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2018 fed tax_summary_whitepaper

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This 2018 federal tax summary explains the key changes enacted by the TCJA that may effect your business.

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2018 fed tax_summary_whitepaper

  1. 1. On Friday, December 22nd, the U.S. government passed the largest change in U.S. federal tax law since 1986, called the Tax Cuts and Jobs Act (the“TCJA”). This document summarizes the key ways the TCJA will change how small businesses in the U.S. will be taxed. Continued on next page ➞ Federal Tax Summary 2018
  2. 2. 2Impact of the Tax Cuts & Jobs Act of 2017© Fiducial, Inc Federal Tax Summary The TCJA will impact your businesses starting with the 2018 calendar tax year. Many of the changes to individual taxes are scheduled to expire after 2025 unless further extended, but many of the corporate tax changes are made permanent unless changed by later law. While the TCJA is extensive, we have highlighted for you below those areas that we feel may most significantly impact your business. Please contact your Fiducial advisor should you have any questions with the application of these provisions to your business. Passthrough Taxation The TCJA significantly effects businesses that are sole proprietorships, partnerships, S corporations or LLCs treated as partnerships. The TCJA defines something called,“Qualified Business Income,”for these types of businesses and provides a 20% deduction of taxable business income passing through these entities to individuals and trusts receiving the income. For passthrough entities other than sole proprietorships, the deduction cannot exceed 50% of W-2 wages paid by the business, though certain capital-intensive businesses may still qualify. One of the most important limitations to this deduction is to professional service businesses, such as attorneys, accountants, doctors and those using their expertise and reputation for their businesses (however architects and engineers still qualify). The 20% business deduction phases out for married couples filing jointly with $315K or more in taxable income or at $157K of taxable income for individuals. How this may impact you: If you are not taxed as a C corporation then this deduction applies to your business, and presents an opportunity for you to reduce your taxable income. Please speak with your Fiducial advisor regarding how this law impacts you.
  3. 3. 3Impact of the Tax Cuts & Jobs Act of 2017© Fiducial, Inc Tax Rates If your business is organized as a C corporation, the TCJA changes your corporate tax rate. Starting with the 2018 calendar tax year, the tax rate for all C corporations becomes a flat tax of 21% with no further brackets. Dividends will still be taxed at the existing ordinary or qualified rates (though the dividends received deduction has been lowered for less than 80% and 20% owned businesses). Individuals, including those receiving income from passthrough entities, temporarily have lower rates from 2018 through 2025 spread out over seven brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These rates vary for married couples filing jointly, married couples filing singly and heads of households. Below we provide charts comparing the 2018 corporate, married filing jointly, married filing singly, and individual rates under the prior law (in blue) with the rates now effective under the TCJA (in orange) for your review. 2018 Tax Brackets for C Corporations 2018 Rate (Old) 2018 Rate (TCJA) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% $- $50,000 $50,001 $75,000 $75,001 $100,000 $100,001 $335,000 $335,001$10,000,000$10,000,001$15,000,000$15,000,001$18,333,333$18,333,334 $19,000,000
  4. 4. 4Impact of the Tax Cuts & Jobs Act of 2017© Fiducial, Inc 2018 Tax Brackets for Individuals 2018 Rate (Old) 2018 Rate (TCJA) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% $- $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 2018 Tax Brackets for Married Filing Separately 2018 Rate (Old) 2018 Rate (TCJA) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% $- $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 2018 Tax Brackets for Married Filing Jointly 2018 Rate (Old) 2018 Rate (TCJA) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% $- $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000
  5. 5. 5Impact of the Tax Cuts & Jobs Act of 2017© Fiducial, Inc How this may impact you: Whether you own a C corporation or receive passthrough income taxed at individual rates, the tax rates applicable to your business income are most likely lower. Please speak with a Fiducial advisor to see how these rates will apply to your business income. IRC §179 Property For property placed in service starting with the 2018 calendar tax year, the maximum IRC §179 expense is increased to $1M and phased-out at $2.5M (up from $2M in 2017). If your business claims §179 deduction for a property, that deduction is subject to recapture if the business use of the property falls to 50% or less. However, §179 allows a taxpayer to elect to expense only particular qualifying assets within any asset class to meet that test and apply §179 to those assets. Furthermore, the IRS clarified that §179 depreciation can be used for improvements to certain business property that may be considered fixtures attached to the property, such as HVACs, fire protection alarm systems, and security systems. How this may impact you: If you are considering making improvements to your physical space or plant, the odds are favorable that the costs of these improvements may be deducted as an expense against your taxable business income. Please speak with your Fiducial advisor as to how these changes apply to your business. Bonus Depreciation For certain new or used business property placed into service after Sept. 27, 2017 (but before 2023 when certain phase-outs begin), the TCJA now allows a business to depreciate and deduct 100% of the expense of that business property in its first year of use. The 100% first-year equipment deduction is reduced from 80% to 20% between 2023 and 2026. This“bonus depreciation”
  6. 6. 6Impact of the Tax Cuts & Jobs Act of 2017© Fiducial, Inc on qualified property should not be confused with the §179 deduction described above, since these different forms of depreciation follow different rules. How this may impact to you: The new definition of“qualified property”for bonus depreciation now includes used property. If you acquire and put into use qualified property for your business, these accelerated depreciation methods may further reduce your taxable business income for 2018 and in the coming years. These depreciation changes may also make asset sales more favorable to a business than stock purchases under prior law. Please speak with your Fiducial advisor regarding how these new bonus depreciation rules may apply to your business plans. Motor Vehicles For vehicles placed into service starting in 2018 or later, the maximum amount of allowable depreciation is increased by: (i) $10,000 for the first year in which the vehicle is placed in service; (ii) $16,000 for the second year; (iii) $9,600 for the third year; and (iv) $5,760 for the fourth and later years. For years after 2018, these motor vehicle expense limitations, as well as the $25K SUV limitation, will be adjusted for inflation. However, please note that specialized vehicles like hearses, tow trucks, and ambulances are still not subject to these depreciation limits. How this may impact you: If you use non-specialized vehicles in your business, you may be able to deduct the vehicles’costs more quickly from your taxable business income. Other Miscellaneous Items Disallowed The TCJA eliminates or limits many popular business expenses that people deducted under prior tax law and the deferral of gain under §1031 (a.k.a.“1031 swaps”) for non-real property. The popular deductions that have been eliminated include items like domestic production activities, moving expenses, and
  7. 7. 7Impact of the Tax Cuts & Jobs Act of 2017© Fiducial, Inc entertainment expenses. Tax law under the TCJA no longer allows businesses to deduct any portion of those expenses. Deductions for employee fringe benefits like parking and mass transit are also eliminated. Under the TCJA, business meal expenses and food provided by employers are now limited to a 50% deduction. How this may impact you: Activities you may have deducted for your business in the past may no longer be deductible, so please speak to your Fiducial advisor regarding how these changes apply to your business activities and tax exposure. Interest Expense Starting with the 2018 tax year, businesses with an average of more than $25M of gross income may no longer deduct interest expense in excess of 30% of businesses’adjusted taxable income, regardless of any applicable net operating losses that your business may have. This limit is generally determined at the individual taxpayer level, but a special rule applies to passthrough entities that require the determination to be made at the entity level. How this may impact you: If your business earns on average over the last three years more than $25M and has debt or inter-company loans, the tax deduction you may take for that interest expense is now limited to 30%, so please speak with your Fiducial advisor as to how this change in the tax laws applies to your business. Cash Method Accounting Starting with the 2018 calendar tax year, C corporations may use the cash method of accounting for tax and financial purposes so long as they have a three-year average of less than $25M in annual gross receipts, which is up from a $5M limit. This change applies regardless of whether your business produces or sells merchandise. S corporations and partnerships that do not have
  8. 8. 8Impact of the Tax Cuts & Jobs Act of 2017© Fiducial, Inc a C corporation partner are still allowed to use the cash method without regard to meeting the $25M average annual gross receipts test. How this may impact you: If your business is organized as a C corporation (or is a partnership with a C corporation as a partner), and earns between $5M and $25M in gross receipts in a given year, the cash method of accounting is now available to you as well. The cash method of accounting may improve the timing of certain tax events, but please speak with your Fiducial advisor to see if this change will help you meet your business goals. Deferred Compensation For options exercised or restricted stock units settled during the 2018 tax year and later, a qualified employee in a pre-IPO company may elect to defer recognition of this income for up to five years (except for FICA or FUTA purposes). Within this time period, an employee may now defer the recognition of this income unless and until one of the following conditions are met: The employee becomes an excluded employee (generally a 1% or more owner that is either CEO or CFO or related by family to either); • The first date the stock becomes transferrable; • The first date the stock is traded on an established security market; or • The date the employee revokes the election. How this may impact you: If you or your employees receive equity options from your non-publicly traded company, the period in which you may defer recognizing the options as income has changed. Please speak with your Fiducial advisor as to how these new rules will apply to you.
  9. 9. 9Impact of the Tax Cuts & Jobs Act of 2017© Fiducial, Inc Alternative Minimum Tax (AMT) Corporate AMT is repealed effective for the 2018 calendar tax year and later. The individual AMT is retained, but with substantially higher exemption amounts. Under the TCJA, the exemption amounts for individuals are: $109,400 for those married filing jointly and surviving spouses; $70,300 for single taxpayers; and $54,700 for those married filing individually. In addition, the phase-out for applying the exemption is 25% of taxable income over $1M for married filing jointly and surviving spouses and $500K for all others. How this may impact you: If you have a C corporation, the AMT no longer applies to your business return, and if you are organized as a passthrough for tax purposes, then your individual AMT exemption is higher, and the phase-out of the individual exemption is substantially higher for you as well. This means that the AMT is less likely to apply to your tax situation, but please speak with a Fiducial advisor to determine the specific tax consequences for you. Net Operating Losses For net operating losses (“NOLs”) first realized during the 2018 calendar tax year and later, the NOL deduction is limited to 80% of taxable income, and carrybacks of those NOLs have been eliminated. NOLs will not expire in the future under the TCJA, and the prior tax law will continue to apply for NOLs that arose before 2018. How this may impact you: The NOL preservation has been reduced to 80% of its value going forward, and will not be applied to past years’gains as they had been under the prior tax law. If you have any NOLs on your 2017 return, or you expect to sustain a loss in any future year, please speak with your Fiducial advisor regarding this new tax law.
  10. 10. 10Impact of the Tax Cuts & Jobs Act of 2017© Fiducial, Inc Foreign Investment in U.S. Partnerships Starting with the 2018 calendar tax year, foreign sellers of interests in U.S. passthrough businesses must pay 10% of the gain associated with the sale of that passthrough business that is connected to the U.S. trade or business. The buyer of the foreign owner’s passthrough interest must withhold and pay to the IRS 10% of the gain from the sale of that interest unless the seller certifies that the it/he/she is a U.S. person. How this may impact you: This new provision for U.S. passthrough businesses is very similar to the FIRPTA withholding provisions applicable to foreign sellers of U.S. real property for those familiar with that regime, and is designed to avoid U.S. tax evasion by foreign sellers of U.S. assets. If you are a domestic or foreign buyer or seller of an active U.S. passthrough business, please consult with your Fiducial advisor regarding the impact of this provision on your transaction. ●

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