Fully invest in your business this year with new tax strategies

Posted on by Jake Burke

As Simple as a Postcard?

One of President Trump’s top promises on the campaign trail was tax reform; there was even talk about a simplified postcard-sized tax return.  While reform did happen, things are not as simple as promised.  Tax returns for 2017 will be similar to prior years, but thanks to the massive new tax legislation, tax year 2018 is an entirely new ball game!  The tax reform package is too large to summarize in its entirety, however, we would like to highlight some of the key points we feel will impact our clients the most.

Individuals

Individuals will benefit from an overall reduction in tax rates, nearly doubled the standard deduction, increased exemption/phase-outs of Alternative Minimum Tax, doubled Child Tax Credit and enhanced 529 college savings plan.   In addition, the overall limitation of itemized deductions was repealed. However, there are other limitations of itemized deductions such as state and local taxes, mortgage interest, employee business expenses, tax prep fees, investment advisory fees and other miscellaneous deductions, which may result in higher taxes for some.  Most of these individual provisions are temporary, which begin January 1, 2018 and expire after 2025.  Below is a chart detailing both the prior and new law:

Topic 2017 Law 2018 Reform
Tax Rates Rates ranging from 10%-39.6%
Married Filing Jointly (example):

  • 10% (Taxable income not over $18,650)
  • 15% (Over $18,650 but not over $75,900)
  • 25% (Over $75,900 but not over $153,100)
  • 28% (Over $153,100 but not over $233,350)
  • 33% (Over $233,350 but not over $416,700)
  • 35% (Over $416,700 but not over 470,700)
  • 39.6% (over $470,700
 Rates Ranging from 10%-37%
Married Filing Jointly (example):

  • 10% (Taxable income not over $19,050)
  • 12% (Over $19,050 but not over $77,400)
  • 22% (Over $77,400 but not over $165,000)
  • 24% (Over $165,000 but not over $315,000)
  • 32% (Over $315,000 but not over $400,000)
  • 35% (Over $400,000 but not over 600,000)
  • 37% (over $600,000)
Standard Deduction Single – $6,350
Married Filing Jointly – $12,700		 Single – $12,000
Married Filing Jointly – $24,000
Personal Exemptions $4,050 per dependent (with phase-out limits) Exemptions repealed
Itemized Deductions PEASE Limit (aka 3% Haircut)

  • Limits itemized deductions by 3% of AGI over threshold

Miscellaneous Itemized Deduction

  • Subject to 2% AGI Floor

Mortgage Interest

  • Deductible on $1M acquisition indebtedness
  • $100K in home equity indebtedness

State & Local Tax Deduction

  • Deductible state and local income tax (or sales tax) and property tax

Medical

  • Subject to 10% AGI Floor
 PEASE Limit (aka 3% Haircut)

  • N/A

Miscellaneous Itemized Deduction

  • N/A

Mortgage Interest

  • Deductible on $1M acquisition indebtedness (Grandfathered Debt on purchases prior to 12/15/17)
  • Deductible on $750K acquisition indebtedness on purchases post  12/15/17
  • Suspends home equity indebtedness

State & Local Tax Deduction

  • Total income and property tax deduction limited to 10K

Medical

  • Subject to 7.5% AGI Floor
Alimony Deduction for payer
Taxable to recipient		 Eliminates Deduction
No longer taxable to recipient
Effects divorce decrees executed or modified after 12/31/18
AMT AMT has 26% and 28% Bracket

  • Exemption of $54,300 (Single)>/ul>
  • Exemption of $84,500 (MFJ)
 AMT remains with increased exemptions and increased phase-out of exemptions

  • Exemption of $70,300 (Single)
  • Exemption of $109,400 (MFJ)
Child Tax Credit $1,000 Credit for Qualifying Child $2,000 Credit for Qualifying Child
529 Education Qualified Tuition programs include higher education only Adds tuition for elementary & secondary school expenses up to 10K per year
Estate & Gift Unified Credit Exclusion = $5M Unified Credit Exclusion – $10M

Businesses

The new tax law also results in dramatic reforms for businesses of all sizes.  Unlike the individual tax provisions, key provisions relating to businesses are permanent changes.  C Corporations will now pay a flat tax rate, rather than the tiered tax rate structure.  Owners of pass-through entities will benefit from a new 20% deduction on Qualified Business Income, with some exceptions on high earning professional service providers.  The enhanced write off of business asset purchases is even further enhanced.  Along with these tax breaks are changes in certain tax deductions, which include business entertainment, domestic production deduction, limit on net operating loss deductions and eliminated net operating loss carryback.  Below is a chart detailing both the prior and new law:

Topic 2017 Law 2018 Reform
Tax Rates Corporate

  • Range from 15%-35%
  • Dividends taxed at individual Capital Gain Rate (0-20%)

Pass-Through Entities

  • Individual Rates (10%-39.6%)
 Corporate

  • Flat 21%
  • Dividends taxed at individual Capital Gain Rate (0-20%)

Pass-Through Entities

  • Individual Rates (10%-37%)
  • Deduction for “Qualified Business Income” up to 20% of taxable income (with limits)
Domestic Productions Activities Deduction Deduction available equal to 9% of qualified production activities income for domestic manufacturing. Deduction repealed.
Business Entertainment Deduction limited to 50% Deduction eliminated
Section 179 $500K Immediate Expense Deduction ($2M Acquisition Phase-Out) $1M Immediate Expense Deduction ($2.5M Acquisition Phase-Out) – expands definition to include qualified improvement property
Bonus Depreciation 50% Bonus Depreciation 100% Bonus Depreciation
AMT 20% AMT Tax Rate Corporate AMT Repealed
NOL Deduction Carryback 2 years

Carryforward 20 years

 Carryback Eliminated

Carryforward indefinitely

NOL Limited to 80% of Taxable Income

After review of the reform package, we’ve determined it is anything but simple.  Contact your Burke & Schindler tax advisor to see how these changes will affect you and/or your business.