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Tax Reform Legislation Analysis - Part 2
The document provides an analysis of the Tax Cuts and Jobs Act of 2017, detailing changes in individual and corporate taxes, including modifications to deductions, tax rates, and the introduction of the Qualified Business Income deduction. It outlines how these changes affect personal exemptions, standard deductions, business interest deductions, and the treatment of pass-through entities. Additionally, it highlights implications for C corporations, such as changes in tax rates and loss offsetting rules.
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Tax Reform Legislation Analysis - Part 2
- 1. Tax Reform Legislation Analysis Anoverview of the Tax Cuts and Jobs Act of 2017
- 2. About Us Mark Heath,CPA Partner and Director of Tax mheath@macpas.com Dan Matarrese, CPA Senior Manager and Director of Individual Tax Services dmatarrese@macpas.com
- 3. Individual Taxes –Digging Deeper What happened to my deductions? • Personal Exemptions • State and Local Taxes • Mortgage Interest • Charitable Contributions • Miscellaneous Deductions • No more phaseout
- 4. Individual Taxes –Digging Deeper Standard Issue – Not such a bad thing….. • Almost doubling in 2018 • MFJ - $24k • HoH - $18K • Single - $12K • MFS - $12K
- 5. Individual Taxes –Digging Deeper The Smiths • Married with two children, take the standard deduction. • 2017 - $28,900 of total deduction ($4,050 exemptions X 4 + $12,700 Standard deduction). • 2018 - $24,000 standard deduction • Don’t forget to consider: • Increased Child Tax Credit • Drop in rates
- 6. Individual Taxes –Digging Deeper Rates…… • Taxable Base: Amount of income subject to tax • Tax Rate: The rate of tax applied to your taxable base • The Tax Cuts and Jobs Act of 2017 cut taxes rates across the board • But, it didn’t necessarily decrease your taxable base
- 7. Individual Taxes –Digging Deeper All about that base, No C-Corp. • With the C-Corp Rate going down, how do we keep pass-throughs competitive? • Qualified Business Income Deduction • A new deduction of 20% from the taxpayer’s “Qualified Business Income”.
- 8. Individual Taxes –Digging Deeper QBI is as simple as ABC…. Right? • Owner of: • Sole proprietorship – Schedule C • Rental Activity – Schedule E • S-Corporation – K-1 • Partnership K-1 • Gets a deduction equal to 20% of the amount of income from the business activity they report on their return.
- 9. Individual Taxes –Digging Deeper QBI – We need more postcards • The deduction, however, is limited to the LESSER OF: • 20% of qualified business income, or • 50% of the total W-2 wages paid by the business. • There is also an alternative limitation based on the owner's allocable share of 2.5% of the unadjusted basis of certain business assets. • The “50% of wage limitation” only applies if the taxable income of the business owner is over certain thresholds • $315,000 for a married filing joint return
- 10. Individual Taxes –Digging Deeper QBI – We need more postcards • So, all pass-through income is qualified business income…….. • Fake News! • If taxable income is over the threshold amounts (315K for MFJ), income from “specified service businesses” is no longer eligible for the deduction.
- 11. Individual Taxes –Digging Deeper QBI – Still haven’t found what we’re looking for • Is still remains clear whether the specifics of the calculation of the QBI deduction will treat all pass-through entities equal.
- 12. C Corporations –The Key Aspects • Flat tax rate of 21% • Fiscal year filers must use a blended rate • Impact on financial reporting • Dividends received deduction • 20% ownership = 65% deduction down from 80% • <20% ownership = 50% deduction down from 70% • AMT gone • AMT Credits – refundable through 2021
- 13. C Corporations –The Key Aspects • Net operating losses • 2018 and future losses limited to offsetting 80% of taxable income • Carried forward indefinitely (no carryback) • 162(m) – key employee compensation • Removes incentive based exception • Applicable only to public companies
- 14. Business Taxes –The Key Aspects • Limit on business interest deduction • 30% of adjusted taxable income • Taxable income adjusted for depreciation, amortization, and depletion • Calculation done at the entity level • 2018 through 2021 • BUSINESS interest only • $25m gross receipts limitation • Other restrictions
- 15. Business Taxes –The Key Aspects • Domestic Production Activities Deduction • Gone in 2018 • Fringe benefit rules • Entertainment expenses now totally non-deductible • No more free lunch • ALL meals now only 50% deductible • No deduction for transportation fringe benefits • No deduction for local lobbying expenses
- 16. Business Taxes –The Key Aspects • FMLA credit • 2018 & 2019 • 12.5% of wages paid to FMLA employees • If rate of wages paid is 50% of normal wages • Increases ratably • Qualified rehabilitation credit • 10% credit – gone • 20% now phased in over 5 years
- 17. Business Taxes –The Key Aspects • 179 Expense • Max up to $1m • Phased out with cap ex over $2.5m • Indexed for inflation • Bonus depreciation • 100% from 9/28/17 through 12/31/2022 • New and new to you • Phase out after 2022 • PA says no bonus for you • Qualified improvement property • Removes restrictions
- 18. Business Taxes –The Key Aspects • R&D Expenses • Must be capitalized and amortized over 5 years beginning in 2022 • Like kind exchanges • Gone for personal property
- 19. Flow-Through Entities –The Key Aspects • Deduction for pass-through income • 20% of qualified business income • Reduction from taxable income at the individual level (not AGI) • If MFJ AGI is greater than $315k, limitations apply • 50% of W2 wages • Sum of 25% of W2 wages plus 2.5% of qualified property • Additional restrictions on professional service providers
- 20. Flow-Through Entities –The Key Aspects • S Corporations converting to C Corporations • Favorable treatment of post conversion distributions • Partnership technical termination – gone
- 21. How Can McKonly& Asbury Help? • Forecasting • 199A deduction • Business interest limitation • Fixed asset review • Bonus or 39 year property? • Entity selection • C Corp is back in play
- 22. Discussion and Questions MarkHeath, CPA Partner and Director of Tax mheath@macpas.com Dan Matarrese, CPA Senior Manager and Director of Individual Tax Services dmatarrese@macpas.com
- 23. Building Successful Employee Relationships ACornerstone to Fraud Prevention and Risk Management