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What is the Tax Cuts and Jobs Act (TCJA)? What Does This Mean?

Presented by Natalie Rasmussen, EA – GreenGrowth CPAs

Agenda

• About GreenGrowth CPAs
• What is the Tax Cuts and Jobs Act (TCJA)?
• Who does this affect and how?
• Comparative TCJA Tax Rates
• When does TCJA go into effect?
• What are Standard Deductions?
• Child Tax Credits
• Adjustments to Gross Income

Agenda

• Adjustments to Gross Income
• Itemized Deductions
• IRC 199A Small Business Deduction
• Shortcut Computations
• What does TCJA mean for Cannabis Companies
• Key Takeaways

GreenGrowth CPAs

About Us:

• Involved in Cannabis Taxes since 2010
• Enrolled Agent with 21 years in the tax industry
• Over 300 cannabis business clients
• Can help cannabis companies with taxes, business plans, licensing, audits and more

What is the Tax Cut and Job Act

• TCJA passed in December 2017 and made several significant changes to

the Individual Income Tax.

• Changes include a nearly double standard deduction, new limitations on

itemized deductions, reduced income tax rates, and reforms to several

• ther provisions.
• Changes simplify the individual tax income by eliminating the need for

millions of households to itemize their deductions

Who Does This Affect and How?

Since the signing of the bill, we have observed the provisions which have become obvious that will be the most detrimental to a large number of taxpayers:

• Loss of exemptions for taxpayer who will continue to itemize
• Loss of exemptions for dependents under 17
• Loss on unrestricted deduction for state and local taxes (SALT)
• Loss of equity debt interest deduction
• Loss of employee business expenses deduction

Who Does This Affect and How?

On the other hand, there are several provisions that will be beneficial to a large number of taxpayers:

• Increased standard deduction
• Increased Child Tax Credit
• Section 199A 20% QBI deduction
• Expanded Section 179 and bonus depreciation rules
• Decreased tax rates

To start, here is your comparative TCJA Income Tax Rates:

Tax Rates 2018

• The tax rate structure does NOT apply to taxable years beginning after

December 31, 2025.

• The dollar amounts for bracket thresholds are all adjusted for inflation

and then rounded to the next lowest multiple of $100 in future years.

• Unlike prior law, which uses a measure of the Consumer Price Index for

All Urban Consumers (“CIP-U”), the new inflation adjustment uses the Chained Consumer Price Index for All Urban Consumers (“C-CPI-U”).

When Does TCJA Go Into Effect?

TCJA took effect in January of 2018 and will expire in December

• f 2025.

It maintains seven tax brackets, but temporarily adjusts the tax rates as follows.

What Are Standard Deductions?

• A dollar amount that reduces the amount of income on which you are taxed and varies

according to your filing status.

• There is an additional standard deduction for individuals who are blind or age 65 or over.
• You CANNOT take the standard deduction if you itemize deductions.
• In addition, certain individuals cannot take a standard deduction or can take only a

reduced standard deduction.

• Tax payers can deduct the amount of the tax year's standard deduction on their tax

returns or add up what they spent on tax deductible expenses for the year.

Standard Deduction Rates

Standard Deduction Rates

Child Tax Credits

• The TCJA temporarily increases the child tax credit to $2,000 per qualifying

child (an individual who has not attained age 17 during the taxable year).

• The credit is further modified to temporarily provide for a $500 nonrefundable

credit for qualifying dependents other than qualifying children.

• It should be noted that this provision generally retains the present-day

definition of dependent.

Adjustments to Gross Income (Above-the-line Deductions/ AGI)

Adjustments to income are specific deductions that directly reduce your total income to arrive at your AGI.

• Educator Expenses: deduction for educator expenses remains at $250 ($500 if both taxpayers
• n a joint return are eligible educators). Under Pre-TCJA law, expenses that exceeded the

limit could be claimed as miscellaneous itemized deductions subject to the 2% floor.

• Moving Expenses: TCJA eliminates the moving expense deduction, as well as the exclusion

from income for qualified moving expense reimbursements provided by an employer. The law retains the pre-TCJA deduction for moving expenses incurred by a member of the U.S. Armed Forces on active duty who moves pursuant to a military order.

AGI

• Alimony: Under TCJA, alimony is no longer deductible by the payor spouse, nor

included in the recipient spouse’s gross income for any divorce or written separation agreement executed after December 31, 2018.

• Grandfathered Payments: Alimony paid pursuant to a divorce or written

separation agreement in place on or before December 31, 2018, remains deductible by the payor spouse and included in the income of the recipient spouse.

• Time is of the essence:
• In CA, there is a minimum 6 month waiting period from the time the divorce is

filed and when the date is finalized.

AGI- Alimony

• When filing, a court date must be scheduled to allow for enough time to get the court date
• If modifying an agreement, its best for payor to finalize the agreement prior to January 1,

2019, to avoid deductibility/taxability issue

• If a couple has court-ordered spousal support in place prior to their divorce being finalized,

those payments will continue to be deductible.

AGI

• St

Student Loans: ○ The deduction for student loan interest is retained! ○ However, the COD (cancellation of debt) income from a student loan discharged on account of death or total disability of the student is excluded from gross income, only if the discharge of indebtedness occurs prior to January 1, 2019.

Itemized Deductions

Itemized deductions are comprised of various types of certain expenses that you may incur throughout the taxable year.

1.

Medical Expenses: TCJA retains the deduction for medical expenses and temporarily reduces the medical expenses threshold back to 7.5% of AGI for 2017 and 2018 for all taxpayers. The threshold returns to 10% after 2018 for all taxpayers.

2.

Deduction for State and Local Taxes: Taxpayers may claim itemized deductions of up to $10,000 for the aggregate of state and local taxes, as well as property taxes. For those married, but filing separately, deductions cannot exceed $5,000.

○

Taxpayers may opt to deduct sales and use tax rather than income tax, which is also subject to a $10,000 limit. (popular in states with no state income tax)

Itemized Deductions: For Example

John is single and made the following state and local payments in 2017 and 2018:

Itemized Deductions

• Mortgage Interest: TCJA introduces new limits that provides for tax years beginning

in 2018, but ends before 2026.

○

May treat no more than $750,000 as acquisition indebtedness ($375,000 for married but filing separately tax payers)

○

Repeals the deduction for interest on home equity debt of up to $100,000, no matter when the debt was incurred. Equity debt is nondeductible from January 1, 2018 through December 31, 2019.

○

Grandfathered Debt: for indebtedness incurred on or before December 15, 2017, the $1 M limitation is grandfathered in.

Itemized Deductions

• Charitable Contributions: TCJA increases the AGI limit from 50% to 60% for

charitable contributions to 50% charities.

• Applies to contributions made in the tax years beginning December 31, 2017 and

before January 1, 2026.

• Increase specifically for cash contributions
• Excess contributions may be carried forward for five years

Itemized Deductions

• Casualty Losses: No longer deductible under TCJA, except in the case of a presidentially declared

disaster, which is a form of casualty loss.

• Miscellaneous Itemized Deductions: Were subject to 2% floor but have been repealed.

○

Tax prep fees, unless able to allocate under Schedule C, E, F

○

Unreimbursed employee expenses, including: sales, travel, and entertainment expenses for

• utside sales people, and entertainment industry expenses, including agent, attorney and

publicist fees

○

Home office for employees, union dues, out of pocket expenses, and uniforms- including Police and Fire, construction workers.

○

Continuing education expenses

○

Investment advisor fees or asset management fees, and

○

Attorney fees, among other.

Itemized Deductions: Misc. Deductions

• Prior to TCJA, employees could deduct business expenses that weren’t

reimbursable by their employer as 2% miscellaneous itemized deductions if they were incurred or paid in the tax year, if it allowed the taxpayer to carry on in their trade, and of the expenses were ordinary and necessary.

• Under TCJA, this is eliminated and will affect the following industries that hardest:

○

Sales

○

Fire and Police

○

Entertainers and Athletes

○

Employees with a home office

IRC Section 199A: Small Business Deduction

• TCJA allows for the complete overhaul of the corporate tax rates.

Corporations, excluding S-Corps or Partnerships, pay tax based on their income on a tax scale that is similar to individual income taxes.

• For the tax year beginning January 1, 2018, all corporations will pay a flat

20% tax rate, no matter the profit of the company.

• Congress enacted Section 199A in response to cover the perceived high

disparity between C-Corps (14% point tax reduction) and flow through entities (S-Corps and Partnerships)

Qualified Business Income (QBI)

• Qualified Business Income may include all kinds of business

income, including income from services and income from rental real estate.

• The only exception is W-2 income, even if the W-2 income is from

a pass through entity owned in whole, or in part, by the tax payer, or a partner’s guaranteed payments.

QBI

• Qualifying entities include:

○

Sole proprietorships and pass-through income received by individuals from partnerships (including publicly traded partnerships), S-Corps, Trusts and Estates, as well as real estate investment trusts (REITs) and qualified cooperatives.

QBI: LLCs

• Income from LLCs qualify if the LLC is treated as a sole

proprietorship (SMLLC), partnership, or S-Corp.

Where will QBIs be deducted from?

• Deductions are NOT taken in computing adjusted gross income (AGI)

○

Not permitted to itemizers and non-itemizers.

○

It appears that the deduction will be taken after either the standard deduction or itemized deduction

Draft Form 1040 2018

Shortcut Computations

Computations- Basic Overview

○

Deductions:

■

Combined “tentative deduction” from trade or business income; plus

■

20% of REIT dividends and publicly traded partnership (PTP) income; plus

■

Deduction for farming cooperative dividends.

Shortcut Computations

Section 199A:

○

Initial Deductions: 20% of qualified business income (QBI);

○

Tentative Deduction: initial deduction reduced by any phaseouts; and

○

IRC Section 199A Deduction: tentative deduction after any reduction under the taxable income limitation.

Phaseout Range

Ask Yourself:

Services Income (IRC Standards)

• QBI does NOT include service businesses unless taxable income is below the top of the

phaseout range.

• High-income tax payers need to determine whether income is from a service or non-service

business.

Services Income

• Services income includes services from the following fields:

○

Health

○

Law

○

Accounting

○

Actuarial Science

○

Performing Arts

○

Consulting

Services Income

• Athletics
• Financial Services
• Brokerage Services, or
• Any trade or business where the principal asset of such trade or business is the reputation
• r skill of one or more of its employees.

What does TCJA mean for Cannabis Companies

• C-Corps more attractive to cannabis operators due to flat tax rate of 20%

○

A lot less than what most of you are used to paying!!

• Pass-Through Entities are a little less attractive

○

280E would disallow the 199A deduction due to being a cannabis operator

○

Contact our Team so we can run a personal analysis for you

What does TCJA mean for Cannabis Companies?

• The Act didn’t repeal IRC 280E.

○

The number one issue with cannabis companies is the impact of 280E.

○

One reason it hasn’t been repealed is because it didn’t fit into Congress’ Budget- since repeals are budgeted as tax cuts.

○

TCJA makes C Corporations more attractive since the new tax law sets the tax rate at 20%. C Corporations can also

• ffer other benefits such as audit protection for shareholders and greater flexibility in offering employee benefits.

○

TCJA makes LLCs and “pass through” entities less attractive and can take a deductions of up to 20% of business

• income. Congress framed this as a deduction and 280E will disallow this deduction for all cannabis cultivators,

distributors, and retailers. Owners of pass-throughs will have their 20% deduction reduced or even disallowed under a maze of complex and inter-related exceptions.

Key Takeaways

1.

TCJA passed in December 2017 and made several significant changes to the Individual Income Tax.

2.

Understand what AGI, Itemized Deductions, and QBI deductions are to know if you qualify and get to keep more of the hard earned money you make.

3.

The Changes took effect in January of 2018 and will expire in December of

• 2025. It maintains seven tax brackets

that could be beneficial to you.

4.

File your taxes correctly and on time by engaging the services of a CPA or EA, who is knowledgeable with the TCJA and will be able to file your taxes accurately.

Have questions or need help with filing your taxes for 2018? Contact GreenGrowth CPAs today! Visit: www.greengrowthcpas.com Call: (800) 674-9050