The new tax bill (the “Tax Reform Act of 2017”) has been passed and is now awaiting the President’s signature. Once he signs the bill, it will become law. It should be noted that the vast majority of the provisions apply to tax years beginning after December 31, 2017.
This bill is a significant change in the tax law on a variety of fronts, altering deductions, tax rates and credits. Below are just a few of the highlights.
We will be releasing more details on the implications on individual taxpayers next week and on international taxpayers the first week in January. If you have any questions, please contact your Briggs & Veselka tax professional.
There will be 7 tax rates ranging from 10% to 37%. Most taxpayers will see a reduction in their marginal tax rate, although a few may see a slight increase. The highest rate fell from 39.6% to 37% for single taxpayers making more than $500,000 and married taxpayers filing jointly making more than $600,000.
For those hoping that the “marriage penalty” (which affects dual income earning households) may be addressed, it was not.
And there will be no change in the current capital gains rates for individuals.
Alternative Minimum Tax (“AMT”)
Not repealed, but exemption amounts have been increased.
The standard deduction will be increased to $24,000 for married filing joint and $12,000 for single, and will be indexed for inflation.
Mortgage interest deduction is limited to mortgages for future homes valued at $750,000.
State and local property and income taxes
Itemized deduction for state and local property taxes is capped at a total amount of $10,000 per year.
The corporate rate will drop from a highest rate of 35% to a flat tax rate of 21%. Corporate shareholders still enjoy the favorable rate of 20% for long term capital gains and for qualified dividend income.
For tax years beginning after December 31, 2017, and before January 1, 2026, a new deduction of 20% for taxpayers who have what will be known as “qualified business income” from a partnership, S corporation, or sole proprietorship will become available. The 20% deduction will also apply to certain REIT dividends and certain publicly traded partnership income. There are certain limitations on the deduction based on wages paid to the owners and tangible property acquired.
Alternative Minimum Tax (“AMT”)
Repealed. Will continue to allow the prior year minimum tax credit to offset the taxpayer’s regular tax liability for any tax year.
Cash Method of Accounting
The $5 million average gross receipts threshold for corporations and partnerships with corporate partners that are not allowed to use the cash method of accounting would be increased to $25 million (indexed for inflation) and would be extended to certain farming entities for tax years beginning after Dec. 31, 2017.
The legislation increases the average gross receipts threshold for the UNICAP rules from $10 million to $25 million (indexed for inflation). Exemptions from the UNICAP rules that are not tied to a gross receipts test will be retained.
Accounting for Long-term Contracts
The $10 million average gross receipts exception to the requirement to use the percentage-of-completion accounting method for long-term contracts to be completed within two years would be increased to $25 million (indexed for inflation) for contracts entered into after 2017, and businesses that meet such exception would be permitted to use the completed-contract method (or any other permissible exempt contract method).
Increase the amount to $1,000,000 and also increase the phase-out threshold to $2,500,000. These amounts would be indexed for inflation for tax years beginning after 2018.
Net Operating Losses (“NOLs”)
Limitation of the NOL deduction to 90% (80% in tax years beginning after Dec. 31, 2022) of taxable income.
Elimination of carrybacks (other than farming), but allows for indefinite carryforward of NOLs.
Temporary 100% Expensing for Certain Business Assets
The legislation would initially allow full expensing for property placed in service after Sept. 27, 2017, reducing the percentage that may be expensed for property placed in service after Jan. 1, 2023.
We will be providing regular updates in the near future, and as mentioned above, a more detailed discussion on the implications for individual taxpayers next week, and one related to international tax the first week of January.