On Dec. 22, 2017, the Tax Cuts and Jobs Act was signed into law.
Hailed by many as the first major tax reform since the Tax Reform Act of 1986, the legislation sought to lower marginal tax rates while also eliminating certain deductions. While the increase in the standard deduction amount and the elimination of the personal exemption will simplify the tax return filing process for some wage-earning taxpayers, the TCJA includes a variety of new business provisions that will likely provide new tax planning opportunities.
Prior to the TCJA, the United States had one of the highest statutory corporate tax rate structures in the world (including eight marginal tax rates with a top rate of 35 percent). The change away from the prior rate structure to a flat 21 percent tax rate is a welcome change for very large corporations; however, smaller corporations may experience a slight tax increase due to the removal of the 15 percent marginal rate. Individual income tax rates were reduced as well from a highest marginal tax rate of 39.6 percent to a new highest marginal tax rate of 37 percent.
In an effort to provide a tax benefit to pass-through entities and sole proprietorships, the TCJA included a new deduction (subject to certain limitations based upon income, type of business, wages and depreciable assets) equal to 20 percent of “qualified business income.”
While most of the TCJA provisions are effective for tax years starting on or after Jan. 1, 2018, the enhanced accelerated depreciation provision allowing for 100 percent depreciation of new or used fixed asset acquisitions is effective for asset acquisitions occurring on or after Sept. 28, 2017. Additionally, the TCJA increases the amount that a taxpayer may expense under §179 from $510,000 to $1,000,000 effective on or after Jan. 1, 2018.
There was early hope in the tax reform process that the alternative minimum tax would be completely repealed. While complete repeal did not occur for individual taxpayers, the AMT was repealed for corporations. Substantially fewer individual taxpayers will likely be subject to AMT due to both the increase in the AMT exemption amounts and corresponding phaseout of the exemption amount, as well as the limitation of the state and local tax deduction.
The TCJA limits the deduction for net interest expense by a business to 30 percent of adjusted taxable income. This may alter the debt/equity structure of certain business; however, this provision will not apply to businesses with average annual gross receipts of $25,000,000 or less.
A significant change in the estate and gift tax area was an increase in the federal estate and gift tax unified credit basic exclusion amount effective for decedents dying and gifts made after 2017 and before 2026. The amount (adjusted for inflation from the 2010 base year) will be $11,200,000 per individual ($22,400,000 for married couples).
As expected with any tax legislation of this magnitude, substantial clarification and guidance from the IRS is needed. This guidance will likely take months and possibly years to become available. Please consult your tax adviser to determine how the TCJA may impact your specific situation.
Joel A. Bock, CPA, MST is a partner in Daniells Phillips Vaughan & Bock, a Bakersfield accounting firm.