The Tax Cuts and Job Acts (TCJA) was passed at the end of 2017. As we start to file 2018 tax returns, we will start to see the effects of this act. Many have called TCJA the most sweeping tax legislation since the Tax Reform Act of 1986. Most people should see a deduction in taxes, but there are exceptions. The actual act is voluminous and had many changes, but there are some that are most likely to impact your own personal or business return.
Changes to Personal Tax Return
- Most personal tax rates went down. The bottom 10% remained unchanged, but others were lowered between 1-4%. Tax bracket income levels also changed.
- Personal exemption deductions went away.
- Standard deductions increased dramatically (most of them doubled). Many taxpayers that used to itemize deductions will no longer do so due to the large threshold of the standard deduction. Single is $12,000 and Married Filing Joint is $24,000.
- Many itemized deductions were eliminated or limited. State income and local taxes are limited to a total combined deduction of $10,000. Home equity loan interest is no longer deductible. The deduction for casualty and theft loss (unless in a presidential declared disaster area) was eliminated.
- Miscellaneous itemized deductions subject to the 2% of AGI floor were eliminated. This includes tax preparation fees, investment advisor fees, and home office deductions. All of the Form 2106 unreimbursed employee business expenses have been eliminated. (This was highly used by those that pay union dues or have large amounts of travel expenses that employers do not reimburse). Since we have a lot of clients involved in the trucking industry, we would like to cover this Company drivers, (W-2 employees) who used to claim travel costs on their taxes versus electing potential employer offered tax free per diems, can no longer do so under the new law. These types of employees might want to look at taking advantage of an employer per diem now. Owner-operators that file a Schedule C or other business return can still deduct their costs.
- Above line deductions for moving expenses (except for military) and alimony were eliminated.
- The child tax credit (for children under 17) doubled from $1,000 to $2,000. The refundable portions of the credit also increased, along with increased income limitations for the credit.
- There is a new dependent credit of $500 for dependents that don’t qualify for the child tax credit, i.e. those 17 or older, or unique situations.
- S529 education plans can now be used for primary and secondary school tuition, in addition to college and university costs.
Changes to Business Tax Return
- The corporate income tax rate dropped from 35% to 21% (C Corp).
- There is a 20% business income deduction for pass-through businesses including sole proprietors, people in partnerships, members in LLCs taxed as a partnership, and shareholders in an S Corporation. This is essentially a mechanism to reduce their tax rate.
- Bonus depreciation was increased from 50% to 100% and is available for new and used equipment.
- Interest expense deductions are limited to 30% of EBITDA (earnings before interest, dividends, and taxes). Anything beyond that is carried forward. This could make leasing more attractive than debt financing.
- Net operating losses can only be carried forward.
- Businesses can no longer deduct entertainment, amusement, and recreation expenses, even if there is bona fide business purpose. All business meals are now subject to 50% limitation rules. This includes those on the employer premise site and for the benefit of the employer that used to be 100% deductible.
- Like-kind exchanges that gave people the ability to defer gain will only be available for real property.
- The S199 domestic production activities deduction has been eliminated.
- The rules for who can be a cash basis taxpayer have been expanded.
Overall, the law seems to simplify the average individual tax filing. It will be interesting to look out for and see the implemented impact. Some of the changes were only temporary, while othersare permanent. These are important to keep in mind for the 2018 tax season while filing. Happy filing!
Jessica Kort is VP of Finance and Treasury for Amur Equipment Finance, Inc. She has a Master’s in Business Administration from the University of Nebraska Kearney and is a member of the American Institute of Certified Public Accountants and the Nebraska Society of CPA’s. Prior to joining Amur, she worked in Public Accounting, held Controller, Tax Manager, and Internal Auditor for two large manufacturers, and was the CFO of a trucking and logistics company. She loves entrepreneurship and helping people own and grow successful businesses.