Having been passed by the House and Senate, the $1.5 trillion Tax Cuts and Jobs Act will soon be signed by President Trump.

The wide-ranging tax bill satisfies the pledge made by Republicans during the last election. The 509-page Conference report is a blend of the original House proposal and subsequent Senate amendment.

Below are the highlights that are included in the finalized bill.

Individual and Families

Most of these provisions are temporary and are slated to sunset in 2025.  Barring action by a future Congress, current law will apply again.

  • There are still seven tax brackets which generally lower the tax burden at all income levels. Higher earners (incomes in excess of $500,000 for singles and $600,000 for married filing jointly) will benefit from a lower top tax bracket (previously 39.6%; now 37%) and no “claw back” of the lower tax brackets as had been previously proposed.

  • Long-term capital gains and qualified dividends rates are unchanged, with a maximum 20% rate. The net investment income tax of 3.8% is also unchanged.
  • One of the most complicated provisions relates to the taxation of income from sole proprietors (Schedule C) and pass-through from S Corporations and Partnerships (K-1s). These benefits do not expire in 2025.
    • Owners of these pass through entities would potentially be eligible for a 20% deduction of qualified business income, which would effectively reduce the top tax rate for those fully eligible to 29.6%.
    • The limitations are based on either (a) 50% of W-2 wages paid by the business OR (b) 25% of W-2 wages PLUS 2.5% of the original purchase price of qualified business property.
    • The addition at the last moment of the “qualified business property” will generally benefit real estate investors who usually do not pay much in W-2 wages.
    • For specified service businesses, the deduction for qualified business income would start to phase out above taxable income levels of $315,000 for married filing jointly and $157,500 for single taxpayers. Specified service businesses would include services in the fields of health, law, consulting, athletics, financial services, brokerage services, investing and investment management trading, or dealing in securities, partnership interests or commodities (but would exclude engineering and architectural services).
      MBAF notes: this provision has garnered the most attention from entrepreneurs and real estate investors, and along with the reduction of the top tax bracket has the potential to provide the most benefit.
  • The standard deduction for single individuals has been increased to $12,000 from $6,500 and married couples to $24,000 from $13,000.
  • For taxpayers wishing to itemize rather than avail themselves of the higher standard deductions, there have been changes to the deductibility of certain items:
    • Deduction of State/local income tax and real property taxes is capped at $10,000.
      MBAF notes: consideration should be given to paying 4Q17 state estimated tax payments (generally due in January) and any 2017 balance due in April now; otherwise, their deductibility will be lost. Also, any real property taxes that have already been assessed, but may not be due until 2018, should be paid before year-end.
    • Interest on home mortgages on the principal residence would still be deductible.
      • For mortgages originated before 2018, the interest on $1,000,000 would still be deductible.
      • For acquisition indebtedness incurred starting 2018, the limitation is lowered to $750,000.
      • No interest on home equity indebtedness will be deductible starting in 2018.
    • Charitable contributions will continue to be deductible.
      • Ceiling for cash contributions increased from 50% to 60% of adjusted gross income.
      • Payments made in exchange for college athletic event seating rights will not be deductible.
    • Medical expense deductions (subject to 7.5% floor through 2018 and 10% floor thereafter) will continue to be deductible.
    • Alimony will only be taxed to the recipient and deductible to the payor for divorce or separation agreements finalized before 2019.
    • All other deductions are disallowed: tax preparation fees, unreimbursed employee expenses, investment advisory fees.
      MBAF notes: consideration should be given to paying some of these expenses in 2017 before their deductibility is lost.
  • Alternative Minimum Tax (AMT) will continue to be applicable, but the exemption has been increased.
  • The Estate Tax exemption would double (currently at $5.49 million to approximately $11 million), but the tax continues to be in effect.
    MBAF notes: even though the exemption is higher, there will still be a need for high net-worth individuals and families to have an estate plan in place.
  • Carried interest now has a three-year holding period for long-term capital gains rates to apply.

Business

  • The maximum corporate tax rate would be reduced from 35% to 21% for taxable years beginning after December 31, 2017.
  • The alternative minimum tax is repealed.
  • Expanded depreciation rules
    • Equipment will be fully deductible upon purchase/utilization rather than depreciated/amortized over their respective lives through 2022. This immediate expensing provision will be gradually phased out from 2023-2026.
    • Increased §179 allowance.
    • Real property improvements generally will qualify for 15-year depreciation.
      MBAF notes: immediate expensing is available for property placed in service after September 27, 2017—so equipment acquired between now and the end of 2017 would qualify for immediate expensing at higher 2017 tax rates.
  • Interest on business loans will continue to be deductible with certain limitations.
    • Generally 30% of earnings before tax.
    • Disallowed interest can be carried forward indefinitely.
  • Taxpayers with average receipts under $25 million can avail themselves of the following provisions:
    • Cash method of accounting for C corporations.
    • Cash method for taxpayer with inventory.
    • Exclusion from uniform capitalization (§263A) rules.
    • Full interest expense deduction (above limitation not applicable).
  • Modified net operating losses
    • No carryback of post-2017 losses.
    • Utilization of post-2017 losses would be limited to 80% of taxable income for the year.
  • Certain business deductions will be disallowed:
    • Domestic production activity deduction has been repealed for non-corporate taxpayers starting in 2018 and for corporations starting in 2019.
    • Charitable contributions deduction for contributions in exchange for college athletic event seating rights.
    • Entertainment expenses (meals continue to be 50% deductible).
    • Qualified transportation fringe benefits.
  • The wage tips credit is modified to account for higher minimum wages in effect.
  • Many of the other business deductions and credits that the House bill would repeal have been left intact:
    • Low income housing credit.
    • Wage tips credit.
    • Orphan drug credit for testing drugs for rare diseases.
    • Energy production credit.
    • Energy investment credit.
    • Work opportunity tax credit.
  • Unrepatriated foreign earnings would be deemed repatriated at reduced rates (15.5% or 8%).

How MBAF Can Help

While there are aspects of simplification for some, there are new, added complexities for entrepreneurs and business owners. Since 2018 is almost upon us, now is the time to analyze your tax situation and make any adjustments to maximize the potential benefits to be found in this tax legislation.

We realize that tax strategies and estate planning, particularly for high net worth individuals, are designed for the long term, and many of your plans are already in place, and may, or may not, be impacted by the passage of the tax reform bill.

However, we also realize that good tax strategies are designed to be flexible. There may be options and opportunities that the new reforms could create that you may not be aware of. We can help you to evaluate your current estate planning and tax strategies in light of the Tax Cuts and Jobs Act, and your individual circumstances.

If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our Tax and Accounting Specialists, or call us at 1-800-239-1474.