The final bill aligned more closely with the Senate's proposal, but it also includes a range of compromises, fixes, and negotiated agreements that reflect the concerns and priorities of members in both chambers.
Below is a summary of the major provisions that could impact your business and personal tax liability once this bill takes effect. We have also noted some last minute steps that can be taken before the end of 2017 in order to take advantage of current rules that will change under the new law.
Individual Income Taxes
The bill retains seven tax brackets, but at reduced rates. It includes a top marginal rate of 37 percent. The bill does not change the current treatment of qualified dividends and capital gains.
The bill doubles the standard deduction and eliminates the personal exemption. Beginning in 2018 the standard deduction will be $24,000 for married individuals filing jointly and $12,000 for single taxpayers.
The charity contribution deduction has been retained. Taxpayers who anticipate taking advantage of the lower rates in the future should consider making charitable donations before December 31, 2017 to shelter income that could be taxed at the higher rates. In cases where a taxpayer may no longer benefit from itemizing deductions in 2018, an acceleration of charitable donations into 2017 may provide a better tax outcome.
Miscellaneous Itemized Deductions
The bill eliminates miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees, and unreimbursed employee business expenses) - through 2025. If you benefited from these deductions in the past, you may want to pay them in 2017 rather than 2018.
State and Local Tax (SALT) Deductions
The SALT deduction for individuals will be capped at $10,000 on state or local income taxes as well as on real estate taxes. This provision will greatly impact many high income taxpayers, including owners of pass-through businesses that rely on this deduction each year to minimize their personal tax liability.
With this change in law, taxpayers should consider paying the estimated balance of their 2017 state and local income tax liabilities that would otherwise be due April 15th by December 31, 2017. This would secure a tax deduction on their 2017 individual tax return that will not exist in 2018. Some taxpayers may be thinking of prepaying their anticipated 2018 state and local income tax liability by December 31, 2017. The tax bill contains provisions which will prevent a 2017 deduction for a prepayment of 2018 state and local income tax liabilities. This provision does not appear to apply to real estate taxes. Consider paying real estate taxes which have been assessed on property you own by December 31, 2017 that may otherwise be payable at some point in 2018.
For new mortgages entered into after December 31, 2017, taxpayers may not deduct interest on more than $750,000 of acquisition indebtedness. For acquisition indebtedness incurred before December 15, 2017, this limitation is $1,000,000. Also, the deduction on interest incurred on home equity indebtedness will be suspended beginning December 31, 2017.
Owners of qualifying pass-through businesses (S-corporations, partnerships, and sole proprietors) will now be able to deduct up to 20 percent of their pass-through income. This deduction is limited to the greater of (a) 50 percent of the W-2 wages paid with respect to the qualified trade or business, or (b) the sum of 25 percent of the W-2 wages paid with respect to the qualified trade or business plus 2.5 percent of the unadjusted basis, immediately after acquisition, of all qualified property.
This deduction does not apply to specific service businesses in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities. It appears that a last minute change will allow engineering and architecture services to qualify for the deduction. The IRS will need to provide clearer guidance in the future about which types of service businesses would be excluded from this deduction.
Also, trust and estates are now eligible for the 20 percent deduction under this provision.
Corporate Tax Rate
C-corporations will now have a 21 percent corporate rate, effective for taxable years beginning after December 31, 2017. Some owners of pass-through businesses may wish to consider the pros and cons of switching to a C-corporation. There are a variety of important considerations, both short and long term, that should be evaluated.
Expansion of the Section 179 Expense
This provision increases the maximum amount a taxpayer may expense under Section 179 to $1,000,000 and increases the phase-out threshold amount to $2,500,000 of qualified property.
The provision also expands the definition of qualified real property eligible for Section 179 expenses to include roofs; heating, ventilation, and air conditioning property; fire protection; and security. Under the current law, these costs would have to be depreciated over 39 years.
This provision applies to property placed in service in taxable years beginning after December 31, 2017.
Bonus depreciation has been expanded and increased to 100 percent for qualifying assets placed in service beginning after September 27, 2017 through 2022. After that, the percentage will decrease by 20 percent for each succeeding year until is it phased out after 2026.
Domestic Production Activities Deduction (DPAD)
Certain taxpayers (i.e., manufacturers, contractors, and certain distributors) will no longer be able to utilize the DPAD deduction, as it has been repealed. This is effective beginning for tax years after December 31, 2017.
The bill provides for a new disallowance of business interest deductions for net interest expense in excess of 30% of the business's adjusted taxable income (exceptions apply).
The IC-DISC was scheduled to be repealed under the Senate version of the bill and has now been removed from the final version. Therefore, the IC-DISC will still be available to qualifying taxpayers.
Under current law, the gift and estate tax exemption is $5.6 million. Under the new bill, the exemption will double to an expected $11.2 million in 2018. The provision will sunset at the end of December 31, 2025.
Taxpayers will need to revisit their estate planning and life insurance needs in light of these changes.
International Tax Provisions
The bill enacts a deemed repatriation of currently-deferred foreign profits at a rate of 15.5 percent for liquid assets and 8.0 percent for illiquid assets. This tax liability may be paid in installments over an eight year period. For S-corporations with deferred foreign profits, this tax liability at the election of the shareholder can be deferred indefinitely until a triggering event occurs.
This is the most significant tax legislation to be enacted in more than 30 years, and we recognize that it will create a great deal of opportunity as well as uncertainty for you and your business. As always, please do not hesitate to contact your Kreischer Miller tax advisor if you have any questions or would like to discuss how this new legislation will impact you.
If you have any questions or would like to discuss this subject further please do not hesitate to contact a member of Kreischer Miller’s Tax Strategies group at 215.441.4600.
Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.