On December 20, Congress passed the Tax Cuts and Jobs Act. This legislation enacts sweeping changes to the U.S. tax code. Many people have questions about how the changes will affect their personal finances or their businesses. Read on for some basics on how tax reform may affect you.
- Effective January 1, 2018, the corporate tax rate moves to a flat rate of 21%.
- The act repeals the corporate alternative minimum tax (AMT). Corporations previously subject to the AMT are eligible for a credit.
- The act extended and modified bonus depreciation. So from now through 2022, corporations can deduct the entire cost of eligible property, compared with 50% previously. These rates will gradually decrease beginning in 2023. Under the definition of property, the act includes real estate, furnishings, and certain improvements to real estate such as roofing, HVAC, and alarm systems. Depreciation limits for luxury automobiles also increased.
- Taxpayers with average annual gross receipts of $25 million or less in the three prior tax years can use the cash method of accounting. That threshold will be indexed for inflation. This change also applies to Farming C corporations.
- Taxpayers who meet the above mentioned $25 million gross-receipts test are exempted from the UNICAP rules of Sec. 263A.
Expenses, Deductions and Credits
- Business interest will be limited moving forward with any disallowed amount being carried forward indefinitely.
- The deduction for net operating losses (NOLs) is 80% of taxable income for losses with an indefinite carryforward and no carryback.
- Entertainment expenses and membership dues would not be deductible.
- Beginning with tax year 2018–when individuals file taxes due in April 2019–tax brackets will look different than they do now.
- Changes to tax brackets are valid until 2025. At that time Congress can vote to extend them or revert to the previous system of brackets and standard deductions.
- The standard deduction has been increased for all categories except estates and trusts. This table, from the Journal of Accountancy, lists the rates. Through 2025, the standard deductions are as follows:
- Married taxpayers filing jointly, $24,000
- Heads of household, $18,000
- All other individuals, $12,000
- The act repeals all personal exemptions.
- The child tax credit for each qualifying child is $2,000. A $500 credit is also now available for qualifying dependents other than children.
- Effective after 2018, there is no penalty for not having health insurance.
Other Changes to Deductions
- Taxpayers earning passthrough income with an S-Corp, sole proprietorship, or partnership can deduct 20% of qualified business income.
- The home-equity loan interest deduction was repealed through 2025.
- Taxpayers can deduct up to $10,000 in state and local income and property taxes.
- Taxpayers can claim casualty losses only in the event of a presidentially declared disaster.
- Deductions for medical expenses have been reduced to 7.5% of adjusted gross income for 2017.
Naturally, changes to the tax code are complex and will affect each business and individual differently, depending on unique circumstances. Therefore if you need help navigating the changes and filing your taxes in the way that best suits you, please contact us. Click here for filing deadlines and other useful dates.