Public Law 115-97, which is commonly known as the Tax Cuts and Jobs Act (TCJA) of 2017 was signed into law by President Donald Trump on December 22, 2017. It is the most sweeping federal tax reform law since 1986. It includes a multitude of provisions that reduces tax rates and modify policies, credits, and deductions for individuals and businesses.
While many of the provisions of the TCJA have major impact on businesses beginning after December 31, 2017 (except where noted), the new law also means substantial changes for most individual taxpayers that generally takes effect in 2018 and expires in 2025.
HOW THE NEW LAW AFFECTS BUSINESSES
The following is a summary of some of the most significant changes affecting businesses:
Corporate Tax Rates
A permanent reduction in the statutory C-corporation tax rate to 21% is one of the highlights of the new tax law. The single flat tax rate of 21% is a massive tax cut as compared to the graduated corporate tax rates ranging from 15% to 35% under the old law. In addition to this, the 20% corporate alternative minimum tax (AMT) has been repealed.
New Pass-Through Tax Deduction
Owners of pass-through entities such as partnerships, limited liability companies and S-corporations are now eligible to a new 20% qualified business income deduction in addition to all their other business deductions (whether, or not they itemize) through 2025.
Under the new law, business owners can deduct a 100% bonus depreciation and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023. The automobile depreciation deduction has been increased for assets placed in service after 2017. This allows a $10,000 deduction the first year and an additional $37,000 of deductions in years two through five.
Section 179 expensing limit is doubled which means businesses can annually expense up to $1 million of business property placed in service after 2017. In addition, the expensing phase out threshold increased to $2.5 million.
Limited Interest Deduction
Under the TCJA, C-corporations (with average gross receipts of $25 million or more) are not allowed to deduct interest payments more than 30% of their earnings before interest, taxes, depreciation and amortization. Any interest amounts disallowed under this provision would be carried forward to the succeeding five taxable years.
Limited Net Operating Losses Deduction
Under the new law, taxpayers can deduct NOLs up to 80% of taxable income. Carrybacks of NOLs is eliminated, meaning NOL deduction can only be made in current and future years.
The new law limits like-kind exchange to only real property held for the productive use in a trade or business (or for investment).
Elimination of Certain Deductions and Credits
The new law also eliminates various business tax deductions and credits, including the:
Territorial Tax System
Under the old law, U.S. corporations pay U.S. taxes on their profits earned abroad. The new law changed the U.S. corporate tax system from a worldwide to a territorial system that will end double-taxing of foreign profits. The new system sets a one-time repatriation rate 15.5% on cash and equivalent foreign-held assets and 8% on illiquid assets like equipment and long-term payables over eight years.
HOW THE NEW LAW AFFECTS INDIVIDUALS
Following are some of the major revisions affecting individuals:
Lower Individual Tax Rates
The current seven tax brackets remain but with generally higher income thresholds and lower rates. Individual income tax rates under the new law are as follows:
Larger Standard Deduction/Elimination of Personal Exemption
Standard deduction has roughly doubled for all individual filers, but the personal exemptions have been suspended through 2025.
Following are the standard deductions by tax filing status:
The new law eliminates the alimony deduction for payors and the corresponding taxable income for recipients. This change takes effect for divorce or separation agreements signed or modified on or after January 1, 2019.
Section 529 Savings Plans
Under the old rule, the Section 529 plan could only be used on qualified higher education expenses. The new law expands the use of tax-free Section 529 plan distributions to include those used to pay eligible elementary and secondary school expenses, up to $10,000 per student (child) per tax year.
Discharged Student Loan
Student loan discharged due to death or disability after December 31, 2017 will not be taxed as income under the new law.
Child Tax Credit
The child tax credit is doubled from $1,000 to $2,000 and raises the refundable portion of the CTC to $1,400. The new law also allows a $500 non-refundable credit for non-child dependents for taxpayers who do not claim the CTC.
The TCJA intends to restrain parents from reducing their taxes by moving investments into their children’s name. For 2018 through 2025, a child’s net unearned income is taxed at the rates paid by trusts and estates.
Estate and Gift Tax
The estate and gift tax are retained but the maximum federal estate tax exemption is doubled from $5 million to $10 million (expected to be $11.2 million for 2018 with inflation indexing).
Affordable Care Act
The individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty is abolished. Starting January 1, 2019, consumers who do not have health insurance will no longer pay penalties.
Alternative Minimum Tax
The AMT remains but fewer households will have to face effective January 1, 2018 through December 31, 2025. The TCJA increases the exemption amounts and the thresholds for phasing out the exemptions as follows:
If you have any questions about the new tax law and how it may affect your tax obligations, please give us a call or visit us at any of our two office locations.