision

http://www.procedurallytaxing.com/a-massive-loss-and-a-huge-rebuke-for-the-irs-from-the-tax-court-in-altera-decision/

Lawyer charged with failing to pay nearly $800,000 in income taxes – Chicago Tribune

http://www.chicagotribune.com/news/local/breaking/ct-lawyer-tax-evasion-charges-met-20150528-story.html

TurboTax Glitch Leads To Long Battle With IRS – Forbes

http://www.forbes.com/sites/peterjreilly/2015/05/28/turbotax-glitch-leads-to-long-battle-with-irs/

NYTimes: Five Steps to Secure Your Data After I.R.S. Breach

Five Steps to Secure Your Data After I.R.S. Breach http://nyti.ms/1LIZa0G

NYTimes: I.R.S. Data Breach May Be Sign of More Personalized Schemes

I.R.S. Data Breach May Be Sign of More Personalized Schemes http://nyti.ms/1HMNhJ6