San Joaquin Farm Bureau Federation

By Gary Daniel, Bowman & Company

On Dec. 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” bringing about numerous changes to the current tax law. The Act dramatically changes many tax provisions for individual and business taxpayers, including reducing tax rates, reducing or eliminating some deductions, while increasing or adding others, and changes to various credits and the alternative minimum tax (AMT). The following is a recap of some of those changes. 

The new law has many other provisions that would be too numerous to put in summary form. If you have any specific situations you would like to discuss, please contact me at (209) 473-1040. 

Individuals – most changes take effect beginning Jan. 1, 2018

• The top tax rate is set at 37 percent, down from 39.6 percent
• Personal exemptions are reduced to zero
• The Child Care Credit has been expanded
• AMT exemption increase from $86,200 to $109,400 for MFJ taxpayers, but subject to phase-out at higher income levels. 
• The Obamacare “shared responsibility payment” is reduced to zero.
• For divorce agreements after Dec. 31, 2018 alimony is no longer deductible by the payer or taxable by the recipient.
• The standard deduction is increased to $24,000 for MFJ taxpayers, $18,000 for H of H and $12,000 for all others
• Moving expenses will no longer be deductible, except for military personnel in some situations.

Changes to itemized deductions:
• Itemize deductions for state income taxes, sales taxes and real estate taxes deductible on Schedule A are capped at $10,000 (this limitation does not apply to business deductions, including rentals). Since these taxes were included in the AMT calculation and many taxpayers were assessed the AMT tax in prior years this may not be a significant change in taxes paid for these taxpayers.
• Schedule A home mortgage interest deduction is limited to the interest on the first $750,000 of mortgage loan principal. Mortgages incurred before December 15, 2017 are limited under the prior $1 million amount. Mortgage on home equity debt will no longer be deductible. 
• The threshold for medical deductions is changed back down to 7.5 percent from 10 percent of adjusted gross income.
• The limitation on cash charitable deductions in increase from 50 percent of adjusted gross income to 60 percent, thus allowing more deductions in a year for those who give significant amounts to charity.
• Deductions for miscellaneous itemized deductions that are subject to the 2 percent floor are suspended. This means that expenses paid for unreimbursed employee business expenses, legal and tax preparation fees for your personal income tax and other personal items (not related to business), investment fees, safe deposit box fee, etc. will no longer be deductible as itemized deductions
• Personal casualty and theft losses are not deductible, except for losses incurred in a federally-declared disaster.

Other items:
• The child tax credit is increased from $1,000 to $2,000 for those who qualify
• For distributions from 529 plan, after Dec. 31, 2017, “qualified higher education expenses” include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year.
• For “carried interests” (certain interests in partnerships acquired for services) must now be held for three years to receive long-term capital gain treatment.
• The act adds assets that cannot receive capital gain treatment. These include patents, inventions, models or designs and secret formulas or processes, which are held by the taxpayer who created the property.

Estate and gift taxes:
• The estate tax exemption is doubled from the original $5,000,000 to $10,000,000 and indexed for inflation. The exemption is expected to be $1 million beginning with 2018.
• The annual gift tax exclusion is raised to $15,000 beginning in 2018. The maximum gift tax rate is 35 percent.

Business – most changes take effect beginning Jan. 1, 2018
• Corporations:

• Beginning in 2018 the corporate tax rate is a flat 21 percent rate, down from an effective top rate of 35 percent (some income was taxed at 38 percent to achieve a flat rate of 35 percent).
• The deduction for dividends received by one corporation from another corporation is reduced to 65 percent and 70 percent (in the corporation owns at least 20 percent of the paying corporation). This is a reduction from 80 percent and 70 percent. 
• The corporation alternative minimum tax is repealed.

Other Business items:
• The Section 179 deduction is increased from $500,000 to $1 million (and the threshold for phase out is increase to $2.5 million). Property eligible for this deduction is expanded to include certain rental property previously excluded from eligibility for 179 deduction.
• 100 percenet bonus depreciation is allowed for qualifying business assets. Qualifying assets are expanded to include used property. The 100 percent deduction is scheduled to phase out over a four year period beginning in 2023. Taxpayers can elect to use 50 percent as a deduction in lieu of the 100 percent deduction.
• Depreciation limits for luxury automobiles has been increased.
• For new farm machinery the depreciation life has been shortened from 7 years to 5 years and is depreciated using the 200 percent declining balance method as opposed to the previous 150 percent declining balance method.
• For property placed in service after Dec. 31, 2017, the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated. A general 15-year recovery period and straight-line depreciation are provided for qualified improvement property, and a 20-year ADS recovery period is provided for such property. Thus, qualified improvement property placed in service after Dec. 31, 2017, is generally depreciable over 15 years using the straight-line method and half-year convention, without regard to whether the improvements are property subject to a lease, placed in service more than three years after the date the building was first placed in service, or made to a restaurant building.
• There is a new limitation on the deduction of business interest expense. Generally, a business is disallowed a deduction of interest expense that exceeds 30 percent of the business’s adjusted taxable income. Adjusted taxable income is computed without the deductions for depreciation, amortization or depletion. This applies to businesses with over $25 million in gross receipts.
• Generally net operating losses will only be carried forward and limited to 80 percent of the taxable income they are applied against. • The domestic production activities deduction is repealed.
• Like-kind (Section 1031) exchanges will only apply to real property.
• Deductions for entertainment expenses are disallowed, but 50 percent of meals expenses is retained.
• The law adds that no deduction is allowed for any settlement, payout, or attorney fees related to a sexual harassment or sexual abuse matter that is subject to a nondisclosure agreement.
• A new tax credit is created for an employer’s payment of family and medical leave.
• The cash basis of accounting is expanded to include more businesses with gross receipts under $25 million that were previously excluded from utilizing the cash method of accounting due to having inventories as a significant part of their business.
• The application of the uniform capitalization rules has been eliminated for producers and resellers that have less than $25 million in gross receipts.
• There is a new deduction of up to 20 percent of qualified business income (QBI). This is pass-through income (income from sole proprietorships, partnerships, limited liability companies, and S corporations). There are calculations that may limit the 20 percent deduction and additional calculations to arrive at QBI.