Tax Cuts and Jobs Act (TCJA): For Individuals and Businesses

12/22/2017 - By David Uslan, CPA

The Tax Cuts and Jobs Act (TCJA) is a sweeping tax package. Here's a look at some of the more important elements of the new law that have an impact on businesses and individuals. Unless otherwise noted, the changes for individuals are effective for tax years beginning in 2018 through 2025.

Businesses

Corporate income tax rate drop. Beginning with the 2018 tax year, the TCJA makes the corporate tax rate a flat 21%.Currently, C corporations are subject to graduated tax rates of 15% for taxable income up to $50,000, 25% (over $50,000 to $75,000), 34% (over $75,000 to $10,000,000), and 35% (over $10,000,000). Personal service corporations pay tax on their entire taxable income at the rate of 35%.

Corporate AMT repeal. The TCJA repeals the AMT on corporations. Conforming changes also simplify dozens of other tax code sections that were related to the corporate AMT. The TCJA also allows corporations to offset regular tax liability by any minimum tax credit they may have for any tax year.

Bonus depreciation. Before the TCJA taxpayers were allowed to deduct 50% of the cost of most new tangible property (other than buildings and some building improvements) and most new computer software in the year that it was placed in service. Effective for property placed in service and acquired after Sept. 27, 2017, the TCJA raised the 50% "bonus depreciation" allowance to 100%. Additionally, the post-Sept. 27, 2017 property eligible for bonus depreciation can be new or used. On the other hand the TCJA repealed the eligibility for bonus depreciation of “qualified improvement property” (certain improvements to buildings other than residential rental buildings). The 100% figure is to be lowered to 80% for property placed in service in calendar year 2023, 60% in 2024, 40% in 2025, 20% in 2026 and 0% in 2027 and afterward.

Code Sec. 179 - expensing. Before the TCJA, taxpayers could expense Section 179 property up to an annual limit of $500,000 adjusted for inflation. The annual limit is reduced by one dollar for every dollar that the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2 million adjusted for inflation. Under the TCJA, beginning with tax years beginning in 2018, taxpayers can expense up to $1 million (adjusted for inflation for tax years beginning after 2018.) Also, the phase down threshold is raised to $2.5 million.

Code Sec. 179 - qualified improvement property. The TCJA, for tax years beginning after 2017, provides as an elective category the much broader qualified improvement property category (that is no longer eligible for bonus depreciation). Also, for the first time, taxpayers can elect to treat as Section 179 property roofs and, even if they are structural components of a building, heating, ventilation and air conditioning property; fire protection and alarm systems; and security systems. The only requirement is that these roofs and other properties not relate to residential rental buildings.

Other rules for real property depreciation. Under the TCJA, if placed in service after 2017, qualified improvement property has a 15 year depreciation period (rather than the 39 year period that generally applies to non-residential buildings).

Depreciation - vehicles. Under the TCJA, the annual dollar caps on depreciation of passenger automobiles (and smaller vans and trucks treated as passenger automobiles) have been more than tripled to $10,000 in the first year, $16,000 in the second year, $9,600 in the third year and $5,740 in the fourth and later years.

Depreciation - farm property. Under the TCJA, if placed in service after 2017, the depreciation period for most farming equipment and machinery is shortened from seven years to five years and many types of farm property that had to be depreciated under the 150% declining balance method can be depreciated under the 200% declining balance method.

Net operating loss. Net operating losses (NOLs) arising after 2017 may only remove 80% of a taxpayer's taxable income, cannot be carried back to a prior tax year (except in limited circumstances for farms and certain property and casualty insurance companies), and are allowed to be carried forward indefinitely.

Like-kind exchange. For exchanges completed after Dec. 31, 2017, the TCJA limits tax-free exchanges to exchanges of real property that is not held primarily for sale (real property limitation). Thus, exchanges of personal property and intangible property can't qualify as tax-free like-kind exchanges.

Section 199. The TCJA repeals the Section 199 domestic production activities deduction.

Research. The TCJA requires research or experimental expenditures to be capitalized and amortized over a period of five years (or 15 years for research conducted outside the United States).

Paid family and medical leave credit. The TCJA introduces a new component credit for paid family and medical leave, which is available to eligible employers for wages paid to qualifying employees on family and medical leave. The credit is available as long as the amount paid to employees on leave is at least 50% of their normal wages and the leave payments are made in employer tax years beginning in 2018 and 2019. For leave payments of 50% of normal wage payments, the credit amount is 12.5% of wages paid on leave. If the leave payment is more than 50% of normal wages, then the credit is raised by .25% for each 1% by which the rate is more than 50% of normal wages. So, if the leave payment rate is 100% of the normal rate, i.e. is equal to the normal rate, then the credit is raised to 25% of the on leave payment rate. The maximum leave allowed for any employee for any tax year is 12 weeks.

Rehabilitation credit. The TCJA changes the rehabilitation credit for qualified rehabilitation expenditures paid or incurred starting in 2018, by eliminating the 10% credit for expenditures for qualified rehabilitation buildings placed in service before 1936, and retaining the 20% credit for expenditures for certified historic structures, but reducing its value by requiring taxpayers to take the credit ratably over five years starting with the date the structure is placed in service. Formerly, a taxpayer could take the entire credit in the year the structure was placed in service. The Act also provides for a transition rule for buildings owned or leased at all times on and after Jan. 1, 2018.

UNICAP. The exception from the uniform capitalization (UNICAP) rules for small taxpayers is expanded for tax years beginning after Dec. 31, 2017, to apply to taxpayers whose average annual gross receipts for the immediately preceding three years didn't exceed $25 million (up from $10 million under pre-TCJA law), and is made available to both producers and resellers of both real and personal property, rather than just resellers (as under pre-TCJA law).

Cash method - inventory. The TCJA provides that, for tax years beginning after Dec. 31, 2017, taxpayers that have average annual gross receipts of $25 million or less during the preceding three years may use the cash method of accounting (i.e., aren't required to use the accrual method of accounting), if it (1) treats inventories as non-incidental materials and supplies, or (2) uses the cash method of accounting for inventories for financial statement purposes.

Individuals

Tax rates. The TCJA imposes a new tax rate structure with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly. The rates applicable to net capital gains and qualified dividends were not changed.

Standard deduction. The TCJA increases the standard deduction to $24,000 for joint filers, $18,000 for heads of household, and $12,000 for singles and married taxpayers filing separately. These figures will be indexed for inflation after 2018.

Exemptions. The TCJA suspends the deduction for personal exemptions. Thus, starting in 2018, taxpayers can no longer claim personal or dependency exemptions. The rules for withholding income tax on wages will be adjusted to reflect this change, but IRS was given the discretion to leave the withholding unchanged for 2018.

New deduction for “qualified business income.” Starting in 2018, taxpayers are allowed a deduction equal to 20 percent of “qualified business income,” otherwise known as “passthrough” income, i.e., income from partnerships, S corporations, LLCs, and sole proprietorships. The income must be from a trade or business within the U.S. Investment income does not qualify, nor do amounts received from an S corporation as reasonable compensation or from a partnership as a guaranteed payment for services provided to the trade or business. The deduction is not used in computing adjusted gross income, just taxable income. For taxpayers with taxable income above $157,500 ($315,000 for joint filers), (1) a limitation based on W-2 wages paid by the business and depreciable tangible property used in the business is phased in, and (2) income from the following trades or businesses is phased out of qualified business income: health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.

Child and family tax credit. The TCJA increases the credit for qualifying children (i.e., children under 17) to $2,000 from $1,000, and increases to $1,400 the refundable portion of the credit. It also introduces a new (nonrefundable) $500 credit for a taxpayer's dependents who are not qualifying children. The adjusted gross income level at which the credits begin to be phased out has been increased to $200,000 ($400,000 for joint filers).

State and local taxes. The itemized deduction for state and local income or sales tax and property taxes is limited to a total of $10,000 starting in 2018.

Mortgage interest. Under the TCJA, mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million), starting with loans taken out in 2018. And there is no longer any deduction for interest on home equity loans, regardless of when the debt was incurred.

Miscellaneous itemized deductions. There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2 percent of adjusted gross income. This category included items such as tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses.

Medical expenses. Under the TCJA, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income for all taxpayers. Previously, the AGI “floor” was 10% for most taxpayers.

Casualty and theft losses. The itemized deduction for casualty and theft losses has been suspended except for losses incurred in a federally declared disaster.

Overall limitation on itemized deductions. The TCJA suspends the overall limitation on itemized deductions that formerly applied to taxpayers whose adjusted gross income exceeded specified thresholds. The itemized deductions of such taxpayers were reduced by 3% of the amount by which AGI exceeded the applicable threshold, but the reduction could not exceed 80% of the total itemized deductions, and certain items were exempt from the limitation.

Moving expenses. The deduction for job-related moving expenses has been eliminated, except for certain military personnel. The exclusion for moving expense reimbursements has also been suspended.

Alimony. For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.

Health care “individual mandate.” Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.

Alternative minimum tax (AMT) exemption. The AMT has been retained for individuals by the new law but the exemption has been increased to $109,400 for joint filers ($54,700 for married taxpayers filing separately), and $70,300 for unmarried taxpayers. The exemption is phased out for taxpayers with alternative minimum taxable income over $1 million for joint filers, and over $500,000 for all others.

Section 529 Plans. Up to a $10,000 per beneficiary tax-free distribution can now be made for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.

Estate and gift tax exemption. Effective for decedents dying, and gifts made, in 2018, the estate and gift tax exemption has been increased to roughly $11.2 million ($22.4 million for married couples).

As you can see from this overview, the TCJA affects many areas of business and individual taxation. If you have any questions, please contact a Saltmarsh Tax Advisor.