On December 22, 2017, President Trump signed into law H.R. 1, formerly referred to as the Tax Cuts and Jobs Act of 2017 (TCJA). 2017 tax reform is the first major tax overhaul in 30 years, and will affect individuals, all types of business, tax-exempt entities, international taxation, and many other areas of tax law.
Although the act is final, there is still a significant amount of guidance needed before we can really understand all of 2017 tax reform, and not all of the provisions are considered permanent. Many of the provisions will expire after December 31, 2025 or another point in time, and caution should be taken when considering drastic changes in tax strategies or entity structuring.
Below is a summary of some of the tax provisions affecting taxpayer’s and business and how they compare to pre-tax reform law. It is important that you are talking with your tax advisor about the potential planning opportunities available to you, and how the changes could impact your tax liability for 2018.
|Individual||Pre-Tax Reform Law||Tax Reform 2017||Comments|
|Individual rates||Seven brackets under 2017 tax law were as follows; 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%||Seven brackets under reform are as follows; 10%, 12%, 22%, 25%, 32%, 35% and 37%. These brackets expire after 2025 tax year.||Taxpayers will see rate cuts and higher income limits at most brackets.|
|Standard deduction||Deduction is $6,350 for single, $9,350 for HOH and $12,700 for joint return.||Increased to $12,000 (single), $18,000 (HOH), 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||For 2017, taxpayer’s may deduct $4,050 for each personal exemption.||Personal exemption suspended for tax years beginning after 12/31/17 and before 1/1/26.||The loss of personal exemptions is being offset for those in “lower” bracket by the increased standard deduction.|
|Child credit||$1,000 tax credit for each child under the age of 17. Tax credit phased out starting at $75,000 of income for single and $110,000 for joint.||Tax credit increased to $2,000 with higher phase-out threshold beginning at $400,000 for joint and $200,000 for other taxpayers.||The increased credit and threshold will benefit many taxpayers. Provision effective for tax years beginning after 12/31/17 and before 1/1/26.|
|Alternative minimum tax (AMT)||Taxpayer’s must compute their regular tax, and their AMT. Tax liability will be the greater of their regular tax or their AMT.||For tax years beginning after 12/31/17 and before 1/1/26, AMT retained and the AMT exemption and phase out of exemption.||The increased exemption, the increased phase-out, and the limiting of state income tax deductions will potentially result in fewer being subject to AMT.|
|State and local tax deduction||Individuals may claim the state and local income or sales tax as an itemized deductions.||Individuals may deduct state and local sales, income, or property taxes up to $10,000 for tax years after 12/31/17 and before 1/1/26.||Oregon residents (not in AMT) will be negatively impacted by this provision because of high state income taxes.|
|Mortgage interest||Taxpayer can deduct interest on $1M of acquisition indebtedness and up to 100,000 in home equity indebtedness.||Reduces mortgage interest to interest on $750,000 of acquisition indebtedness for debt after 12/15/17. Pre-tax reform debt is exempt from new limit. Mortgage interest on home equity has been suspended.||Provisions revert back after 12/31/25.|
|Charitable contribution||For 2017 and after 2025, cash contributions to public charities deductible up to 50% of AGI.
Donations to for the right to purchase tickets are 80% deductible as charitable.
|Tax reform increased AGI limit on cash donations to public charities to 60% for years after 2017 and before 2026.
Tax reform repeals 80% deduction for donations made for athletic seating rights.
|Taxpayers will lose the deduction for seating rights unless prepaid at the end of 2017. Charitable venture funds may be more attractive due to deduction and Oregon tax credit.|
|Alimony||Above-the-line deduction for amounts paid, and taxable income to the recipient.||Act eliminates the current above-the-line deduction for alimony payments and not taxable to the recipient.||The provision is effective for divorces beginning after 12/31/18.|
|Corporate/Business||Pre-Tax Reform Law||Tax Reform 2017||Comments|
|Alternative minimum tax (AMT)||C corporations subject to AMT if average annual gross receipts over $7.5M for preceding three years.||Corporate AMT repealed beginning with 2018 tax year. Prior year minimum tax credit allowed to offset regular tax liability. No expiration||Many small businesses are not subject to AMT, but many will benefit from the repeal of AMT.|
|Corporate tax rate||Corporate tax brackets as follows; 15%, 25%, 34%, and 35% with phase out of lower rates if corporation exceeds certain taxable income thresholds. Personal service corporations a flat 35% tax rate.||Corporate tax rate a flat 21% rate effective for 2018 tax year.||Personal service corporations (covers healthcare, accounting, and other service based industries) do not have special rate, they are also taxed at 21%.|
|Corporate net operating loss (NOL)||NOL is the amount of current year loss. Can be carried back two years or carried forward 20 years.||NOL deduction limited to 80% of taxable income. Carried back eliminated and carryforward indefinite.|
|Temporary 100% cost recovery||50% bonus depreciation for 2017 on new asset purchases with tax life less than 20 years. Bonus depreciation reduces to 40% in 2018 and 30% in 2019.||100% expensing For property placed in service after 9/27/17 and before 1/1/23. Reduces to 80% for 2023, 60% for 2024, 40% for 2025, and 20% for 2026.||For small business owners, there is not much of a beneficial difference between cost recovery and Section 179 (see below).|
|Luxury Auto and Personal Use Property||Annual cost recovery for passenger autos placed in service in 2017 is $3,160 (Year 1) up to $11,160 with bonus , $5,100 (Year 2), $3,050 (Year 3), and $1,875 (Year 4 and later).||Limits increased for passenger autos placed in service after 12/31/17. Cost recovery year 1 $10,000, year 2 $16,000, year 3 $9,600 and year 4 or later $5,760.||Used autos will have more benefit up front under the new law. Overall, the deduction is front loaded into first three years.|
|Section 179 expensing||In 2017, Businesses may expense up to $510K, expensing limited when assets placed in service in the current year exceeds $2.03M, or based on businesses taxable income.||Expensing increased to $1M ($2.5M phase-out threshold). Expands definition for eligible property to include qualified improvement property and certain improvements (roofs, HVAC, fire alarm, and security system) to nonresidential property.||The expansion of additional property will be beneficial as well as the increased limits. Oregon business owners will need to plan for their depreciation deduction. Oregon, among others states, will likely not follow Federal which will create differences.|
|Business interest expense||Business interest is generally allowed as a deduction in the year it is paid or accrued.||Interest deduction limited to 30% of business adjusted taxable income. Business with average annual gross receipts of $25M or less are exempt. Disallowed interest is carried forward indefinitely. Real property and farm business can elect out, but must use ADS depreciation.||Most small business will be unaffected by this provision, however, highly leveraged businesses with more than $25M in sales will likely have a portion of their business interest deduction suspended.|
|Fringe benefits||Certain fringe benefits are deductible and excluded from employees gross income.||No deduction for qualified transportation fringe benefit and still not taxable to employee.
50% limit on deducting meals provided to employees at company eating facility.
|The expenses connected to an onsite eating facility will be nondeductible after 12/31/25. These expenses have traditionally been fully deductible fringe benefits.|
|Entertainment expenses||Expenses related to entertainment are 50% deductible as long as they are directly related to active trade or business.
|No deduction is allowed for activity of a type generally considered to be entertainment unless directly related active conduct of trade or business. Entertainment deductible if taxable to the employee as compensation, paid as reimbursement in the performance of services, or for the employees (other than HCEs).||Entertainment expenses are nondeductible, regardless of whether they are directly related to the taxpayer’s business, unless one of the exceptions mentioned.
|Like-kind exchanges||No gain or loss recognized to the extent that business/investment property exchanged for like-kind property.||Limits like-kind exchanges to real property only for exchanged after 12/31/17||Would no longer be able to defer the gain on business personal property such as equipment and vehicles.|
|Domestic production activities deduction (DPAD)||Taxpayer’s may claim a deduction equal to 9% of their qualified production activities income.||Deduction repealed for tax years beginning after 12/31/17.||The lost deduction affects some, but many will see additional benefit from the business deduction on PTEs.|
|Research and development||Taxpayer’s can elect to deduct current research expenses or amortize over 60 months.||Effective for years beginning after 12/31/21, specified research expenses will be capitalized and amortized over 15 years.||Taxpayer’s will lose the benefit of deducting expenses in the current year after 2021.|
|Credit for paid family and medical leave (FML)||Taxpayer’s generally able to deduct amounts paid for FML.||Business eligible for 12.5% credit on wages paid (if over 50% of employee’s normal wage). Credit is increased by .25% (up to 25%) for each % point by which payment exceeds 50%.||Brand new credit for two years only 2018 – 2019.|
|Pass-Through Entities (PTE)||Pre-Tax Reform Law||Tax Reform 2017||Comments|
|Pass-through deduction on qualified business income (QBI)||Net income earned by owners of pass-through entities is reported on their individual income tax returns and is subject to ordinary income tax rates.
|For years beginning after 12/31/17 and before 1/1/26, taxpayer’s with QBI entitled to deduction of QBI or 20% of taxable income. In general, deduction is limited to 50% of wages or 25% of wages plus 2.5% of qualified property. Deduction phases out when taxable income exceeds $157,500 ($315,000 for joint return). Specified business (business that are service based excluding engineering and architecture) still eligible, but with further restrictions.||The deduction reduces taxable income, but not adjusted gross income and taxpayer’s will receive regardless of whether they itemize. Taxpayer’s in specified businesses are eligible unless income exceeds limitation (does not phase out like for other taxpayers).|
|S corporation conversion to C corporation||Distributions from a terminated S corporation are treated as paid from its accumulated adjustment account if made during the post-termination transition period.
|Distributions after post-termination transition are allocated to AAA and E&P (pro rata).
Six-year period for adjustment due to conversion from S corporation to C corporation.
|Applies to S corporation revocations during the 2-year period following the date of enactment when the same owners on the date of enactment and revocation.|
|Partner losses||A partner’s distributive share of partnership loss is limited to the adjusted basis of the partner’s interest in the partnership tax year in which the loss occurred.||Effective for partnership tax years beginning after 2017, basis limitation on deductibility of partner losses applies to charitable contributions and foreign taxes.|
|Excess business losses||The passive loss rules limit the deduction of losses from passive trade or business activities of a taxpayer.
|Effective for tax years beginning after Dec. 31, 2017, disallows an excess business loss of a taxpayer other than a C corporation. An excess business loss is the aggregate deductions over the sum of aggregate gross income plus a threshold amount ($500,000 for married taxpayers filing jointly; $250,000 for all other taxpayers (indexed for inflation)).
|The limitation expires after 12/31/25. The limitation applies at the partner or shareholder level. Passive activity limitations are applied first. Disallowed amounts are treated as NOL carryovers.|
|Technical termination of partnership||A partnership technical termination occurs when 50% or more of the total interests in partnership capital and profits is sold or exchanged within a 12-month period.||Repeals the technical termination rule for partnerships after 12/31/17.||Partnership will continue even if more than 50% is exchanged in a year.|
|Other Provisions||Pre-Tax Reform Law||Tax Reform 2017||Comments|
|Cash Method of Accounting||In general, corporations prohibited from cash method if average annual gross receipts for the three preceding years is in excess of $5M.||Effective for 2018 tax year, taxpayer’s with average gross receipts less than $25M for three preceding tax years are permitted to use the cash method.||Application of this provision is a change in accounting method.|
|Accounting for Inventories||Must capitalize as inventory for items purchases, produced, etc. and use accrual method of accounting. Taxpayer’s with average gross receipts of less than $10M can choose to not capitalize materials and supplies as inventory under certain rules.||Effective for 2018 tax year, taxpayer’s with average gross receipts less than $25M for three preceding tax years are exempt from the requirement to account for inventories.||Application of this provision is a change in accounting method.|
|Uniform Capitalization (UNICAP)||In general, businesses must capitalize certain direct and indirect costs related to inventory either manufactured or acquired for resale.||Effective for 2018 tax year, taxpayer’s with average gross receipts less than $25M for three preceding tax years are exempt from UNICAP, regardless of entity structure or industry.||Application of this provision is a change in accounting method.|
|Accounting for Long-Term Contracts||Contractors with average gross receipts of $10M or less for the three prior taxable years are exempt from using percentage-of-completion method. May instead use completed contract method.||Effective for contracts entered into after 12/31/17, taxpayer’s with average gross receipts of less than $25M for the prior three taxable years are exempt from using percentage-of-completion method.||Application of this provision is a change in accounting method.|