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Industry Alerts

The U.S. House of Representatives and Senate recently voted to pass the 2018 Tax Bill, which contains many major changes to the tax landscape for both businesses and individuals. Below are some key highlights and a comparison between the current tax law and the new 2018 tax bill:

Businesses

Topic

Current Tax Law

2018 Tax Bill

C-Corporation tax rates Multi-bracket income tax structure ranging from 15% to 35%. Single rate at 21% of corporate income.
Corporate Alternative Minimum Tax (AMT) 20% tax rate on alternative minimum taxable income. Eliminated.
Section 179/Capital investment • 50% bonus depreciation on short-lived capital investments (e.g., machinery and automobiles) through 2020.

• Immediate expensing (Sec 179) with $500k cap and $2 million phaseout.

• 100% expensing of short-lived capital investments (e.g., machinery and automobiles) and “Qualified Improvement Property” through 2022, then phased out between 2023 and 2026.

• Raises Section 179 expensing cap to $1 million and $2.5 million phaseout.

Net interest expense capping • Tax payers can take a full deduction of interest paid.

• No cap.

• Net interest deduction is capped at 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years.

• Net interest deduction is capped at 30% of earnings before interest and taxes (EBIT) after initial four-year period.

Net operating loss carrybacks (NOLs) • NOLs can be carried back two years.

• NOLs can be carried forward 20 years.

• No usage limits in regards to taxable income.

• Eliminates two-year carryback.

• Indefinite carryforward.

• Usage limited to 80% of taxable income.

Deductions and credits (highlights) • Domestic Production Activities Deduction – taxpayers may currently take a deduction of 9% of the lesser of qualified production activities income or taxable income.

• Research and Development Credit – companies that incur research and development (R&D) costs in the United States may take a credit on qualified costs.

• Amortization of Research and Experimental Expenditures – may deduct expenditures in the current year, or elect to capitalize and amortize over a 5 or 10 year period.

• Work Opportunity Tax Credit – credit on 25 or 40 percent of a qualified employee’s first-year salary.

• Employer paid meal expense deduction – generally deduct 50 percent of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel).

• Can currently deduct 50% of expenses for entertainment, amusement, or recreation that is directly related to the active conduct of the taxpayer’s trade or business.

• Domestic Production Activities Deduction – repealed as of 12/31/17.

• Research and Development Credit – preserved.

• Amortization of Research and Experimental Expenditures – must be capitalized and amortized over 5 years if research was performed within the U.S. or 15 years if research was performed outside the U.S. – effective 1/1/2022.

• Work Opportunity Tax Credit – not addressed.

• Employer paid meal expense deduction – expanded the 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility.

• Repeals the exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to the active conduct of the taxpayer’s trade or business (and the related rule applying a 50 percent limit to such deductions).

Small business eligibility for cash accounting Eligibility threshold for utilizing the cash accounting method is $5 million in income or less. Eligibility threshold increases to $25 million in income.
International revenue Current laws enforce a worldwide taxation system. Enacts a territorial tax system with base erosion rules for passive income, as well as anti-abuse rules for U.S. subsidiaries of foreign-based entities.
• Base erosion anti-abuse tax rate of 5% of modified taxable income over an amount equal to regular tax liability for year one.
• After year one, rate increases to 10% for years through 2025.
• After 2025, the rate increases to 12.5% with increased rates for banks.
Deferred foreign income/Deemed repatriation Not addressed in current tax law. Deemed repatriation of currently deferred foreign income:

• 15.5% repatriation tax rate for liquid assets.

• 8% repatriation tax rate for illiquid assets.

Employee compensation Not addressed in current tax law. Enacts new credit for compensation paid to employees while on leave.

Estates and Trusts

Topic

Current Tax Law

2018 Tax Bill

Basic exclusion/Estate and Generation-skipping Transfer (GST) taxes $5.6 million tax exemption that is adjusted for inflation annually. The estate tax exemption is doubled in 2018 to $11.2 million and still adjusted for inflation annually.
Gift tax exemption $5.6 million tax exemption that is adjusted for inflation annually. Exemption follows the increased amounts for estate tax exemption.

Individuals and Families

Topic

Current Tax Law

2018 Tax Bill

Expiration date N/A Many provisions begin to phase-out at the conclusion of the 2025 tax year.
Tax brackets

Rate

Single

Head of Household

Joint

10%> $0 $0 $0
15%> $9,525 $13,600 $19,050
25%> $38,700 $51,800 $77,400
28%> $93,700 $133,850 $156,150
33%> $195,450 $216,700 $237,950
35% > $424,950 $424,950 $424,950
39.6%> $426,700 $453,350 $480,050
Rate Single Head of Household Joint
10%> $0 $0 $0
12%> $9,525 $13,600 $19,050
22%> $38,700 $51,800 $77,400
24%> $82,500 $82,500 $165,000
32%> $157,500 $157,500 $315,000
35%> $200,000 $200,000 $400,000
37%> $500,000 $500,000 $600,000
Standard deduction and personal exemptions Standard Deduction:

• $6,350 for single filers

• $9,350 for head of household

• $12,700 for joint filers

Personal exemption:

• $4,050 per person

Standard Deduction:

• $12,000 for single filers

• $18,000 for head of household

• $24,000 for joint filers

Personal exemption:

• All exemptions are eliminated.

Alternative minimum tax (AMT) • $54,300 exemption for single filers with $120,700 phaseout threshold.

• $54,300 exemption for head of household with $120,700 phaseout threshold.

• $84,500 exemption for joint filers with $160,900 phaseout threshold.

• $70,300 exemption for single filers with $500,000 phaseout threshold.

• $70,300 exemption for head of household with $500,000 phaseout threshold.

• $109,400 exemption for joint filers with $1,000,000 phaseout threshold.

Taxation of pass-through entities Pass-through income is generally subject to individual income tax rates and brackets. Enacts a 20% deduction of qualified business income for certain pass-through businesses limited to the greater of:
• 50% of wage income or
• 25% of wage income plus 2.5% of the cost of tangible depreciable property.

Specified Service Business are not eligible for the deduction unless below the following thresholds:
• Joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income.
• Specified Service Businesses include: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services.

Mortgage interest deduction Tax payers may deduct interest paid on mortgages and equity debt.

• Limited to $1,000,000 in mortgage debt.

• Limited to $100,000 in home equity debt.

Proposed law states that tax payers may deduct interest paid on mortgages:

• No home equity debt.

• Limited to $750,000 in total mortgage debt.

State and local income/sales/property tax deduction Can currently deduct all state and local taxes. $10,000 limit comprised of property tax plus your choice of state income tax or sales tax.
Health insurance Current tax law imposes a penalty for those who opt out of health insurance. Reduces the individual mandate penalty of not carrying health insurance to $0 in 2019.
Gross income adjustments Current law provides many favorable adjustments that can be claimed regardless if the taxpayer itemizes. • Repeals the moving expense deduction, exempting active duty military personnel.

• Eliminates the alimony deduction in 2019 as well as eliminates the requirement for alimony payments to be included in income.

• Keeps student loan interest deduction, graduate student tuition waivers, and educator expense deduction.

Miscellaneous itemized deductions Currently there are many favorable deductions available to taxpayers to itemize. Suspends miscellaneous itemized deductions that are required to be greater than 2% of adjusted gross income (2% floor).
Medical expense deduction Medical expense deduction currently has a 10% threshold. Medical expense deduction is not suspended, but the threshold is reduced to 7.5% for 2018 and reverts to 10% afterwards.
Child and family tax credits • Current law provides for a partially refundable $1,000 child tax credit for the first two children.

• Reduced additional child credit for third and subsequent children.

• Child tax credit increased to $2,000 with $1,400 being refundable.

• Dependents ineligible for the child tax credit would be able to utilize a new $500 per-person family tax credit.

• Phaseout thresholds are set at $400,000 for joint filers and $200,000 for single filers.

• No limit to number of children.

The tax bill now heads to President Trump’s desk, and he is expected to sign it into law. While most of the business provisions are permanent, many of the individual provisions will expire after the 2025 tax year. Individuals and business owners should reach out to their tax advisors to understand how these new provisions may affect them and proactively plan within these new rules.

We will be reaching out to clients to evaluate current tax structures, project future tax liabilities, and review other changes for you and your business resulting from the new law. Please contact your Moore Colson advisor with any questions.

 

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