We have been promised all year that tax reform is coming and it looks like that promise will be fulfilled, but there are still steps that have to be taken for that to become a reality. The House has proposed their plan and the Senate has proposed their own plan, but there are many differences that still need to be reconciled by each party.
We have identified what we think are some of the major differences between the House’s plan and the Senate’s plan and summarized these in the table below. The table also includes some of the provisions where the House and Senate agree and we will likely see impact to the physicians that we work with.
As we navigate the final steps of tax reform it is important that you are talking with your tax advisor about the potential planning opportunities available to you for 2017. It is also important that you understand how the above changes could impact your tax liability for 2018.
|Individual rates||Tax rate cuts for individuals and number of brackets reduced to four brackets of: 12%, 25%, 35%, and 39.6%.||Seven brackets kept, but rates were cut in for most brackets. Seven brackets are as follows; 10%, 12%, 22%, 25%, 32%, 35% and 38.5%||Substantial rate cuts under each plan, but very different in structure.|
|Standard deduction||Increased to $12,200 (single) and $24,400 (joint), and indexed for inflation.||Increased to $12,000 (single) and $24,000 (joint), and indexed for inflation before reverting to current law in 2026.||The increased standard deduction will help those that do not itemize, but will likely not benefit those that historically have itemized.|
|Personal exemption||Repeal||Repeal until 2026||The loss of personal exemptions is being offset for those in “lower” bracket by the increased standard deduction.|
|Child credit||Increased to $1,600||Increased to $2,000 with higher phase-out threshold and increased refundability until 2026.||The increased credit will help those below the AGI threshold.|
|Alternative minimum tax (AMT)||Repeal||Retain with a 39% increase in the individual AMT exemption.||A repeal of AMT appears good, but many Oregon physicians are in AMT because of high state income taxes. The potential loss of those deductions (see below) makes this a moot point.|
|State and local tax deduction||Repealed except for trade or business taxes paid at entity level and up to $10,000 in property taxes.||Same provision as the House but it expires in 2016.||Oregon residents (not in AMT) will be negatively impacted by this provision because of high state income taxes.|
|Mortgage interest||Capped at $500,000 in debt.
Debit incurred or under contract before 11/2/17 would be exempt.
|Repeals deduction for interest on up to $100,000 in home equity debt until 2026.||Impact still uncertain since differences yet to be reconciled.|
|Alimony||Above-the-line deduction repealed, and recipient no longer included in income.||No change to current tax law.||The loss of the alimony deduction will create issues with the income equalization of current divorce decrees.|
|Principle residence||Must be principle residence for five of eight years and only use exclusion every five years. Exclusion phases out above $250,000 for single and $500,000 for joint filers.||Same as House without the high-income phase out and reverts to current law in 2026. Exception for sales in contract before 1/1/18.||Home owners will need to hold their homes longer as their personal residence to take advantage of the exclusion.|
|Athletic seating rights donations||Repeal of 80% donation for amounts paid to athletic funds to purchase tickets.||Same as House||Accelerating the dues into 2017 would be advantageous for taxpayers.|
|Alternative minimum tax (AMT)||Repeal for C corporations||Retain corporate AMT||Many small physician practices are exempt from AMT so this is likely moot.|
|Corporate tax rate||Flat 20% rate effective for 2018.||Flat 20% rate effective for 2019.||See item below for PSC.|
|Pass-through business rate||25% tax rate on qualifying income (if passive). For active owners only a portion of PTE income is at 25% rate.||Nothing for Senate||See item below on Pass-through rate deduction.|
|Pass-through business deduction||Nothing for House||23% deduction for qualifying pass-through income up to certain thresholds.||Rather than have a separate tax rate like under the House plan. The senate has proposed this deduction.|
|Bonus depreciation||100% for property placed in service after 9/27/17. Used property qualifies, but real estate does not.||Same as House, but with five-year extension: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. Real estate is eligible but can forgo in order to preserve interest deduction.||This will benefit many small business owners.|
|Section 179 expensing||Increased to $5M for five years with $20M phase-out threshold. Expands definition for eligible property to include energy efficient HVAC.||Increased to $1M for five years with $2.5M phase-out threshold. Expands definition for eligible property to include nonresidential roofs, HVAC, fire alarm, and security system.||The expansion of additional property will be beneficial as well as the increased limits.|
|Real Property||No provision||Reduces recovery period from 39 years for nonresidential real property and 27.5 for residential real rental to 25 years for both.||Shorten the recovery period will allow physician owned property to recover their cost more quickly.|
|Interest expense||Net interest expense limited to 30% of taxable income without interest expense or income, NOL, depreciation, amortization, or depletion. Five-year carryover of unused expense. Real estate exempt.||Net interest expense limited to 30% of taxable income without investment income or loss, interest income or expense, NOLs, and pass-through deductions.||This will affect new practice owners with significant debt. They will potentially lose a portion of their deduction if not utilized in the carryover period.|
|Work opportunity tax credit||Repealed||Retained||The loss of this credit would hurt employers that hire eligible employees.|
|Like-kind exchanges||Limited to real property.||Limited to real property.||Would no longer be able to defer the gain on business personal property like cars.|
|Deduction for meals provided for the convenience of employer||Retained||Deduction reduced to 50% in2018 and then eliminated altogether in 2026.||Companies will lose a portion of meals provided for trainings or company events.|
|50% deduction for entertainment expenses.||Repealed||Repealed||These expense will be lost.|
Elliott Tracy, CPA is a Healthcare & Dental CPA specializing in practice management, advisory services, and tax & accounting services for medical and dental practices across the U.S.