Redpath Insights

Federal Tax Reform: House Releases Tax Cuts and Jobs Act

by Gloria McDonnell, CPA

On November 2, the House released the long-awaited Tax Cuts and Jobs Act. The Act is broad and covers multiple aspects of individual and corporate taxation. The Act, which is not yet law, will likely see some changes before it is finalized.

We will be releasing summaries of specific areas of the act over the next couple of weeks as we continue our in-depth analysis of the lengthy Act.

The summary below reflects some of the major tax law changes contained in the Act.

 

Changes impacting individual taxpayers

 

 Existing Tax Brackets - Current Law

Federal Tax Reform

Proposed Tax Brackets - Tax Cuts & Jobs Act

Federal Tax Reform

Standard Deduction

Federal Tax Reform

Personal exemptions are eliminated under the Tax Cuts & Jobs Act

  • Child tax credit increased from $1,000 to $1,600
  • Repeal of the dependent care assistance program allowing for an exclusion from income of up to $5,000 for dependent care expenses
  • Deductions for student loan interest and qualified tuition and expenses are eliminated
  • Mortgage interest deduction limited to mortgages of $500,000 (old law $1,000,000) for mortgages acquired after November 2, 2017
  • Deduction for state income tax paid is eliminated
  • Deduction for personal casualty loss is eliminated
  • Medical expense itemized deduction is eliminated
  • Alimony payments would not be deductible and would not be included in income by the recipient
  • Deduction for unreimbursed employee business expenses is eliminated
  • Provision allowing for recharacterization of IRA contributions is eliminated
  • The alternative minimum tax is eliminated

Business Income of Individuals

Pass-through income treated as business income will be subject to a reduced 25% tax rate. Individual tax rates and self-employment tax rates apply to the remainder of pass-through income. The business income is determined by the taxpayer’s “capital percentage” which is generally 30%. Certain industries may be eligible for an increased rate. Business income from certain service businesses is not eligible for the 25% rate on business income.

Estate and Gift Tax

  • Estate tax exclusion amount doubled to $10 million for tax years beginning after December 31, 2017
  • Estate tax repealed for years beginning after December 31, 2023
  • Gift tax - $10 Million exclusion retained
  • Gift tax rate lowered to 35% for gifts made after December 31, 2023

Changes Impacting Businesses

  • Corporate tax rate lowered from 35% to 20% and alternative minimum tax eliminated
  • Immediate expensing of 100% of cost of qualified property placed in service after September 27, 2017, and before January 1, 2023
  • 179 expensing increased from $500,000 to $5 million
  • Like-kind exchange provisions no longer apply to tangible personal property for exchanges that take place after December 31, 2017
  • Deduction for any business related entertainment expenses is eliminated for expenses incurred after December 31, 2017
  • The domestic production activities deduction is eliminated for tax years beginning after December 31, 2017
  • The rehabilitation credit and the work opportunity credit are repealed
  • Interest expense deduction limited to 30% of adjusted taxable income for businesses with average gross receipts in excess of $25 million
  • Net operating loss deduction is limited to 90% of taxable income for losses utilized in tax years beginning after December 31, 2017
  • Businesses with average gross receipts of $25 million or less would be permitted to use the cash method of accounting even if the business keeps inventory
  • Businesses with average gross receipts of $25 million or less would be exempt from the uniform capitalization rules (UNICAP)
  • Businesses with average gross receipts of $25 million or less would be allowed to use the completed contract method of accounting for long-term contracts

International Tax

  • Deemed repatriation of foreign subsidiary accumulated earnings & profits (E&P) as of November 2, 2017 (or December 31, 2017, whichever is higher)
  • Repatriated amount that was retained as cash or cash equivalents will be taxed at 12%
  • Remaining repatriated amount will be taxed at 5%
  • Taxpayer can elect to pay the tax liability relating to the repatriated E&P over a period of up to 8 years
  • For tax years beginning after December 31, 2017, there is a 100% dividend exclusion for dividends received from a foreign corporation in which the US taxpayer is at least a 10% owner

While there is still a long way to go before The Tax Cuts and Jobs Act becomes law, the bill has the potential to dramatically change our current tax system.  Businesses and individuals alike will need to consider the potential impact on some decisions they have made or are considering including their choice of business entity, their decision to utilize debt for the financing of certain investments, and also the groupings of certain business interests.  We will continue to provide additional updates as the bill moves through Congress.

If you have any questions regarding how the Tax Cuts and Jobs Act may impact you or your business, please contact Redpath and Company tax partners John Kammerer and Gloria McDonnell:

John Kammerer, CPA, Partner
651-255-9305
jkammerer@redpathcpas.com

Gloria McDonnell, CPA, Partner
651-407-5829
gmcdonnell@redpathcpas.com

Gloria McDonnell, CPA

Gloria McDonnell, CPA

Gloria McDonnell is the tax operations director and serves on the leadership team at Redpath and Company. She specializes in corporate and individual tax planning and compliance, multi-state taxation, international tax, and tax research. Gloria works with closely-held businesses in a variety of industries, and has provided business tax accounting services since 1989, and has been at Redpath and Company since 1991.