Ah, that fresh New Year smell is in the air. For many, the New Year is a fresh start to tackle those resolutions made either personally or for your practice. New personal goals, new business objectives and, of course, new changes to the tax code! That’s right; Congress passed the Tax Cuts and Jobs Act of 2017 on Dec. 20, 2017, which applies to years 2018–2025. This article will discuss the bigger picture income tax changes for both business and personal income taxes.
The changes made to business taxation mostly involve the tax rates and how “pass-through” income is taxed. As many have heard, the law reduces the corporate level tax rate to 21 percent. That is, if the entity is structured as a corporation (not an S corporation, which we’ll touch on next), the net profit from the business is taxed at a flat rate of 21 percent, a reduction from the previous top rate of 35 percent.
While this is good news for corporations, keep in mind that the net, after tax, profit is still subject to what is referred to as double taxation if distributed to the shareholders of the corporation. You should consult your tax advisor about this point to learn more. Now, pass-through income changes are a little more complicated under the new law. Pass-through income, which is income generated by entities organized as a partnership, LLC or S corporation, is passed down to members/partners and shareholders of the entity where that income is ultimately taxed. That is, the pass-through entity does not pay income tax on the earnings at the entity level (like a corporation does), the owner(s) of the pass-through entity do.
In general, the law provides that qualified business income from a pass-through entity will receive a 20 percent deduction of the taxpayer’s share of that income. There are a few catches, of course. First, this 20 percent deduction is not available for specified service business owners if your taxable income exceeds $415,000 for the year. A specified service business is defined as any business providing services in the following fields: health, law, accounting, consulting, financial services and brokerage services, to name a few. Contact your tax advisor for a comprehensive list of specified service businesses. Second, if you’re not a specified service business owner, once your income reaches $415,000, the amount of allowable deduction against your share of flow-through income has a couple of more hurdles to go through and may be subject to further limitations. Lastly, the new tax law also includes changes made to extend and enhance depreciation allowances. For example, Section 179 expensing is increased to allow up to $1 million in current year expensing for business assets purchased and placed into service during the year (as always, limitations apply). In summary of the changes to business income taxes, careful review of how the new tax law applies to your business is merited for proper planning in 2018 and beyond.
There are four main changes in the new law that will affect your personal income taxes.
First, the income tax brackets for taxpayers filing as “married filing joint” (MFJ) are reduced from previous years and will range from 10 percent to a maximum rate of 37 percent for taxpayers with adjusted gross income beginning at $600,000. Similarly to previous years, there will be a total of seven tax brackets. The biggest change in the tax bracket arena is that top income tax bracket is reduced to 37 percent for 2018–2025 from 39.6 percent in previous years.
Second, the act essentially doubles the standard deduction from $12,700 to $24,000 for taxpayers filing as MFJ and from $6,350 to $12,000 for taxpayers filing as “single”. Similar to previous years, you have the option of utilizing the greater amount between that of the standard deduction or your itemized deductions. However, with the doubling of the standard deduction comes a couple of tradeoffs which include capping the property tax (or state income tax) deduction to $10,000 and reducing the overall allowable portion of deductible mortgage interest by capping the amount of mortgage indebtedness that can be considered to $750,000 (down from $1 million).
Third, the act eliminates the personal exemption deduction previously allowed for a taxpayer and their dependents (children and other qualified relatives). In 2017, the amount per personal exemption was $4,050 per person. For a family of four, this equates to a total loss of $16,200 in personal exemption deductions in 2018. In consideration of this, the new law does expand child and family tax credits that are designed to off-set the loss of the personal exemptions for most families.
Last, but certainly not least, beginning in 2019 the law will reduce to $0 the individual mandate penalty under the Affordable Care Act for not having health insurance for the year. Essentially, there is no longer a penalty assessed by the IRS for not carrying health insurance policy for you, your spouse or your dependents.
The new tax law has many changes to the tax code that were not discussed in this article that could affect you or your business in some capacity. We recommend contacting your tax advisor to discuss the new tax laws in detail to determine your income tax exposure for the changes made.
Christopher Davis, CPA, is a Manager with Sol Schwartz & Associates PC and has been practicing public accounting since 2008. Davis practices in various areas of public accounting including tax compliance and consulting for individual, corporate, S corporation and partnership taxation. He is a member of the firm’s Healthcare niche that specializes in identifying and implementing solutions to achieve the goals of the physician clientele we serve. Contact Davis via email at email@example.com or 210-384-8000, ext. 118.