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SPECIAL REPORT ON NEW TAX REFORM LAW--The New 20% Qualified Business Income Deduction

The new 20% Qualified Business Income Deduction (20% QBID) is a HUGE tax break for most small business owners.  In fact, this may be the biggest tax break to come down from Washington that mainly applies to small businesses in my 35+ year career.

Of course, this is also one of the most complex provisions, with many yet unanswered questions awaiting future IRS regulations and court case rulings for clarification.

To give you some idea of the complexity of the 20% QBID, the detail in Thomson Reuters Complete Analysis of the TAX CUTS AND JOBS ACT takes 12 pages to cover.  A Cliff Notes version written by Tony Nitti (a Forbes contributor and author of Tax Geek Tuesday) runs 30+ pages.

On its surface, the 20% QBID gives owners of sole proprietorships, S-Corps, partnerships, and even owners of rental property reported on Schedule E a 20% deduction against their business income.  This allows these business owners to retain their competitive tax rate advantage over C corporations.  It was a 10% advantage before the new law and remains 10% after.

Qualified Business Income (QBI) is your share of income less deductions from the trade and business.  It does not include capital gains or losses, dividends, non-business interest income, reasonable compensation (W-2 income), or guaranteed payments from partnerships.  If you’re involved in multiple businesses, first calculate the deduction, subject to any limitations, on each business.

The deduction won’t reduce self-employment earnings or adjusted gross income, which is used to calculate many limits and phase-outs under tax law.  Taxpayers won’t need to itemize to take the deduction.

But there are many special rules and restrictions designed to stop taxpayers from gaming the new law.

For taxpayers with income in excess of $315,000 for couples filing jointly and $157,500 for all others (after adding back the 20% deduction), the deduction is limited as follows:

1. The income phases out for those in service fields where the principal asset is the reputation or skill of the employees. This includes health, law, accounting, consulting, financial services, performing arts, actuarial science, athletics, brokerage services, investing, or trading securities.  The law here is very hazy and will require future IRS regulations to clear up.

2. There is a W-2 wages limitation for high-income earners not in service fields covered above. This caps the deduction to W-2 wages and the basis of certain business assets.

The QBID is also limited to 20% of taxable income, excluding the 20% QBID and less any net capital gain.  Additionally there are very complicated rules if a business has a loss.

If you own a business, and you want to make sure you maximize your 20% QBID, you must meet with a CPA or Enrolled Agent who specializes in tax planning before the end of the year.

SPECIAL REPORT ON NEW TAX REFORM LAW--20 Changes For Business Owners

 The new tax reform law passed in December of 2017 (the “Tax Cuts and Jobs Act” or TCJA) is the biggest overhaul of the federal income tax code since 1986.  It will have huge effects on business owners in 2018 and beyond.  In fact I would argue that this is the biggest tax cut for the largest number of business owners in my lifetime.  This special report covers the main issues of the new tax law affecting business owners.

1. The new tax law dramatically reduces regular corporation (“C corporations”) will now pay a flat rate of 21%. This is down from a maximum rate of 35%.  Warning:  Check with your tax planner before you decide to convert your business to a “C corporation”.  Double taxation of the earnings from a “C corporation” almost always results in a higher tax bill.

2. Many business owners will qualify for a new 20% deduction. They can generally deduct 20% of “qualified business income" (in effect, you are only taxed on 80% of your business income).  This is a great break for small business owners, but it is also one of the most complex changes in the new law.  There are many restrictions designed to limit gaming the new rule.  The break also phases out for higher earners in professional service firms such as accounting, health care, law, consulting, and financial services with taxable incomes in excess of $315,000 for joint returns and $157,500 for all other taxpayers.

3. Business losses on individual returns are capped at $500,000 for couples and $250,000 for all other filers. The excess can be carried over.

4. Net operating loss can offset only 80% of taxable income and net operating loss carrybacks are generally prohibited.

5. Businesses can write off 100% of the entire cost of qualifying assets that they bought and placed in service after September 27, 2017. The deduction applies to either new and used assets with lives of 20 years or less.

6. The maximum depreciation for qualified assets under Section 179 increases to $1 million (from $500,000). The deduction expires dollar for dollar once more than $2.5 million in assets are placed in service for the year.

7. Property eligible for expensing now includes depreciable assets used predominantly to furnish lodging. Examples are furniture and appliances used in hotels, apartments, and rental homes.

8. Commercial buildings can now expense roofs, HVAC equipment, fire protection, and security systems. This area is now much more complicated and you should contact a qualified tax planner.

9. The annual depreciation caps for passenger vehicles placed in service (for the amount not deducted under the 100% bonus depreciation) is increased to $10,000 for the first year, $16,000 for the second year, $9,600 for the third year, and $5,760 for remaining years.
10. Buyers of SUVs (new or used) with a gross weight over 6,000 pounds can write off up to 100% of the cost. You can also expense 100% of the cost of heavy pickups if the cargo bed is at least six feet long.

11. Separate depreciation rules for restaurant, retail, and leasehold improvements are gone. They have been consolidated under the grouping of qualified improvement property and subject to new depreciation rules.

12. The corporate alternative minimum tax is eliminated.

13. Businesses that provide paid family or medical leave to employees qualify for a new credit of generally 12.5% of wages paid for family and medical leave. This credit is only for 2018 and 2019.

14. The domestic production deduction, which allowed the write-off of up to 90% of income derived from U.S. production activities, is eliminated.

15. Business entertainment and country club dues deduction is eliminated.

16. Meals provided on the premises of the employer are now also reduced by 50%.

17. Sexual harassment settlement payments are not deductible if subject to a nondisclosure agreement.

18. Attorneys can’t deduct litigation costs until the contingency ends.

19. Qualified small businesses with inventories are no longer to use the accrual method unless they meet a $25 million sales test. This is up from $1 million.

20. If you reimburse your employees for auto and other business expenses, you should switch to an “accountable plan” rather than a fixed fee amount. Employees can no longer deduct these on their personal returns unless they are reimbursed for actual expenses.

As you can see, I wasn’t exaggerating when I stated that this is the biggest tax cut for businesses in my lifetime.  Many of the changes listed above will happen automatically to help you save.  But if you own your own business, there are several very important choices you have to make to get the most out of this once in a generation opportunity to cut your tax bill.  If you don’t do your planning now, you will lose those opportunities forever!

 

If you own a business, and you want to pay the lowest tax amount possible, you must meet with a CPA or Enrolled Agent who specializes in tax planning before the end of the year.

SPECIAL REPORT ON NEW TAX REFORM LAW--20 Changes For Individuals

The new tax reform law passed in December of 2017 (the "Tax Cuts and Jobs Act” or TCJA) is the biggest overhaul of the federal income tax code since 1986.  It will have huge effects on individuals in 2018 and beyond.  This special report covers the main issues of the new tax law that will affect individuals.

1. The new law keeps the seven tax brackets but with different rates and break points. I’m not going to detail it here but whatever tax bracket you are in, your income will be taxed at lower rates than under the old law.

2. The standard deduction will nearly double in 2018. It will increase to $24,000 for couples, $12,000 for individuals, and $18,000 for heads of household.

3. Individuals age 65 or older and the blind will continue to receive an additional standard deduction under the new tax law. For 2018, each person can claim an additional $1,300 deduction (an unmarried individual can claim $1,600).

4. Personal exemptions for all filers are repealed.

5. The child tax credit (direct dollar-for-dollar reduction of tax) is doubled to $2,000 for every dependent under age 17. Up to $1,400 of the credit is refundable for lower income taxpayers.  The AGI phase-out starts at a much higher limit of $400,000 for couples and $200,000 for singles and heads-of-household.

6. A new $500 credit is added for each dependent who is not a qualifying child.

7. Home mortgage deductions are limited. Interest can be deducted on up to $750,000 of new acquisition debt on a primary or second residence.   This is down from $1 million.  This applies to mortgage debt incurred after December 14, 2017.  Older loans, and refinancing of old loans, get the $1 million cap.

8. There will no longer be a deduction for the interest paid on home equity loans.

9. State and local tax (SALT) deductions will now be limited to $10,000. Property taxes are still fully deductible for businesses and owners of rental property.

10. The law eliminates the deduction for job-related moves except for military personnel.

11. All miscellaneous itemized deductions (reported on Schedule A) that are subject to the 2% of AGI threshold are eliminated. This includes (but is not limited to):
    1. Employee business expenses
    2. Brokerage fees
    3. IRA custodial fees
    4. Hobby expenses
    5. Theft and casualty losses (except for those in presidentially declared disaster areas)
    6. Alimony deductions for post-2018 divorce decrees. This is good news for those who receive alimony; they will not have to report it as income.

12. The medical expense deduction limitation for 2017 and 2018 is reduced from 10% to 7.5% of adjusted gross income.

13. Charitable contributions remain, and the AGI limitation on cash donations to qualified charities increases from 50% to 60%.

14. The phase-out of itemized deductions for higher-income taxpayers is eliminated.

15. The new law makes converting a traditional IRA to a Roth IRA something that should be done carefully. In the past you had until October 15^th of the following year to reverse the conversion if the ROTH lost money.  After 2017 conversions are irreversible.

16. Unearned income of dependent minor children is no longer taxed at the parents’ rate. It is taxed at trust return rates, which are normally lower than the parents' rate but higher than the child's rate.

17. The new law lowers the individual alternative minimum tax (AMT) by increasing the exemption amount to $109,400 for joint returns and $70,300 for singles and heads of household. The exemption starts at $1 million for couples and $500,000 for single filers and heads of household.

18. The Obamacare requirement that individuals have health insurance, qualify for an exemption, or pay a fine is repealed for years after 2018.

19. Tax-free treatment of like-kind properties has been eliminated for all but real estate transactions.

20. The estate and gift tax exemption per person is doubled to $10 million from $5 million.

 

To reflect the new lower tax rates and tax brackets, higher standard deductions, and repeal of personal exemptions, the IRS has issued new 2018 withholding tables.  Most wage earners will see an increase in their paychecks starting no later than February 15, 2018.