Changes in the Tax Law

Jun 29, 2019

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 Business returns

 The biggest news for businesses is the 21% tax rate on C Corp income.  This is quite a reduction in rates from prior years and may mean that C Corps become more attractive.  This is not a scaled or progressive tax.  It is a flat tax for all levels of taxable income.

 For business returns in 2018, we have lost the deduction for entertainment.  This includes seats at sporting events and theatres, golf tee fees, night club table fees, hunting or fishing trips, etc….  Business meals are still 50% deductible.

 This is the year to buy new equipment or office furniture.  Assets purchased before the end of 2022, will be subject to an accelerated depreciation method called bonus depreciation.  In most cases, you will be able to write off 100% of the cost of the asset as a current year tax deduction. 

 We can also take advantage of an increase in the maximum deduction allowed for qualified section 179 property from $500,000 to $1 million.

 The rules for depreciating business passenger vehicles have become more generous as well.  A new or used vehicle placed into service in 2018 will be able to take bonus depreciation of $8,000 plus an additional maximum of $10,000 of regular depreciation for a total of a potential $18,000 write off in year one.

 Keep in mind that mileage logs are still required to establish the qualified business usage of the vehicle.

 New pass-through deduction

 We have a new pass-through deduction the Qualified Business Income (QBI) available to owners of pass-through entities such as Sub S corporations, partnership, sole proprietorships and rental activities.  The maximum deduction available will be 20% of the qualified business income of the pass-through entities.

 If you are a personal service company, restrictions will apply if your taxable income is over $315,000 but less than $415,000.  Once your taxable income exceeds $415,000 the deduction is disallowed.

 If you are not a personal service company, you also have additional tests to apply after your taxable income exceeds $315,000 but there is no upper cap on taxable income.

 The QBI deduction can never exceed 20% of the modified taxable income which is taxable income reduced by capital gains including qualified dividend income.

 Personal returns

 As with corporations, we have new limitations on deducting net operating losses on personal returns.  The deduction is limited to 80% of the taxable income.  This means that an NOL cannot entirely wipe out taxable income in any given year.  Unused portions will be rolled forward.

 A big change for 2018 is in the deductions arena.  We have lost:

• Moving expenses
• The alimony paid deduction for divorces executed after December 31, 2018
• The domestic production activities deduction
• The deduction for taxes paid – state income and property – are now limited to $10,000 per year.  Not terrible for Nevada residents but potentially devastating to California residents.
• Mortgage interest is limited to acquisition debt of $750,000 for homes purchased after 2017.  This used to be $1,000,000.  Excess interest paid is lost, not rolled over.
• Interest on home equity debt used to pay off personal credit cards or auto loans, will not deductible in 2018.
• All itemized deductions subject to the 2% limitation which includes investment fees, safety deposit box fees, tax return preparation fees, unreimbursed employee job expenses, estate planning fees, and home office for employees
• The exemption credit for children.  In 2017 this deduction was $4,050 for each person in the house.  In 2018, this deduction is zero.  In other words, you will not get a better tax break for having more children or a bigger household.

 The standard deduction has been raised to $24,000 for married couples.  Many taxpayers will use the standard deduction in 2018 rather than itemize their deductions.  It will net them a better tax break. 

 The child tax credit has been increased from $1,000 to $2,000 for children under 17.  The credit begins to phase out at a modified AGI of $400,000/200,000 in income.  Up to $1,400 of the credit may be refundable.

 Educational plan funds (529 plans) can now be used to pay for K-12 private school tuition for up to $10,000 per year.