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The Bonadio Group
Please see below for a brief summary of some of the significant changes enacted as
part of the Tax Cuts and Jobs Act (TCJA).
Individual Changes
Tax Rates
The new bill that was signed into law has seven income tax rates, but they are now
generally lower with the highest rate being reduced from 39.6% to 37%. The maximum
rate of 37% applies to single taxpayers with over $500,000 of taxable income and
married taxpayers with taxable income exceeding $600,000. The tax rates applicable
to net capital gains and qualified dividends did not change. These rates are effective
Jan. 1, 2018 through Dec. 31, 2025.
For the period starting Jan. 1, 2018 through Dec. 31, 2025, the AMT exemption amount
has been increased to $109,400 for married taxpayers who file jointly ($54,700 for
married taxpayer filing separately) and $70,300 for all other taxpayers. The exemption
phase out was increased significantly, with it not applying unless adjusted gross income
(AGI) exceeds $1 million for married taxpayers and surviving spouses or $500,000 for
all other taxpayers.
Elimination of Personal and Dependent Exemptions
In the past, taxpayers received an exemption for themselves, their spouse and each of
the eligible dependents that they claimed on their tax return. The TCJA eliminated these
exemptions through Dec. 31, 2025.
TAX CUTS AND JOBS ACT
Connect with us:
Lynn Mucenski-Keck, CPA
Manager
585.200.5144
Increased Standard Deduction
The new standard deductions are:
• Heads of household: $18,000
• Married filing jointly: $24,000
• All other taxpayers: $12,000
Although you may have historically had itemized deductions
exceeding these amounts, other changes to itemized
deductions may affect whether your itemized deduction
exceeds the standard deduction in a given year. The
increased standard deduction is effective through Dec. 31,
2025.
Changes to Itemized Deductions
• The overall phase out of itemized deductions has been
repealed.
• The itemized deduction for state and local taxes is
limited to a total of $10,000 ($5,000 for those using the
filing status of married filing separately). For example,
if you paid $15,000 in state income taxes and $6,000 in
real estate taxes on your home ($21,000 in total), you
would not be able to deduct the $11,000 that exceeds
the deduction threshold. In addition, taxes that were
prepaid in 2017 relating to the 2018 tax year must have
been assessed prior to December 31, 2017 in order to
be deductible on the 2017 tax return.
• Mortgage interest on loans used to acquire a principal
residence and a second home is only deductible on
debt up to $750,000 (down from $1 million). The new
law reduces the ceiling of acquisition indebtedness to
$750,000, unless the indebtedness was incurred before
Dec.15, 2017, where the limitation is still $1 million.
• The deduction for home equity indebtedness is
suspended. However, there is a possibility that home
equity indebtedness may be categorized as acquisition
indebtedness, loans used to acquire, construct, or
substantially improve a home. In addition, consideration
as to whether the indebtedness is used for business or
investment purposes should also be explored.
• Cash donations to public charities are now deductible
up to 60% of adjusted gross income.
• Donations to colleges and universities for ticket or seat
rights at sporting events are no longer deductible.
• Miscellaneous itemized deductions, such as investment
management fees, tax preparation fees, unreimbursed
employee business expenses and safe deposit box
rental fees are no longer deductible.
• Medical expenses are deductible by the amount the
expenses exceed 7.5% of adjusted gross income for
2018 (limit changes to 10% starting in 2019).
These changes (except as noted) to itemized deductions are
in effect from Jan. 1, 2018 through Dec. 31, 2025.
New Deduction for Qualified Business Income
A new deduction, often referred to as the pass-through
deduction, was introduced in the TCJA that allows
individuals a deduction of 20% of qualified business income
from a partnership, S corporation or sole proprietorship, as
well as 20% of qualified real estate investment trust (REIT)
dividends and qualified publicly traded partnership income.
The pass-through deduction is available for tax years after
December 31, 2017 through December 31, 2025.
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This deduction will reduce taxable income, but not adjusted
gross income, and is available regardless of whether an
individual itemizes their deductions. There are many
limitations and restrictions to this provision, including the
following:
• The activity must give rise to a trade or business, which
is particularly important to rental real estate activities.
• If a married filing joint taxpayers’ taxable income
exceeds $315,000 (or $157,500 for all other taxpayers),
and the business is considered a specified service
trade or business the deduction will be reduced or
completely disallowed. A specified service trade or
business includes any trade or business involving
the performance of services in the fields of health,
law, accounting, actuarial science, performing arts,
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. In addition, the
performance of services that consist of investing
and investment management, trading, or dealing in
securities, partnership interests, or commodities.
• If a married filing joint taxpayers taxable income
exceeds $315,000 (or $157,500 for all other taxpayers)
and the business is not considered a specified service
trade or business, additional wage and property
limitations could apply that may lower or eliminate the
20% deduction.
• Temporary treasury regulations were recently released
regarding the 20% deduction, which provide further
guidance regarding the ability to aggregate businesses
in order to receive the most effective deduction. In
addition, guidance was provided regarding the
treatment of entities that have common ownership
and that provide service or property to related entities.
Due to the intricacies of the new law, we strongly
encourage our clients to reach out to their advisors
directly in order to review their current structure and
ensure appropriate planning takes place to receive the
maximum benefit of the 20% deduction.
Loss Limitation Rules
Effective for tax years beginning after Dec. 31, 2017, any
business loss over $500,000 for married taxpayers filing
jointly or $250,000 for all other taxpayers is disallowed. In
order to determine an individual’s business loss one must
combine all their deductions and gross income related to
their trades or businesses.
Any excess business loss is treated as part of the taxpayer’s
net operating loss carryover to the following year. The
limitation applies at the partner or S corporation shareholder
level. The limitation expires after Dec. 31, 2025.
Net Operating Loss Utilization Rules
The carryback of net operating losses is repealed effective
for tax years ending after Dec. 31, 2017. Net operating losses
generated for years beginning after 2017 cannot reduce
taxable income by more than 80%. Net operating losses
carryforward indefinitely under the new law.
Other Adjusted Gross Income Adjustments
• The tax law suspends the deductibility of moving
expenses and exclusion for reimbursement of qualified
moving expenses. The provisions related to members
of the Armed Forces remain. The suspension of the
moving deduction is applicable from Jan. 1, 2018 to
Dec. 31, 2025.
• The new law repeals the deduction for alimony paid
and the inclusion of alimony received for divorce
decrees executed after Dec. 31, 2018. Therefore,
clients considering modification of an earlier divorce
agreement should be aware that this may change the
tax consequences.
The Bonadio GroupTAX CUTS AND JOBS ACT
Sec. 529 Plans
Sec. 529 plans have been a widely used tool to help
taxpayers save money for college, presuming they distribute
that money for qualified higher-education costs. Depending
on your Sec. 529 plan, you may be eligible for a state tax
deduction for contributions to the plan. The TCJA expanded
the opportunities available for education tax planning by
permitting $10,000 per year to be distributed from Sec. 529
plans to pay for private elementary and secondary tuition.
Contact us to learn how these new rules may help you pay
for private school tuition for your family.
Child and Family Tax Credit
The updated child tax credit is designed to help reduce
the tax burden related to the disallowance of personal
and dependency exemptions, as well as changes made to
itemized deductions. The TCJA increased the child credit
for children under age 17 to $2,000 and also introduced a
new $500 credit for a taxpayer’s dependents who are not
their qualifying children. In addition, the phase-out limits
for these credits have increased to $400,000 for joint filers
($200,000 for others), so that more individuals will be able
to take advantage of this credit.
Utilization of Opportunity Zones
The new tax law also added the ability for certain
investments in Opportunity Zones to allow for potential
preferential tax treatment. Opportunity Zones are an
economic development tool, designed to spur economic
development and job creation in distressed communities.
The first set of Opportunity Zones, covering parts of 18
states, were designated on April 9, 2018. Individuals have the
ability to invest in Opportunity Zones, even if they do not
work, live, or have a business in a Opportunity Zone area.
In general, if an individual creates a gain with an unrelated
person they may defer the gain up to the amount invested
in a qualified opportunity fund if contributed within 180 days
beginning on the date of such sale or exchange. The gain
will be deferred until the date on which the investment in the
opportunity fund is sold or December 31, 2026. If applicable,
please contact us for further details.
Business Changes
Tax Rates: C Corporations
The new corporate tax rate is 21% effective for tax years
starting Jan. 1, 2018. The corporate AMT is repealed effective
for tax years beginning after Dec. 31, 2017. The law continues
to allow the prior year minimum tax credit to offset the
taxpayer’s regular tax liability for any tax year. However, for
tax years beginning after 2017 and before 2022, the prior
year minimum tax credit is refundable in an amount equal
to 50% (100% for tax years beginning 2021).
The significant reduction in the income tax rate for C
corporations has led many businesses to consider converting
to C corporation status. While changing one’s business
entity to a C corporation may be beneficial for some, it is
not the appropriate choice for all structures. If you have
been considering a change in entity structure, please reach
out to your advisor for further analysis and discussion.
Net Operating Loss Deduction
The new law limits the net operating loss (NOL) deduction
for NOLs arising in tax years beginning after Dec. 31, 2017,
to 80% of taxable income. Net operating losses generated
in taxable years beginning before January 1, 2018, will not
be limited. The new law also eliminates NOL carrybacks and
allows unused NOLs to be carried forward indefinitely.
Due to the limitation that exists for losses created in tax year
beginning after December 31, 2017, businesses that generate
a taxable loss should ensure that they are accelerating
deductions and deferring income to the greatest extent
possible for tax years beginning before January 1, 2018.
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Repeal of Domestic Production Activity Deduction (DPAD)
The new tax act repeals the DPAD effective for tax years
beginning after Dec. 31, 2017.
Changes in Methods of Accounting
Taxpayers subject to Sec. 448 (other than tax shelters) with
three-year average annual gross receipts of $25 million or
less are eligible for the cash basis of accounting. The prior
year exception defining small businesses was removed.
Thus, if a business with gross receipts above the $25 million
threshold drops below this threshold, it may change to the
favored methods.
Taxpayers who meet the $25 million gross receipts test
are also not required to account for inventories and are
excluded from all parts of Sec. 263A. Lastly, the dollar
threshold for long-term contract income recognition for
certain construction contracts has been increased to $25
million.
Provided the income threshold has been met, the new law
could allow clients to change to more favorable accounting
methods and thereby allow income to be deferred until
actual receipt and expenses not recognized until paid.
The new provisions are effective for tax years beginning
after Dec. 31, 2017.
Taxable Year of Inclusion for Accrual Based Taxpayers
Under an accrual method of accounting, income is includible
in gross income when all the events have occurred which
fix the right to receive such income and the amount can be
determined with reasonable accuracy. The new tax law has
added that the “all events” test is treated as being met no
later than when the item is considered revenue for financial
statement purposes.
Depending on how an item is treated for financial statement
purposes, this could accelerate income recognition for some
accrual basis taxpayers.
Interest Expense Limitation Rules
Prior to the Tax Cuts and Jobs Act of 2017, the interest
expense limitation rule applied to a very narrow group
of businesses. However, under the new interest expense
limitation rule, the number of businesses affected is much
more expansive. The deduction for business interest is
limited to business interest income, 30% of the adjusted
taxable income (as defined in the new law), and the floor
plan financing interest.
The definition of adjusted taxable income for purposes of
the limitation is generally taxable income before income
tax, depreciation, and amortization for taxable years before
January 1, 2022. However, starting in the 2022 taxable year
the limitation becomes even more restrictive as adjusted
taxable income no longer allows a depreciation and
amortization addback, and is instead based on taxable
income before income tax.
The interest expense limitation rule occurs at the taxpayer
level. Therefore, the limitation is applied at the level of each
partnership or S Corporation. Currently, no aggregation
rules exist for partnerships or S Corporations. However, the
IRS has provided clarification that for a group of affiliated
C Corporations, the limitation will apply at the consolidated
tax return filing level.
There are two major exceptions in which the interest
expense limitation rule will not apply. The first exception is
provided for small businesses (IRC §163(j)(3)). The interest
expense limitation rule does not apply if a taxpayer has
average annual gross receipts for the 3-taxable-year period
ending with the prior taxable year that do not exceed
$25,000,000. However, for purposes of determining
whether the small business exception is met a taxpayer must
follow aggregation rules. The second exception to avoid the
interest expense limitation rule applies to business that can
qualify as a real property trade or business and choose to
make an irrevocable election.
The Bonadio GroupTAX CUTS AND JOBS ACT
The term real property trade or business means any real
property development, redevelopment, construction,
reconstruction, acquisition, conversion, rental, operation,
management, leasing, or brokerage trade or business.
Similar to the 20% pass-through deduction, the interest
expense limitation rule is very complex. If you suspect that
this limitation rule applies to your business, please reach out
to us for further review and planning.
Entertainment and Transportation Expenses
Generally, entertainment, leisure, amusement, or recreation
expenses incurred after December 31, 2017 are no longer
deductible, regardless if the ordinary and necessary trade
or business test is met. However, there are some exceptions,
including expenses for recreational, social, or similar
activities primarily for the benefit of employees may still
be 100% deductible.
Taxpayers may still deduct up to 50% of expenses for
meals (off the premises) provided they are considered
“directly related” or “associated with” the active conduct
of the trade or business. Taxpayers may continue to deduct
50% of the costs associated with meals provided for the
convenience of the employer through December 31, 2025.
However, expenses paid after December 31, 2025 in relation
to providing meals for the convenience of the employer will
no longer be deductible.
The act also repeals the deductibility of qualified
transportation fringe benefits, including commuting or
subsidized parking expenses (including pre-tax salary
reductions) of employees (except if necessary for employee
safety).
Now is a good time for taxpayers to review their current
accounting, reimbursement, and employee meal policies, as
well as their documentation procedures for meals. Taxpayers
should consider creating separate general ledger accounts
for entertainment, meals, and employee holiday parties in
order to have the expenses correctly categorized at year-
end for tax preparation. Taking the time to accurately record
expenses as meals or entertainment throughout the year
will help ensure that all eligible amounts are captured for
deduction.
Like Kind Exchanges
The new law restricts the non-recognition of gain in a Like
Kind Exchange to exchanges of real property effective for
exchanges completed by Dec. 31, 2017. Therefore, clients
who exchange personal property after December 31, 2017
will have to recognize a gain on the transaction. In addition,
for real property exchanges, consideration should be given
to any personal property in the building.
Changes to Cost Recovery
• Taxpayers are allowed to claim a 100% first-year
depreciation deduction on qualified property that is
acquired and placed in service after Sept. 27, 2017.
The use of the qualified property does not have to
originate with the taxpayer, which allows new and used
property to qualify for bonus depreciation. Starting in
2023, there will be a phase out of 20% each year until
2027 when the first year additional depreciation is 0%.
• The Section 179 deduction was also increased from
$500,000 in 2017 to $1,000,000 in 2018. In addition,
the deduction does not start to phase out until Sec.
179 acquired property exceeds $2.5 million. Lastly, the
definition of qualified real property that is eligible for
Sec. 179 expensing now includes improvements to
nonresidential real property such as roofs, heating,
ventilation, air conditioning, fire protection, and alarm
and security systems placed in service after Dec. 31,
2017.
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• The passenger automobile limitations were also
increased. A passenger automobile includes any four-
wheel vehicle that is manufactured primarily for use on
public streets, roads, and highways, and that is rated at
6,000 pounds gross vehicle weight or less.
Other than
Trucks/VansPrior Law New Law
Year 1 $3,160/$11,160* $10,000/$16,400*
Year 2 $5,100 $16,000
Year 3 $3,050 $9,600
Year 4 and
forward$1,875 $5,760
*Assuming bonus depreciation
• The new law consolidated qualified leasehold
improvements, qualified restaurant property and
qualified retail improvement property into one
category — qualified improvement property (QIP).
However, Congressional oversight failed to identify
the MACRS class life for QIP after December 31, 2017,
therefore defaulting it to 39-year MACRS class life and
no longer allowing it to qualify for bonus depreciation.
A variety of efforts are taking place to encourage a
technical corrections bill from Congress that ideally
would be retroactive until January 1, 2018, identify a 15
year MACRS class life for QIP, and thereby allow QIP to
be eligible for bonus depreciation.
Furthermore, for property placed in service between Sept.
27, 2017, and Dec. 31. 2017, every business will have to use
the prior definitions of qualified leasehold improvements,
qualified restaurant property, qualified retail improvement
property, and qualified improvement property to determine
what methods of depreciation apply.
The cost recovery rules have become even more complex
and clients should continue their conversations with their
advisors about their asset acquisition behavior and how
this will impact their tax planning. In addition, this may
affect a client’s decision to perform an asset versus a stock
acquisition, as bonus depreciation is now allowed on used
assets.
Technical Termination of a Partnership
The new law repeals the technical termination rule for
partnership tax years beginning after Dec. 31, 2017. Thus, a
partnership is treated as continuing upon a sale or exchange
of 50% or more of the total interest in a partnership’s capital
and profits within a 12-month period, and new elections are
not required or permitted.
International Provisions
Modified Territorial System of Taxation
Prior to tax reform, the earnings of foreign subsidiaries
were subject to U.S. tax when repatriated to their U.S.
shareholders, and the U.S. shareholders had the ability to
claim foreign tax credits to mitigate the burden of double
taxation on the foreign subsidiary’s earnings. The new
law adopts a “modified” territorial system of taxation of
the earnings of foreign corporate subsidiaries. Domestic C
corporations that are U.S. shareholders of certain foreign
corporations are able to claim a 100% deduction for the
foreign-sourced portion of dividends paid by such foreign
corporations after December 31, 2017. Non-corporate
owners that are U.S. shareholders of foreign corporations,
whether directly or through pass-through entities such as
partnerships and S Corporations, are ineligible to claim
this deduction, and therefore will continue to be taxed on
dividends paid by such foreign corporations.
It is important to note that the Subpart F anti-deferral
regime, which subjects certain types of income to taxation as
a deemed dividend, continues to apply with modifications.
Any deemed dividend arising from Subpart F income is not
eligible for the 100% deduction discussed above.
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Sec. 902 of the code, which allowed U.S. corporate
shareholders to claim a deemed-paid foreign tax credit
on the earnings of foreign subsidiaries when distributed,
has been repealed, effective for tax years beginning after
December 31, 2017. Sec. 960, which allows domestic C
corporations (and individuals electing to be taxed under
Sec. 962) to claim a deemed-paid foreign tax credit for
Subpart F income when generated, has been retained with
modifications.
Transition Tax
To transition to the modified territorial system of taxation
discussed above, a mandatory one-time deemed repatriation
tax, or transition tax, applies to the previously untaxed
accumulated foreign earnings of certain foreign corporations
by treating the earnings as Subpart F income to their U.S.
shareholders in the foreign corporation’s last taxable year
which begins before January 1, 2018. The U.S. shareholders
are able to claim a participation exemption deduction
against these earnings, which result in and effective rate of
tax, before consideration of foreign tax credits, of between
8% and 15.5% of the previously untaxed accumulated foreign
earnings, depending upon the amount of such earnings that
are considered to be held in liquid assets. Foreign tax credits
may be claimed against this income at a reduced rate, based
on the participation exemption deduction claimed. Note
that the transition tax applies to all U.S. shareholders, even
those that are unable to take advantage of the dividend
received deduction discussed above. To ease the burden
on taxpayers, the law allows taxpayers to elect to pay their
net transition tax in eight installments, and it also allows
shareholders of S corporations that are U.S. shareholders
of foreign corporations to elect to defer payment of the net
transition tax indefinitely, until a triggering event (such as a
sale, liquidation, termination of S election) occurs.
GILTI
The new law creates a new category of income, Global
Intangible Low-Taxed Income (or GILTI). A U.S. shareholder
of a foreign corporation is required to include in income
its share of GILTI for taxable years of foreign corporations
beginning after December 31, 2017. GILTI is generally
treated as Subpart F income and is therefore treated as a
deemed dividend to the U.S. shareholder. GILTI is generally
defined as the earnings of a foreign corporation not already
subject to U.S. taxation, over the deemed intangible return
(defined as a 10% return on depreciable tangible assets
used in the foreign operations). A deemed-paid foreign
tax credit is available at a rate of 80%. Any unused foreign
tax credits attributable to GILTI expire unused and cannot
be carried forward. Additionally, C corporations that are
U.S. shareholders are able to claim a 50% deduction for
GILTI through 2025, after which the deduction is reduced
to 37.5%. Non-corporate owners that are U.S. shareholders
of foreign corporations, whether directly or through pass-
through entities such as partnerships and S Corporations,
are ineligible to claim this deduction, and therefore will be
taxed on 100% of GILTI.
State Impact
Federal tax reform does not just affect federal taxable
income, but also how taxes are calculated at the state level.
States largely use the federal Internal Revenue Code as
the basis of their states taxes, and then adjust accordingly.
The state implications of federal tax reform should also be
closely monitored. Please reach out to your advisor for
further discussions.
The Bonadio GroupTAX CUTS AND JOBS ACT
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