The calendar has turned to 2019 and it’s the first time to use the provisions passed in 2017 to apply to taxes in 2018. Here are reminders about some of the provisions of the Tax Cuts and Jobs Act required for the 2018 returns now being prepared.
Tax Rates for Individuals changed. Consult a chart for the new percentages. Incremental tax savings on each $1M is $26,000. Capital gains and qualified dividend rates are unchanged at 20%.
Tax Rates for C. Corporations are now simplified. Instead of eight brackets, from under $15,000 to over $18.3M, the rate is now 21% across the board.
Business bonus depreciation for the adjusted basis of qualified property used to be 50%. Now it’s 100%. “Used property” did not qualify in the past. Now it does. Qualified improvement property used to be eligible. Now it isn’t.
Business Section 179 deduction. Can expense $1M before phase-out (was $500k). Dollar-for-dollar phase-out after total purchases exceeding $2.5M (was $2M); fully phased-out at $3.5M (was $2.5M). The definition of eligible property is expanded to include depreciable tangible personal property such as furniture, appliances, carpet, etc., used in residential rentals and expenditures such as roofs, HVACs, fire protection and security systems for non-residential buildings.
Business: Section 199 domestic production activities deduction (DPAD). The old law allowed a 9% deduction on the taxpayer’s “qualified production activities income” and it was limited to 50% of the W-2 wages paid by the taxpayer in the calendar year. The new law eliminates all of that.
Business/Individual: 199A Deduction (20% pass-thru deduction). New for 2018 and forward: 20% deduction against Qualified Business Income QBI, REIT dividends and PTP income. This deduction does not apply to income from “specified service trades or business” (SSTB) when taxable income is at or above the phaseout ceiling. SSTB includes accounting, law, health, consulting brokerage services, investment management and trading (engineering and architectural services are excluded).
The old law identified “Specified Service Trades or Businesses, and included accounting, law, health, consulting brokerage services, investment management and trading. The new law includes engineering and architectural services. Banking, insurance, financing and leasing may also qualify for the 20% deduction.
Business: Cash Method of Accounting. Now available if the average gross receipts do not exceed $25M (was $5 M) for the past three years. The $1M threshold for businesses with inventories is eliminated. The service industry exclusion still applies.
Business: Accounting for long-term contracts. Now the percentage-of-completion method is required if the average gross receipts exceeds $25M (was $10M) in past three years.
Business: 263a capitalization. If the average gross receipts do not exceed $25M (was $10M) for the preceding three years, they are fully exempt from the UNICAP rules.
Business: Limit on interest expense deduction. All businesses are subject to a limitation of a deduction for net interest expenses in excess of 30% of the business’s “adjusted taxable income.” Adjusted business taxable income is a business taxable income computed without regard to business interest expense, business interest income, net operating losses (NOLs), qualified business income deduction, depreciation, amortization and depletion. Any interest amounts limited under this rule would be carried forward indefinitely. Businesses with average gross receipts of $25 million or less for the preceding three years would be exempt from these limitation rules.
Individual: Net operating losses (NOL) The current year NOLs of $500k or less MFJ ($250k for others) can be used to offset all current year income. Any NOLs in excess of $500k ($250k for others) are disallowed in the current year and carried forward indefinitely until used up (but limited to 80% of taxable income going forward). No carryback is allowed except in limited circumstances. As before, current year NOL can be used to offset all current year income, but any excess is carried forward indefinitely until used up (but limited to 100% of taxable income going forward). No carryback is allowed. Previously any excess was carried back two years or carried forward 20 years.
Business: Meals and entertainment expenses. In the past, 50% of meals and entertainment expenses were deductible. Now entertainment expenses, business or personal, are NOT deductible.
Business: Like kind exchange (1031 exchange). Under the old law deferral of gain on disposition of qualifying assets was allowed for real estate and other qualifying types of property, such as vehicles and equipment. Now, the like-kind exchange provision only apply to real estate.
Individual: Alternative minimum tax (AMT). The AMT exemption amount jumps from $86,200 to $109,400. Since the state income tax deduction is essentially eliminated, it is unlikely to be in AMT now.
Business: Corporate alternative minimum tax. The AMT credit is refundable and can offset regular tax liability in an amount equal to 50% (100% for tax years beginning in 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular liability.
Mike Amerio is Managing Partner with Lucas Horsfall.
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