Understanding accounting rules and tax law is no easy task.
As of January 1, 2018, the most significant changes to tax law in the past 30 years went into effect. Known as the Tax Cuts and Jobs Act (TCJA) Law, this law provides sweeping changes to how businesses and individuals are taxed. The list below provides a brief summary of some of the most significant changes that you should be aware of.
- All tax brackets have been lowered by 2-3% with the highest tax bracket reduced from 39.6% to 37%.
- While it is a positive that Itemized Deductions are almost doubling, what is deductible is significantly changing.The deduction for State and Local income taxes, as well as property taxes are now limited to $10,000. Many individuals who had significant deductions in this area will be limited and may not qualify to itemize as a result.
- Personal exemptions are no longer a reduction in taxable income.In fact, the TCJA has eliminated exemptions all together. For families with children, and more critically families with multiple children, this results a significant lost deduction.
- Charitable donations are now limited to 60% of Adjusted Gross Income.
- Miscellaneous itemized deductions, such as accounting fees, investment management fees, and unreimbursed business expenses are no longer deductible.The loss of unreimbursed business expenses could be substantial for employees who travel substantially but are not reimbursed for mileage.
- Historically, alimony could be a deduction depending on specifics within the agreement.For eligible alimony for a divorce decree executed before December 31, 2018, alimony will still be deductible. Any divorce decree signed January 1, 2019 or later will not allow under any circumstances a deduction for alimony.
- Child Tax credits are increasing and a new Family Credit is now available for dependents who might not be a qualified child.
- You can access information from the IRS here (https://www.irs.gov/pub/irs-pdf/p5307.pdf)
- A new ceiling on the tax rates for C Corporations is in effect lowering income tax for these businesses from 35% to 21%.
- C Corporations that might have prior net operating losses (NOLs) are now limited to using up to 80% of an NOL as an offset to current year income.
- A significant and complex change to pass-through entities (Subchapter S corporations and Partnerships) and Real-Estate Investment Trusts (REIT) known as Section 199A allows owners of these entities to deduct 20% of income on their personal returns. This new law is not a benefit to all pass-through entities however as there are rules regarding the type of entity (Specified service trade or business (aka SSTB)) and the basis of which the deduction is calculated (Qualified Business Income (aka QBI)). The amount of income a taxpayer reports on their personal tax return also impacts what is deductible by the owners of these entities.
- Valid business meals are still deductible up to 50% of cost, but general recreation or entertainment expenses are no longer deductible, even if they are ordinary and necessary for business.
Please reach out to us for more information on these changes and how you may be impacted.