As we begin the new year, companies should consider exploring opportunities to minimize their 2018 tax bill and plan ahead for 2019.
We want you to be aware of new tax legislation that will have the most sweeping impact on the business community. In our 2018 Tax Legislation Highlights, we focus on the tax law changes due to the Tax Cuts and Jobs Act and how they will apply to businesses and individuals.
TAX REFORM CHANGES WILL GO INTO EFFECT THIS YEAR
At the end of 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. Now, as we begin the 2019 tax filing season, the changes from the TCJA will start to take effect. In our 2018 Tax Legislation Highlights, we discuss some of the more significant revisions to the tax law that will apply to businesses and individuals. If you have questions about these updates or potential tax-saving opportunities, please contact our tax team for a consultation.
Qualified Business Income Deduction
One of the most talked-about business provisions in the TCJA is the new Qualified Business Income (QBI) deduction. This provides a deduction equal to 20% of qualified business income from pass-through entities (e.g., partnerships, S corporations and LLCs). However, this deduction is limited to the greater of: 50% of the owner’s allocable share of W-2 wages paid by the business, or the sum of 25% of that W-2 wage share plus 2.5% of the original cost basis of qualified property.
In general, qualified business income is the net amount of qualified items of income, gain, loss and deduction with respect to any qualified trade or business of the taxpayer. Qualified items generally are items of income, gain, loss and deduction effectively connected with the conduct of a qualified trade or business in the United States. Qualified business income does not include investment-type income (e.g., capital gains, dividends and non-business interest), or reasonable compensation and guaranteed payments.
Qualified trades or businesses include all trades or businesses except performing services as an employee and specified service trades or businesses. Specified service trades or businesses involve the performance of the following services: law, accounting, financial services, brokerage services, actuarial science, health, performing arts, consulting or athletics. This also includes trades or businesses where the principal asset is the reputation or skill of one or more owners or employees.
Qualified assets placed in service between September 27, 2017 and January 1, 2023, are eligible for 100% bonus depreciation, allowing for immediate expensing of these assets. For qualified property placed in service in calendar years 2023, 2024, 2025 and 2026, the applicable bonus depreciation percentage is reduced to 80%, 60%, 40% and 20%, respectively. Bonus depreciation is now also allowed for qualified used property in addition to new property.
The TCJA also increases the Section 179 expensing dollar limitation to $1 million (up from $510,000 in 2017). It also increases the cost of property subject to the phase-out to $2.5 million (up from $2,030,000 in 2017) for property placed in service during the tax year. The new dollar limitations will be adjusted for inflation for tax years beginning after 2018.
NOL Deductions Limited
The TCJA has made significant changes to Net Operating Loss (NOL) deductions. NOLs arising in tax years after December 31, 2017 can no longer be carried back to previous tax years, though they can be carried forward indefinitely. However, the NOL deduction in future years will be limited to 80% of taxable income.
Meals and Entertainment Expenses
Under the TCJA, business entertainment expenses incurred after December 31, 2017 will be nondeductible for tax purposes. The 50% limitation for most meals still applies, but there have been some changes to the treatment of certain meal expenses. Expenses that were previously 100% deductible but are now subject to the 50% limitation include: food and beverages that are excludable from employee income as a de minimis fringe benefit and meals provided for the convenience of the employer.
Interest Expense Limitation
The TCJA introduced a new limitation on the business interest expense deduction. It is now limited to the sum of: (1) business interest income, (2) 30% of “adjusted taxable income,” and (3) floor plan financing interest. Any interest expense that is disallowed can be carried forward indefinitely.
Adjusted taxable income is the taxable income of the trade or business without regard to the following: business interest expense or business interest income, NOL deductions, any Qualified Business Income deduction, or any depreciation or amortization deduction. Floor plan financing interest is interest on debt used to finance the acquisition of motor vehicles held for sale or lease that is secured by the motor vehicles.
There are some exceptions to this limitation. The limitation does not apply to trades or businesses with average annual gross receipts of less than $25 million. It also does not apply to certain types of trades or businesses, including performing services as an employee, electing real property trades or business, or electing farming businesses.
INDIVIDUAL TAX PROVISIONS
Standard Deductions and Personal Exemptions
The TCJA significantly increased the standard deduction amounts for all taxpayers. For 2018, the standard deduction will be $24,000 for married filing joint filers (up from $12,700 in 2017), $12,000 for single filers (up from $6,350 in 2017), and $18,000 for head of household filers (up from $9,350 in 2017). These amounts will be adjusted for inflation beginning in 2019. Personal exemptions, however, are eliminated starting in 2018.
The TCJA made many changes to itemized deductions. One that will affect many taxpayers is the limit on state and local taxes. Taxpayers can now only deduct up to $10,000 for any combination of state and local income taxes, sales taxes or property taxes.
The mortgage interest deduction is now only allowed for mortgage debt up to $750,000 (for homes purchased after December 15, 2017). If the home was purchased before December 15, 2017, the interest deduction is still allowed for debt up to $1 million.
Another important change is all miscellaneous itemized deductions subject to the 2% floor are eliminated. This includes unreimbursed employee expenses, tax preparation fees and investment expenses.
The good news for taxpayers who itemize, however, is that the overall limitation on itemized deductions has been suspended.
Child Tax Credit
Starting in 2018, the child tax credit is doubled to $2,000 per child under age 17. This credit will also be available to more families than in the past because the phase-out threshold has been drastically increased. Now, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for joint filers or $200,000 for other filers (the phase-out threshold was $110,000 for joint filers and $75,000 for others in 2017). The TCJA also introduced a new $500 credit for dependents other than qualifying children.
If you have questions about how these law changes may affect you or your business, or whether any changes were enacted that may impact your particular industry or entity structure, please contact our tax team at 512.610.7200.