TAX CUTS & JOBS ACT DEVELOPMENTS P L A N N I N G F O R B U S - - PDF document
12/6/2018 TAX CUTS & JOBS ACT DEVELOPMENTS P L A N N I N G F O R B U S I N E S S E S A N D I N D I V I D U A L S D E C E M B E R 1 2 , 2 0 1 8 THE TAX CUTS & JOBS ACT AT A GLANCE BUSINESS PROVISIONS Created Enhanced Reduced
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P L A N N I N G F O R B U S I N E S S E S A N D I N D I V I D U A L S D E C E M B E R 1 2 , 2 0 1 8
Reduced Tax Rates Increased Standard Deduction Limited Itemized Deductions Created Qualified Opportunity Zones Doubled lifetime exemption
Reduced Tax Rates Created New 20 Percent Deduction Enhanced Capital Expensing Limited Deductions
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Reduced Tax Rates Created New 20 Percent Deduction Enhanced Capital Expensing Limited Deductions
Taxable Income Previous Law TCJA $0–$50,000 15% 21% $50,001–$75,000 25% $75,001–$100,000 34% $100,001–$335,000 39% $335,001–$10,000,000 34% $10,000,001–$15,000,000 35% $15,000,001–$18,333,333 38% Over $18,333,333 35%
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Permanent Repeal
Remaining AMT credits refundable
Previous Law TCJA 20% Repealed
Reduced Tax Rates Created New 20 Percent Deduction Enhanced Capital Expensing Limited Deductions
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Full phaseout = $207,500 (single) | $415,000 (married filing jointly (MFJ)), indexed Threshold = $157,500 (single) | $315,000 (MFJ), indexed
Health Law Athletics Trading or Dealing Accounting Actuarial Science Brokerage Services Investment Management Performing Arts Consulting Principal Asset Reputation/Skill of Employees/Owners Financial Services
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Health
Good (Not an SSTB) Bad (SSTB)
physical exercise/conditioning to their customers
manufacture/sales of pharmaceutical/medical devices
individuals directly to a patient/service recipient, e.g., physicians, pharmacists, nurses, dentists, veterinarians, physical therapists & psychologists
Financial Services
Good (Not an SSTB) Bad (SSTB)
finances
(retirement advisors)
services regarding valuations, mergers, acquisitions, dispositions, restructurings & raising financial capital by underwriting or acting as a client’s agent in the issuance of securities & similar services (investment bankers)
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Consulting
Good (Not an SSTB) Bad (SSTB)
than advice & counsel
courses
services embedded in/ancillary to the sale of goods/performance of services on behalf of trade/business that’s not
separate payment for consulting services
counsel to clients to assist in achieving goals & solving problems (includes advocacy with intention of influencing decisions made by government or governmental agency)
Good (Not an SSTB) Bad (SSTB)
products/services
signature, voice, trademark or any
individual’s identity
appearing at events or on radio, television or other media formats
Principal Asset Reputation
Employees Or Owners
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property or services to an SSTB if 50 percent or more common
to provide substantially same services (unless they can provide evidence to substantiate nonemployee status)
Reduced Tax Rates Created New 20 Percent Deduction Enhanced Capital Expensing Limited Deductions
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Enhanced Bonus Depreciation
(created unintended need for technical correction)
September 28, 2017– December 31, 2022 100% 2023 80% 2024 60% 2025 40% 2026 20%
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depreciation under the TCJA
Expanded Section 179
service (adjusted for inflation)
certain improvements to nonresidential real property, including roofs, HVAC systems, fire protection & alarm systems & security systems
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Planning Considerations
Reduced Tax Rates Created New 20 Percent Deduction Enhanced Capital Expensing Limited Deductions
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December 31, 2017
December 31, 2017 (except property/casualty insurance companies & certain farm losses)
December 31, 2017
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Corporations Pass-throughs Number of tax brackets One, flat rate Seven brackets for individuals (four for trusts/estates) Top tax rate 21 percent + 23.8 percent on qualified dividends 37 percent + 3.8 percent net investment income tax Alternative minimum tax None 28 percent (exemption $70,300 single/$109,400 MFJ; phaseout $500,000/$1 million MFJ) Other tax
(20 percent)
personal holding company income (20 percent)
percent)
Other rate considerations
stock
deduction (20 percent)
Previous Tax Law New Tax Law Corporation 50.47% (35% + .65 * 23.8%) 39.8% (21% + 0.71 * 23.8%) Pass-through 43.4% (39.6% + 3.8%) 40.8% (37% + 3.8%)
Effective tax rate case study fact pattern
0.79
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Previous Tax Law New Tax Law
Corp S Corp Corp S Corp Business income
$1,000,000 $1,000,000 $1,000,000 $1,000,000
Pass-through business deduction
(200,000)
State income tax (entity level)
(60,000)
(60,000)
Taxable income
940,000 1,000,000 940,000 800,000
State income tax (shareholder level)
(60,000)
(60,000)
Federal income tax on business income
(319,600) (325,623) (197,400) (226,499)
Tax on distribution to owner
(184,879)
(221,295)
Total tax
(564,479) (385,623) (478,695) (286,499)
Net cash to owner
$435,521 $614,377 $521,305 $713,501
Combined effective tax rate
56.45% 38.56% 47.87% 28.65%
Previous Tax Law New Tax Law
Corp S Corp Corp S Corp Business income
$1,000,000 $1,000,000 $1,000,000 $1,000,000
Pass-through business deduction
State income tax (entity level)
(60,000)
(60,000)
Taxable income
940,000 1,000,000 940,000 1,000,000
State income tax (shareholder level)
(60,000)
(60,000)
Federal income tax on business income
(319,600) (325,623) (197,400) (300,499)
Tax on distribution to owner
(184,879)
(221,295)
Total tax
(564,479) (385,623) (478,695) (360,499)
Net cash to owner
$435,521 $614,377 $521,305 $639,501
Combined effective tax rate
56.45% 38.56% 47.87% 36.05%
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Previous Tax Law New Tax Law
Corp S Corp Corp S Corp Business income
$1,000,000 $1,000,000 $1,000,000 $1,000,000
Pass-through business deduction
State income tax (entity level)
(60,000)
(60,000)
Taxable income
940,000 1,000,000 940,000 1,000,000
State income tax (shareholder level)
(60,000)
(60,000)
Federal income tax on business income
(319,600) (325,623) (197,400) (300,499)
Tax on distribution to owner
(92,440)
(110,647)
Total tax
(472,040) (385,623) (368,047) (360,499)
Net cash to owner
217,760 114,377 260,653 139,501
Net cash retained in business
310,200 500,000 371,300 500,000
Total net cash after taxes
$527,960 $614,377 $631,953 $639,501
Combined effective tax rate
47.20% 38.56% 36.80% 36.05%
Reduced Tax Rates Increased Standard Deduction Limited Itemized Deductions Created Qualified Opportunity Zones Doubled lifetime exemption
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brackets
Previous Law New Law Top rate 28 percent 28 percent Exemption $55,400 single ($86,200 MFJ) $70,300 single ($109,400 MFJ) Phaseout of exemption $123,100 single ($164,100 MFJ) $500,000 single ($1 million MFJ)
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Reduced Tax Rates Increased Standard Deduction Limited Itemized Deductions Created Qualified Opportunity Zones Doubled lifetime exemption
Previous Law New Law
Standard deduction $6,500 single $9,550 HOH $13,000 MFJ $12,000 single $18,000 HOH $24,000 MFJ Personal exemption $4,150 Repealed Child tax credit $1,000; phaseout at $75,000 single ($110,000 MFJ) $2,000 ($1,400 refundable); phaseout at $200,000 single ($400,000 MFJ) Family tax credit Not addressed $500 nonrefundable credit for dependents other than qualifying children; phaseout at $200,000 single ($400,000 MFJ)
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Reduced Tax Rates Increased Standard Deduction Limited Itemized Deductions Created Qualified Opportunity Zones Doubled lifetime exemption
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Medical & Dental Expense
incurred during year to extent exceed
State & Local Income/Sales, Real Estate & Personal Property Tax Expense
treated as paid in 2018
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Home Mortgage Interest Expense
Gifts to Charity
limited to 60 percent of contribution base
100% 50% Regular 30% Special 30% 20% *An individual’s charitable contribution deduction for a tax year is limited to a specified percentage of their contribution base or adjusted gross income (AGI) computed without regard to any net operating loss carryback 60% Overall 50%
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*An individual’s charitable contribution deduction for a tax year are limited to specified percentage of their contribution base or adjusted gross income (AGI) computed without regard to any net operating loss carryback **Assets where sale results in long-term capital gain (includes Section 1231 trade or business assets) ***Fair market value if smaller
Topic Public charity / Donor advised fund (DAF) Private foundation (PF) Cash 60% until 2025; 50% thereafter 30% Capital gain property** Fair market value 30% 20% Tax basis of property*** 50% 20%
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Reduced Tax Rates Increased Standard Deduction Limited Itemized Deductions Created Qualified Opportunity Zones Doubled lifetime exemption
Qualified opportunity (QO)
property
Not limited to real estate
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Temporary Deferral of Gain
period
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Reduced Tax Rates Increased Standard Deduction Limited Itemized Deductions Created Qualified Opportunity Zones Doubled lifetime exemption
Previous Law New Law
Estate tax 40 percent rate with $5.6 million basic exclusion amount per taxpayer 40 percent rate with $11.18 million basic exclusion amount per taxpayer Gift tax 40 percent rate with $5.6 million basic exclusion amount per taxpayer; $15,000 annual exclusion 40 percent rate with $11.18 million basic exclusion amount per taxpayer; $15,000 annual exclusion Generation-skilling transfer tax 40 percent rate with $5.6 million basic exclusion amount per taxpayer 40 percent rate with $11.18 million basic exclusion amount per taxpayer
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Ernie Skyrme, CPA | eskyrme@bkd.com
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