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Congress Passes Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act has passed in both houses of Congress and was signed into law Friday, December 22. The majority of the provisions contained in the sweeping reform legislation go into effect as of January 1, 2018. Read on for a few recommendations on actions to be taken before the end of 2017 followed by an overview of items included in the act.

 

Initial Individual Observations

  1. Maximum tax rate is 37% for income above $600,000 (MFJ)
  2. Pass-through income tax rates
    1. 20% deduction on Qualified Business Income from sole proprietors, S-Corporations, LLCs and partnerships (subject to limitations)
  3. Standard deduction up to $24,000 (MFJ)
  4. Personal exemptions are repealed
  5. Child tax credit increases to $2,000 per child with phase outs beginning above $400,000 of AGI
  6. Property taxes and state income taxes are limited to $10,000 (in total)
  7. Home mortgage acquisition debt limited to $750,000
  8. Deduction for interest on home equity lines of credit is repealed
  9. College athletic fund contributions (for preferential seating) are no longer deductible (previously 80% deductible)
  10. Sale of primary residence – no change in current rules
  11. Alimony deduction is repealed after 2018 (for divorces executed after 12-31-18)
  12. Estate tax exemption is doubled to $10.98MM per individual
  13. Individual AMT stays, but exemptions are increased

 

Initial Individual Recommendations May Include

  1. Pay 2017 state income taxes due before 12-31-17
  2. Pay 2017 property taxes due before 12-31-17
  3. Pay college athletic fund contributions due before 12-31-17
  4. Pay 2% itemized deductions due (such as investment advisory fees, tax preparation fees, professional licenses, etc.) before 12-31-17
  5. Prepare for additional estate gifting beginning 1-1-18

 

Initial Business Observations

  1. 21% corporate tax rate with a repeal of the corporate AMT
  2. 100% bonus on assets acquired and placed in service beyond 9/27/17 (with phase outs in later years)
  3. Section 179 increased to $1MM (with increased phase outs)
  4. Farms property transitions from 7-year property to 5-year depreciable property
  5. No changes to residential rental or commercial property depreciable lives (still 27.5 and 39 years)
  6. New 15-year improvement property category
  7. Cash method of accounting available for most business up to $25MM in revenue including businesses with inventory
  8. Percentage of completion requirements are liberalized and only required on business with average revenue of $25MM or more
  9. 30% Interest expense limitation is without regard depreciation and amortization
    1. Real estate business can elect out
    2. ADS deprecation required for real-estate trade or business with opt-out election
  10. 1031 exchanges (i.e. like kind exchanges) are now only available for real property
  11. DPAD deduction is repealed
  12. No business deduction for entertainment (previously 50% deductible)
  13. R&D expenses must be capitalized and amortized over 5 years (vs current immediate write-off) beginning after 12-31-21
  14. Technical termination of partnership rules are repealed

 

Initial Business Recommendations May Include

  1. Consider change of accounting methods for business below $25MM
    1. Cash basis method
    2. Completed contract accounting (vs percentage of completion)
  2. Consider accelerating equipment purchases for immediate write-offs
  3. Close 1031 exchanges on personal property before 12-31-17
  4. Pay for business entertainment in 2017
  5. Consider timing of terminated partnerships – technical termination rules go away in 2018
  6. Consider choice of business entity
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