Today we continue our series highlighting some of the provisions in the recent Tax Cuts and Jobs Act. All provisions are effective 1/1/2018 unless otherwise stated. As always, if you should have any questions, please feel free to reach out to our office.
Changes for Businesses
The Act adds a new Code sec. 199A — Qualified Business Income, which is intended to allow pass-through entities to deduct the first 20% of their business income up to a threshold amount of $157,500 ($315,000 if joint return), adjusted for inflation after 2018. This is meant to allow a lower effective tax rate for taxpayers’ business enterprise income, but to still subject a portion of their earnings to the individual tax rates.
Because the deduction is meant to assist businesses and not wage earners, the deduction cannot be taken by those in specified personal service professions whose income is above the threshold amount plus $50,000 ($100,000 if filing a joint return). These include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees (new provision) and the performance of services that consist of investing and investment management, trading or dealing in securities, partnership interests or commodities. The Act specifically excludes engineering and architecture from the list of service providers who cannot take advantage of the deduction.
These new rules are complex and it will likely take time some time for privately-held companies to determine when or if it makes sense to convert to a C corporation, or for a C corporation to convert to a pass-through entity.
Corporate Tax Rate
The corporate rate is changed from a graduated rate ranging from 15% to 35% to a flat tax rate of 21%.
Alternative Minimum Tax
This tax is repealed for corporations. The repeal of the alternative minimum tax (AMT) will be a win for companies that own COLI and BOLI policies because cash values and death benefits are a preference item under the AMT. The AMT remains in place for noncorporate taxpayers; however, the exemption amount increases to $109,400 for joint return/surviving spouse (up from $86,200) and $70,300 all others (up from $55,400 for single filers and $43,100 for married filing separate returns (except estates and trusts)). The phase out thresholds are increased to $1 million for joint filers (up from $164,100 for joint filers and surviving spouses) and $500,000 for all other taxpayers (up from $123,100 for single filers and $82,020 for married filing separately) (except estates and trusts). These amounts are indexed for inflation.
Expensing Depreciable Business Assets
The annual cost that can be taken into account is increased from $520,000 (in 2018) to $1 million. This limit is reduced by the amount of which the cost of section 179 property placed in service during the year exceeds $2.5 million (increased from $2,070,000 in 2018). It also expands the definition of section 179 property.
Effective for property placed in service after 12/31/2017.
The $1 million and $2.5 million are indexed for inflation beginning 1/1/2019.