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FIRST IMPRESSIONS OF THE NEW TAX LAW
The Tax Cuts and Jobs Act was signed by President Trump last week. The law contains massive changes which will provide tremendous challenges to all tax professionals and taxpayers for years to come. The new law redefined a few of our existing tax terms while also creating new terms and concepts. At this writing we have not yet seen the actual legislative language. Since the end of the year is coming days away, we are forced to rely entirely upon summaries provided to us by our professional associations and the tax research companies we rely upon for up to the minute details. As accountants we try to provide meaningful, well thought advice on a timely basis. Under the current circumstances that just isn’t possible. Instead, we are going to give our first impressions that may change within minutes of our completion of this article. In addition, we are going to provide links or references to information sources. Please check back here regularly for updates. Finally feel free to give us a call to discuss matters or schedule a tax planning meeting. All tax planning meetings will be charged. Don’t assume you can rely upon this article as advice…the changes in interpretation are ongoing.
Individual Income Tax Changes
Please review the Journal of Accountancy article titled “What the tax reform bill means for individuals” located here. It provides a summary of the changes to individual income tax returns.
One of the biggest planning points this year centers around itemized deductions (Schedule A). Next year the standard deduction and personal exemption deductions are combined into one item. A married couple receives a $24,000 deduction and a single person gets $12,000. Instead of that deduction you can claim itemized deductions. However, itemized deductions have been altered. Unreimbursed employee business expenses are no longer deductible. State income and property tax deductions for non-business property are capped at only $10,000. Charitable contributions remain deductible. The result of these changes will be that many people will no longer itemize deductions beginning with their 2018 tax returns. People in that situation may be well served to double up deductions for charitable contributions this year. Further if you have employee business expenses, state income taxes or real estate taxes on your residence or a second home you may wish to prepay those this year. If you are subject to Alternative Minimum Tax prepayment will not be to your benefit.
An equally important change in the law concerns flow through income. This is an area with many new terms, definitions and restrictions. If you have ‘flow through’ income you will most likely benefit by timing deductions and income to decrease net income this year even if it increases net income next year. Assume you own a business or rental property as a partnership, S corporation, Limited Liability Company or proprietor. The net income from that business will be considered ‘flow through’ income to you. The new law gives you a deduction equal to 20% of the qualified business income from those sources beginning in 2018. If you can accelerate $10,000 of deductions from this source into 2017 you will have the benefit of an extra $2,000 of deductions between the two tax years. Prepayment of expenses such as fertilizer and chemicals for farmers, real estate taxes and insurance for active businesses and landlords and deferment of income by not billing or collecting revenue this year are all strategies that can be used. The acquisition of new business equipment is another potential strategy. Depending upon the retirement plan you have, funding to the plan may be effective. However, not every strategy will work for every taxpayer. For example, if you have rental losses the passive activity loss rules may eliminate any benefit of prepayment of expenses. Careful analysis and study is required.
In this area we are attaching or referencing articles published by Thompson Reuters Tax & Accounting News. These articles are not as user friendly as we wish. Please review them here as well.
“C” corporations will have a new flat tax at the rate of 21% beginning with years starting in 2018. The change in rates for “C” corporations will make business owners reconsider whether being taxed as a “C” corporation is advantageous. Compounding this analysis is the fact that changes to individual rates are temporary, whereas the change to “C” corporate rates is permanent. Keep in mind however, nothing should be considered permanent. Our first impression is that other forms of business structures will generally continue to be more heavily favored over “C” corporations, but the gap certainly closed a bit. Every situation will have to be reviewed to make this determination. Luckily, we should have until early March to make this choice.
Businesses will get bigger tax deductions for business automobiles beginning in 2018. For 2018 the law will no longer allow you to trade depreciable personal property (such as vehicles) without recognition of the gain on your trade. This rule may lead to some unexpected results and the full impact won’t be understood until the exact language of the new law is fully disclosed to us.
In addition, deductions for equipment, leasehold improvements, HVAC, alarm and security systems all get more favorable beginning with assets acquired as early as September 27, 2017.
International tax for businesses changed dramatically. If you have an international business, private planning sessions are mandatory.
Penalties for failure to file information returns continue to be a major concern. If you have paid any unincorporated taxpayer (individual or partnership) more than $600 for services to your business you must issue forms 1099 or face the possibility of major penalties. The forms are due to the payee and the IRS by January 31, 2018. You can’t wait until you bring us your income tax return information to have us prepare these forms for you.
Check our website and all news publications for any updates on the tax law. If you are thinking about doing any material year end moves to save taxes you need to know the concept will work for you. There are many pitfalls for every strategy and only if you contact us can we hope to provide reliable assistance.
Since 1987, Schwarz & Associates has been providing quality, personalized financial guidance to local individuals and businesses. Our expertise ranges from basic tax management and accounting services to more in-depth services such as audits, financial statements, and financial planning.
Our mission is to help clients maintain financial viability in the present, while taking a proactive approach to achieve future goals.
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