The Tax Cuts and Jobs Act (H.R. 1) was signed into law by President Trump on December 22, 2017. As promised, the Tax Cuts and Jobs Act provides widespread tax reform from an individual and business perspective such as reducing the individual and corporate tax rates, increasing business expenses, and repealing deductions and tax credits.
The following table summarizes various key individual and business provisions within the tax bill. Please note that unless otherwise noted all of the changes below are temporary, effective for tax years beginning after December 31, 2017 and expiring December 31, 2025.
If you have any questions or are interested in understanding how these provisions may impact your business, please contact CW Associates, CPAs at (808) 531-1040.
Tax Cuts and Jobs Act
Individual Tax Reform
Individual tax rates reduced
Married Filing Jointly
$0 – $19,050
$19,050 – $77,400
$77,400 – $165,000
$165,000 – $315,000
$315,000 – $400,000
$400,000 – $600,000
$0 – $9,525
$9,525 – $38,700
$38,700 – $82,500
$82,500 – $157,500
$157,500 – $200,000
$200,000 – $500,000
Standard deduction modified
- The standard deduction increases to $24,000 for married filing jointly; $18,000 for an unmarried individual with at least one qualifying child: and $12,000 for single filers.”
- The amount of the standard deduction will be indexed for inflation for tax years after 2018.
Personal exemptions suspended
- The deduction for personal exemptions is suspended and other provisions in the code that contains references to the personal exemption are modified.
Mortgage interest deduction limitation lowered for new acquisition indebtedness
- The mortgage interest deduction is limited to interest on $750,000 of acquisition indebtedness ($375,000 for married taxpayers filing separately). Acquisition indebtedness incurred before December 15, 2017 is subject to the current $1 million limitation ($500,000 for married taxpayers filing separately).
- Additionally the deduction for home equity indebtedness is suspended.
State and local tax deduction limited
- A taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of (1) state and local property taxes not paid or accrued in carrying on a trade or business and (2) state and local income, war profits, and excess profits taxes paid or accrued in the tax year.
- State, local and foreign property taxes and state and local sales taxes, paid or accrued by an individual carrying on a trade or business are deductible.
Miscellaneous itemized deductions suspended
- All miscellaneous itemized deductions that are subject to the 2% floor under current law are suspended.
Medical expense deduction floor temporarily modified
- For tax years beginning after December 31, 2016, the medical expense deduction floor is reduced to 7.5% of adjusted gross income and eliminates the minimum tax preference.
- The reduction to the medical expense deduction floor expires December 31, 2018.
Charitable contribution deduction limit increased
- The 50% limitation for cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding the 60% limit may be carried forward and deduction for up to five years, subject to the later year’s ceiling.
Deduction for alimony payments eliminated
- For any divorce or separation agreement executed after December 31, 2018 or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), alimony and separate maintenance payments are not deductible by the payor and are not included in the income of the payee.
Individual alternative minimum tax (AMT) continues subject to higher exemption amounts
- AMT is not repealed for individuals, however, the exemption amount increases to $109,400 for joint filers, $54,700 for married taxpayers filing separately and $70,300 for single taxpayers.
- In addition, the exemption phase out levels increase to $1 million for joint filers and surviving spouses and $500,000 for all other taxpayers (other than estates and trusts).
- These amounts will be adjusted for inflation after 2018.
Federal Estate Tax exclusion amount is increased
- Increases the federal estate and gift tax unified credit basic exclusion amount to $10 million (with adjustments for inflation) effective for decedents dying and gifts made after December 31, 2017.
Business Tax Reform
Corporate tax rate reduced
- Reduces the corporate tax rate to a flat 21% permanently
- Reduces the 80% dividends received deduction to 65% and the 70% dividends received deduction to 50%.
Pass-through tax treatment
- Taxpayers (including trusts and estates) who have domestic qualified business income (QBI) from a partnership, S corporation or sole proprietorship are entitled to deduct the lesser of the QBI or 20% of taxable income. Note: the deduction reduces taxable income not AGI and taxpayers are entitled to the deduction whether or not they itemize. The 20% deduction also applies to a taxpayer’s qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income.
- The deduction is generally limited to the greater or either (1) 50% of the W-2 wages paid with respect to the qualified trade or business, or (2) the sum of 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition.
- Taxpayers with pass-through income from specified service businesses in the fields of health, law, accounting, actuarial, science, performing arts, consulting, athletics, financial services and brokerage services are not eligible for the deduction.
- Taxpayers with taxable income below $157,500 ($315,000 if married filing jointly) are not subject to W-2 wage limit or the prohibition on specified services.
Corporate alternative minimum tax (AMT) repealed
- Corporate AMT is repealed for tax years beginning after 12/31/2017
- Prior year’s minimum tax credits can be used to offset regular tax liability for any year. 50% of the remaining prior year minimum tax credit is refundable in tax years 2019 – 2021 and any remaining minimum tax credit is refundable in 2022.
Section 179 expensing increased
- Increases the maximum amount that can be expensed under section 179 to $1 million with an increased phase-out threshold of $2.5 million.
- The maximum amount and phase-out threshold will be indexed for inflation after 2018.
- Additionally, expands the definition of qualified real property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging and certain improvements to nonresidential real property after the date such property was first placed in service (roofs, HVAC, fire protection and alarm systems, and security systems).
Temporary 100% expensing for certain business assets
- Increases the 50% bonus depreciation deduction to 100% for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. The first-year bonus depreciation deduction phases down by 20% each year beginning in 2023 until 2026. The following is a schedule of the first-year bonus depreciation:
Jan 1, 2018 – Dec 31, 2022
Jan 1, 2023 – Dec 31, 2023
Jan 1, 2024 – Dec 31, 2024
Jan 1, 2025 – Dec 31, 2025
Jan 1, 2026 – Dec 31, 2026
- The additional first-year depreciation deduction applies to both new and used property.
Depreciation limitation for luxury automobiles increased
- The maximum amount of allowable depreciation is increased to the following:
Year vehicle is placed in service
Fourth and subsequent years
- The amount of allowable depreciation will be indexed for passenger automobiles placed in service after 2018.
- Computer or peripheral equipment is removed from the definition of listed property and thus is no longer subject to the substantiation requirements that apply to listed property.
Depreciation period for real property shortened
- The separate definitions of qualified leasehold improvement, qualified restaurant and qualified retail improvement property is eliminated and a general 15-year recovery period and straight-line depreciation apply to qualified improvement property.
Interest deductions limited
- Caps the deduction for net interest expense at 30% of adjusted taxable income. Any disallowed interest can be carried forward indefinitely.
- Adjusted taxable income is computed without regard to depreciation, amortization or depletion for tax years beginning after December 31, 2018 and before January 1, 2022.
- The limitation is applied at the tax filer level, however, for pass-through entities the limitation is applied at the entity level (e.g., partnership level instead of partner level).
- Taxpayers with less than $25 million in average annual gross receipts for the prior three years are exempt from the limitation and real property trades or businesses that use ADS can elect out of the limitation provisions.
Net operating loss (NOL) carryback repealed and NOL deduction modified
- The NOL deduction is limited to 80% of taxable income (determined without regard to the deduction). Carryovers to other years are adjusted to account for the limitation.
- NOLs arising in tax years beginning after December 31, 2017 cannot be carried back to offset income in prior years, but can be carried forward indefinitely.
Domestic production activities deduction (section 199) repealed
- The domestic production activities deduction is repealed
Like-kind exchange treatment limited
- Limits the non-recognition of gain for like-kind exchanges to real property that is not held primarily for sale.
Entertainment expense deduction limited
- Employers cannot deduct expenses for entertainment, amusement or recreation regardless of whether or not it is directly related to an active trade or business. The 50% limit on the deductibility of business meals is expanded to include meals provided through an in-house cafeteria or otherwise on the premises of the employer.
- For tax years beginning after December 31, 2025 employers may not deduct expenses associated with meals provided for the employer’s convenience on the employer’s business premises, or provided on or near the employer’s business premises through an employer-operated facility that meets certain requirements.
Cash method of accounting
- The taxpayers with average gross receipts of less than $25 million (indexed for inflation) for the prior three years are permitted to use the cash method of accounting regardless of the entity structure or industry.
Accounting for inventories
- Taxpayers with average gross receipts of less than $25 million (indexed for inflation) for the prior three years are exempt from the requirement to account for inventory under section 471 and may treat inventories as non-incidental materials and supplies or conform to the taxpayer’s financial accounting treatment of inventories.
- Additionally such taxpayers are exempt from the application of the UNICAP (section 263A) rules.
Long-term contract accounting
- Taxpayers with average gross receipts of less than $25 million (indexed for inflation) for the prior three years are exempt from the requirements to use the percentage-of-completion accounting method for long term construction contracts to be completed within two years.
- Such taxpayers can uses the completed contract method or any other permissible exempt contract method.
S corporation conversion to C corporation
- If an S corporation revokes its S corporation election before December 23, 2019 and has the same owners on December 22, 2017 and the revocation date, the distribution from a terminated S corporation will be treated as paid from its accumulated adjustment account and from its earnings and profits.
International Tax Reform
Territorial tax system implemented
- Implements a territorial tax system which provides a 100% deduction for foreign-sourced dividends received from specified 10% owned foreign corporations subject to a one year holding period. No foreign tax credit is permitted for foreign taxes paid or accrued with respect to a qualifying dividend.
- Imposes a mandatory tax on post-86 accumulated foreign earnings: 15.5% if the earnings are held in cash or cash equivalents and 8% if the earnings are held in illiquid assets. Taxpayers may elect to pay any resulting liability over 8 years.
Foreign tax credit modified
- Indirect foreign tax credits under section 902 are repealed. However, a foreign tax credit is permitted for subpart F income included in the gross income of a domestic corporation that is a US shareholder of a CFC without regard to the pools of foreign earnings kept abroad.