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US Tax Reform - Top Action Items and Observations

12/22/2017  |  By: Brian McCuller, JD, CPA, Shareholder, Practice Leader Tax, Art Van Buren, CPA, Shareholder, Tax Services, Kevin Yager, CPA, Senior Manager, Tax, Blake Harrison, CPA/PFS, Senior Manager, Tax, Jessica Brice, CPA, Manager, Tax, Andrew E. Hill, JD, Manager, State and Local Tax, Elizabeth McLeod, CPA, Manager, Tax

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The Tax Cuts and Jobs Act (TCJA) is the biggest federal tax law overhaul in 31 years, and it has both good and bad news for taxpayers. Below, LBMC highlights some of the most significant changes affecting business and individual taxpayers.

Top Action Items for Businesses Before Year-End

  • Entertain clients and business associates by year-end. After Dec. 31, businesses will no longer be allowed to deduct 50% of the cost of entertainment related to the active conduct of a business.
  • Take advantage of next year’s lower corporate tax rates:
    • If you run a business that renders services and operates on the cash basis, the income you earn isn't taxed until your clients or patients pay. If you hold off on billings until next year—or until so late in the year that no payment will likely be received this year—you will likely succeed in deferring income until next year.
    • If your business is on the accrual basis, deferral of income until next year may be possible. For example, you might be able to postpone completion of a last-minute job or defer deliveries of merchandise until 2018. Taking these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind the rules are complex and may require a tax professional's input.
  • Consider postponing debt reduction deals with creditors until 2018 in order to defer any resulting debt cancellation income.

Biggest Changes for Businesses

  • Corporate tax rate changes to 21%, and the corporate AMT is eliminated.
  • Immediate expensing (100% Bonus Depreciation) – Immediate write-off of qualified property both acquired and placed into service after 09/27/2017. Also, eliminates the original use requirement (i.e., used property can qualify for 100% Bonus).
  • Interest Expense Deduction – Limits deduction for interest expense to 30% of Adjusted Taxable Income (ATI). ATI is calculated without depreciation or amortization.
  • NOLs - Limits NOLs to 80% of taxable income for losses arising in tax years beginning after 2017. Repeals carryback provisions, except for certain farm and property and casualty losses; allows NOLs to be carried forward indefinitely.
  • Section 179 expensing - Increases to $1 million for “qualified property” placed in service in tax years beginning after 2017, with a phase-out beginning at $2.5 million. Expands “qualified property” to include certain depreciable personal property used to furnish lodging, and improvements to nonresidential real property (such as roofs, heating, and property protection systems).

Biggest Changes for Individuals

  • Tax rates have been reduced at nearly every income level, the standard deduction has been expanded (although personal exemptions were eliminated), and the Pease limitation of itemized deductions has been repealed. However, itemized deductions such as state and local taxes, investment expenses, and unreimbursed employee expenses have been limited or eliminated.
  • A new deduction of 20% of trade or business income reported from pass-through entities has been created. For individual taxpayers reporting more than $315,000 in taxable income, the deduction can be limited to income from non-service related business, and further limited by the business’s wages to employees and/or the unadjusted basis of depreciable property in service during the year.
  • The estate tax exemption has been doubled and indexed for inflation, now only taxing personal estates in excess of $10 million dollars, or $20 million for married couples.
  • The child tax credit was increased to $2,000, and $1,400 of that is refundable. All dependents ineligible for the child tax credit are eligible for a new $500 per-person family tax credit.

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Posted in: Tax, Wealth Management