For the first time since 1986, the U.S. Congress passed major tax changes affecting both individuals and businesses across the country. The Tax Cuts and Job Act of 2017 (TCJA) has far-reaching impact for many business types and individuals.
- The corporate income tax rate is permanently lowered from 35 to 21 percent starting in January 1, 2018.
- Pass through businesses – A new 20 percent deduction of qualifying business income from some pass-through businesses in industries such as sole proprietorships, partnerships and S Corporations will now be available. According to the Brookings Institute, pass-through businesses, those businesses who have their income ‘pass through’ to their owners, account for approximately 95 percent of U.S. businesses, while only 5 percent are C-corporations. Previously, income for pass-through businesses was charged at the highest personal tax income rate of 39.6 percent. The new law allows for 20 percent of the pass-through to be deductible while the remainder is subject to tax at the individual marginal income tax rates to a new lower maximum of 37 percent. There are exclusions including health, law, and professional services organizations except for households with taxable income below $157,500 for single filers and $315,000 for married filers. For these filers, there is a restriction to pass one of two tests:
- 50 percent of the wages paid by the pass-through entity; or
- 25 percent of the wages paid plus 2.5 percent of the “tangible, depreciable property used by the pass-through entity to make income. These pass-through provisions will expire at the end of 2025.
- AMT – The TCJA eliminates the corporate alternative minimum tax (AMT) allowing for full expensing of capital investments for the next five years.
- Craft Beverage Modernization and Tax Reform Act – Part of the larger TCJA law, this change provides excise relief in the next two calendar years of 2018 and 2019. Brewers that produce less than 2 million barrels annually will be taxed at a rate of $3.50 per barrel on the first 60,000 barrels of beer produced, and $16 per barrel on any further barrels produced up to 6 million. This change will help to provide additional capital that previously would have been sent to the government enabling additional growth and profitability. This reduction also impacts wineries and distillers.
- Section 179 deductions- Used for expensing capital assets for small business, the deduction thresholds have been raised from $500,000 to $1 million. Odds are most small businesses won’t be able to reinvest such a large amount of $500,000 to $1 million in capital expenditures in a single year, but the offer is nice.
- Individual tax brackets – The Tax Cuts and Jobs Act retains the current seven individual income tax brackets, but modifies both the width and tax rates. The new brackets are reduced to 10%, 12%,22%, 24%, 32%, 35% and 37% respectively. The downside is that while these tax changes are permanent for corporate tax payers, the individual tax changes are temporary, running out in 2025. Additionally, the Tax Policy Center found that “while the average household would get a big initial cut, by 2027 households in the $50,000 to $75,000 income range would see an average increase of $30 compared with today. Secondly, the bill is expected to add $1.4 trillion to the deficit. How will this be paid? As mentioned by Speaker of House Paul Ryan, healthcare entitlements such as Medicare, Medicaid, and Social Security are the best way to handle the growing deficit.
- Child Tax Credit – There is an increase in the child tax credit amount to $2,000 from the current$1,000. Families making up to approximately $400,000 will get to take the credit and more of the tax credit is refundable, meaning that families that work but don’t earn enough to actually owe federal income taxes will get a check back from the government.
- ACA Penalty – Repeal of the individual healthcare mandate penalty for not having health insurance starting in 2019. How this will play out in uninsured Americans and increased health insurance costs down the road is yet to be seen.
The new tax changes did not simplify the tax code, rather it is now more complicated. To learn more or to have your specific questions answered talk with a professional small business advisor.
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Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.