As you may know, there has been significant tax reform for individual, passthrough and corporate taxpayers. Sorting through the new changes can be confusing and burdensome. Below are some of the significant changes that will impact our individual and business clients. Please take some time to review and let me or the tax team know if you have any questions.

Individual Business
Individual
  1. Personal exemptions suspended – in other words, personal exemptions no longer exist in 2018. 2017 Amount $4,050.
  2. Standard deduction increased to MFJ $24,000, Single $12,000 and HOH $18,000. 2017 Amounts MFJ $12,700, Single $6,350, HOH $9,350.
  3. AMT (Alternative Minimum Tax) exemption increased to MFJ $109,400, Single $70,300.
  4. Itemized deductions:
    • Taxes: The sum of property taxes and income taxes (or sales tax) is now limited and may not exceed $10,000 per taxpayer/family. 2017 Amounts were typically not limited.
    • Charitable contributions: AGI limitation increases to 60%. 2017 Amount 50%.
    • Mortgage interest: Limited to home indebtedness of $750k. 2017 Amounts $1M plus $100k for HELOC.
    • Medical expenses: Deductible for costs in excess of 7.5% of AGI. 2017 Amount 10%.
    • 2% miscellaneous itemized deductions: Eliminated. Previously, the sum of certain expenses were allowed once in excess of 2% of AGI. These expenses include tax preparation fees, investment fees, hobby expenses, safety deposit box, and most importantly, unreimbursed employee business expenses. This has a large impact on employees who have out of pocket expenses related to their profession - home office deduction, cell phone, mileage, etc.
    • Other
      • Alimony is not deductible by payor and is not taxable to payee.
      • Moving expenses are no longer deductible.
      • Estate Tax, GST, and Gift Tax exemptions increased to $10M/$20M. Previously $5.5M & $11M.
      • Cryptocurrency (i.e. Bitcoin) is still treated as property - the sale is treated as a capital gain and taxability depends on holding period (short term or longer 
  5. Tax Rates: Overall decrease in tax rates.
Income Brackets & Tax Rates

Individual Planning Ideas:

  • Unreimbursed Employee Business Expenses: Renegotiate employment agreement or consider other options to deduct business costs.
  • Estate and gift tax planning.
Business
  1. C Corporation
    • Tax Rates: 21% flat rate. Fiscal year-end taxpayers use a blended rate. 2017 Rates Max 35%
      • Note that for most small business taxpayers, the choice of a S corporation or Partnership will continue to be a desirable entity choice (of course, various factors to consider). This is primarily due to the new Passthrough Deduction – see below.
    • Corporate AMT repealed.
    • DRD (dividends received deduction): Change in overall rates depending on ownership.
    • Net operating losses: Carryforward allowed indefinitely but limited to 80% of taxable income. Carrybacks are no longer allowed. Previously, carryback and carryforward of NOL was allowed to offset taxable income with no limitations.
  2. New Passthrough Deduction: New Section 199A deduction allowed for Qualified Business Income for Noncorporate taxpayers. Max potential is a 20% deduction off of taxable income – shortening the gap between individual passthrough rates and the new corporate tax rates. Special rules for service businesses and thresholds are based on W2 wages, qualified property and 20% of taxable income. Many details are involved – see rules for more information.
  3. Business interest deduction: Limited to the sum of 30% of adjusted taxable income. Other special rules apply. Previously, no limitations on business interest deductions.
  4. Domestic production activities deduction (DPAD S. 199): The DPAD is repealed. Previously, taxpayers participating in manufacturing/producing activities in the US were given a 9% deduction based on taxable income from those activities.
  5. Methods of accounting: New exceptions that are applicable to businesses with average 3 years gross receipts of $25M or less. Previously, these rules did not exist.
    • Cash method
    • Exempt from maintaining inventories
    • Exempt from UNICAP (S. 263A)
    • Exempt from percentage of completion method for long term contracts expected to be completed within two years.
  6. Bonus Depreciation: 100% deduction for qualified property acquired and placed in service after 9/27/17. Qualified property includes new and used property. Previously, deduction was only 50% and property had to be brand new.
  7. Improvement Property: The classifications qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated. One category will replace the previously used multiple classifications - Qualified Improvement Property (QIP).
    • Useful life 39 years
    • Technical correction may be made by Service to change life from 39 years to 15 years.
    • Not eligible for bonus depreciation
  8. Section 179: Deduction increased to $1M with phaseout limitation of $2.5M. Previously, 179 was $510K with a $2.030M phaseout.
    • S. 179 now applies to
      • QIP (with 39 year life).
      • Nonresidential real property improvements such as roofs, HVACs, fire protection, alarm systems and security systems.
  9. Entertainment: Entertainment and recreational expenses are not tax deductible. Previously, 50% deductible.
  10. Meals: All meals are 50% deductible. Previously, certain de minimis and convenience of the employer meals were 100% deductible.
  11. Transportation/Parking: Amount paid by employer for employee are not deductible or must be included in employee’s taxable wages to be deductible unless parking is for the safety of the employee. Previously, parking was a nontaxable fringe benefit.
  12. Like kind exchange: Now limited to only transactions in real property. Previously, other tangible property qualified (i.e. vehicles, equipment).
  13. International tax law: Various changes for businesses doing business internationally including a new one-time repatriation tax.

Business Planning Ideas:

  1. Accelerate deductions to 2017 and defer revenue to 2018. Consider change in accounting method for method of accounting (cash), inventory, accrued liabilities, deferred revenue, cost segregation or depreciation.
  2. Meals, Entertainment, and Parking: Evaluate company policy to see if any changes should be made.
  3. Entity Choice: For most passthrough businesses (S co & Partnership), coverting to a C corporation will not significantly decrease or alter taxes. However, the decision to change how an entity is taxed must be made on a business by business case - considering the long term objectives of the business, size of the entity and parties involved.

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