VOLUME 1 – 2018
In Volume 1 of our 2018 newsletter, we highlight:
- New Pass-Through Income Deduction
- Business Tax Changes in the Tax Cuts and Jobs Act
- New Individual Tax Provisions
- New Depreciation Rules
- Best Practices For Gift Acknowledgements
New Pass-Through Income Deduction
Generally for tax years beginning after December 31, 2017 and before January 1, 2026, the Tax Cuts and Jobs Act (the Act) adds a new section, Code Section 199A, Qualified Business Income, under which a non-corporate taxpayer, including a trust or estate, who has qualified business income (QBI) from a partnership, S corporation, or sole proprietorship may receive a 20% deduction of their QBI.
The deduction is generally equal to 20% of the QBI, which is defined as the net amount of items of income, gain, deduction, and loss with respect to the trade or business. The business must be conducted within the United States to qualify, and specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business). The trade or business of being an employee does not qualify. Also, QBI does not include reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership’s business.
The deduction is taken “below the line”, therefore, it reduces your taxable income but not your adjusted gross income. It is available regardless of whether you itemize deductions or take the standard deduction. Taxable income thresholds are in place to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction. The threshold for most individuals is between $157,500 and $207,500 ($315,000 and $415,000 married filing a joint return). For taxpayers above the taxable income threshold, there are additional limitations based upon a certain percentage of W-2 wages and the amount of tangible asset acquisitions for the year.
There are additional limitations for specified service trades or businesses, these are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial, or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners. For individuals in these specified service businesses, there are more deduction limitations than individuals in other businesses.
If their income is above the $207,500/$415,000 limits, they are barred from taking the 20% deduction. As you can see there are numerous rules and regulations in relation to this deduction and more to come from the IRS. Please let us know if you have any questions concerning this new deduction, and how it will affect you personally.
Business Tax Changes in the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) which was passed in December 2017 was a sweeping tax package. Here is an overview of some of the more important business tax changes in the new law. Unless otherwise noted, the changes are effective for tax years beginning in 2018.
♦ Corporate tax rates reduced. One of the more significant new law provisions cuts the corporate tax rate to a flat 21%. Before the new law, rates were graduated, starting at 15% for taxable income up to $50,000, with rates at 25% for income between $50,001 and $75,000, 34% for income between $75,001 and $10 million, and 35% for income above $10 million.
♦ Alternative minimum tax (AMT). The corporate AMT has been repealed by the new law. Corporations are allowed to offset their regular tax liability by the AMT credit. For tax years beginning after 2017 and before 2022, the credit is refundable in an amount equal to 50% (100% for years beginning in 2021) of the excess of the AMT credit for the year over the amount of the credit allowable for the year against regular tax liability. Thus, the full amount of the credit will be allowed in tax years beginning before 2022.
♦ Net operating loss (NOL) deduction modified. Under the new law, generally, NOLs arising in tax years ending after 2017 can only be carried forward, not back. The general two-year carryback rule, and other special carryback provisions, have been repealed. However, a two-year carryback for certain farming losses is allowed. These NOLs can be carried forward indefinitely, rather than expiring after 20 years. Additionally, under the new law, for losses arising in tax years beginning after 2017, the NOL deduction is limited to 80% of taxable income, determined without regard to the deduction. Carryovers to other years are adjusted to take account of the 80% limitation.
♦ Domestic production activities deduction (DPAD) repealed. The new law repeals the DPAD for tax years beginning after 2017. The DPAD formerly allowed taxpayers to deduct 9% (6% for certain oil and gas activities) of the lesser of the taxpayer’s: 1) qualified production activities income (QPAI) or 2) taxable income for the year, limited to 50% of the W-2 wages paid by the taxpayer for the year.
♦ Like-kind exchange. Under the new law, the rule allowing the deferral of gain on like-kind exchanges of property held for productive use in a taxpayer’s trade or business or for investment purposes is limited to cover only like-kind exchanges of real property not held primarily for sale. The 45 day identification and 180 day exchange period remain in effect.
Like-kind exchanges will no longer apply to personal property, such as automobiles and equipment. Therefore, if you buy a new vehicle for business use and trade in your old vehicle, you will no longer be able to do that tax-free. You will now have to recognize a gain or loss on the vehicle you traded-in. This will give you a higher basis for the new vehicle for depreciation purposes.
♦ Meals and entertainment. Effective January 1, 2018 entertainment, amusement, or recreation expenses will no longer be deductible as a business expense. This includes items such as sporting events, theater tickets, golf club dues, etc. All business related meals, with a few minor exceptions, will only be 50% deductible.
These are just some of the more important changes effecting businesses.
New Individual Tax Provisions
Here is a look at some of the more important elements of the new law that have an impact on individuals. Unless otherwise noted, the changes are effective for tax years beginning in 2018 through 2025.
♦ Tax rates. The new law imposes a new tax rate structure with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly. The rates applicable to net capital gains and qualified dividends were not changed. The “kiddie tax” rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child’s tax is unaffected by the parent’s tax situation or the unearned income of any siblings.
♦ Standard deduction. The new law increases the standard deduction to $24,000 for joint filers, $18,000 for heads of household, and $12,000 for singles and married taxpayers filing separately. Given these increases, many taxpayers will no longer be itemizing deductions. These figures will be indexed for inflation after 2018.
♦ Exemptions. The new law suspends the deduction for personal exemptions. Thus, starting in 2018, taxpayers can no longer claim personal or dependency exemptions.
♦ Child and family tax credit. The new law increases the credit for qualifying children (i.e., children under 17) to $2,000 from $1,000, and increases to $1,400 the refundable portion of the credit. The adjusted gross income (AGI) level at which the credits begin to be phased out has been increased to $200,000 ($400,000 for joint filers).
♦ Itemized deductions. The itemized deduction for state and local income and property taxes is limited to a total of $10,000 starting in 2018.
Mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million), starting with loans taken out in 2018. There is no longer any deduction for interest on home equity loans, regardless of when the debt was incurred.
There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2% of AGI. This category included items such as tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses.
For 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5% of adjusted gross income for all taxpayers. Previously, the AGI “floor” was 10% for most taxpayers.
The new law suspends the overall limitation on itemized deductions that formerly applied to taxpayers whose AGI exceeded specific thresholds. The itemized deductions of such taxpayers were reduced by 3% of the amount by which AGI exceeded the applicable threshold, but the reduction could not exceed 80% of the total itemized deductions, and certain items were exempt from the limitation.
♦ Estate and gift tax exemption. Effective for decedents dying, and gifts made, in 2018, the estate and gift tax exemption has been increased to roughly $11.2 million ($22.4 million for married couples).
♦ Alternative minimum tax (AMT) exemption. The AMT has been retained for individuals by the new law but the exemption has been increased to $109,400 for joint filers ($54,700 for married taxpayers filing separately), and $70,300 for unmarried taxpayers. The exemption is phased out for taxpayers with alternative minimum taxable income over $1 million for joint filers, and over $500,000 for all others.
As you can see from this overview, the new law affects many areas of taxation. If you wish to discuss the impact of the law on your particular situation, please give us a call.
New Depreciation Rules
The new law increases the maximum amount that may be expensed under Code Section 179 to $1 million. If more than $2.5 million of property is placed in service during the year, the $1 million limitation is reduced by the excess over $2.5 million. Both the $1 million and the $2.5 million amounts are indexed for inflation after 2018.
A 100% first-year bonus depreciation deduction (Section 168) is allowed for qualified new and used property acquired and placed in service after September 27, 2017 and before 2023.
Subject to certain exceptions, the cost recovery period for farming equipment and machinery, the original use of which begins with the taxpayer, is reduced from 7 to 5 years. Additionally, in general, the 200% declining balance method may be used in place of the 150% declining balance method that was required under pre-Act law.
For a passenger automobile for which bonus depreciation is not claimed, the maximum depreciation allowance is increased to $10,000 for the year it is placed in service, $16,000 for the second year, $9,000 for the third year, and $5,760 for the fourth and later years in the recovery period. These amounts are indexed for inflation after 2018. For passenger autos eligible for bonus first year depreciation, the maximum additional first year depreciation allowance remains at $8,000 as under pre-Act law.
The new law removes computers and peripheral equipment from the definition of listed property. Thus, the heightened substantiation requirements and possibly slower cost recovery for listed property no longer apply.
Best Practices For Gift Acknowledgements
By: Ashley Straatmann, CPA
Nonprofit organizations often rely substantially on contributions from donors. Donors often give to charitable organizations in part to receive a tax deduction for their gifts. It is important for nonprofits to provide the necessary documentation to their donors so they are able to deduct their contributions.
In order for a donor to deduct any single contribution of $250 or more, they must obtain a written acknowledgement
of the contribution from the recipient charity prior to the donor filing their return. The charity should provide a timely written statement that includes the name of the charity, the date and amount of any cash contribution, the description of any noncash contributions (but not the value), and whether any goods or services were provided in return for the contribution. If goods or services were provided, the charity should provide a description and a good faith estimate of the value of those goods or services.
The charity can provide separate acknowledgement letters for each contribution of $250 or more, or they can list several single contributions of $250 or more in one acknowledgement letter. This gift acknowledgement letter can be provided as a paper copy or in electronic form to the donor. In order for the donor to deduct his or her gift for tax purposes, this acknowledgement must be received by the donor by the date on which they file their tax return for the year, or the due date of their return (whichever is earlier). There is no penalty to the nonprofit for failure to provide an acknowledgement letter; however, donors may think twice about making additional gifts to a charity that does not provide them with the documentation needed to substantiate their tax deduction.
Special rules are required for quid pro quo contributions. A quid pro quo contribution is one made by a donor in exchange for goods or services. Donors can only take a tax deduction for the portion of the contribution that exceeds the fair market value of the goods and services received by the donor for their contribution.
Anytime a donor makes a payment exceeding $75 that is partly a contribution and partly for goods or services, the organization must provide a written disclosure statement to the donor. This statement must inform the donor that the amount of their contribution that is tax deductible is limited to the excess of money contributed by the donor over the value of goods or services provided by the charity. The statement must also provide the donor with a good faith estimate of the fair market value of the goods or services. This statement should be provided in any fundraising or solicitation materials for the event, or at the time the payment is received at the latest. A penalty of $10 per contribution (not to exceed $5,000 per fundraising event or mailing) applies to charities that do not meet this written disclosure requirement.
Nonprofit organizations often hold fundraising events that may include raffles, bingo, or other games of chance. It is important to note that amounts paid to purchase raffle tickets or to play bingo or other games of chance are not deductible as charitable contributions by participants.
For additional information or assistance in drafting your disclosure statements for donors, please contact our office.
Hochschild, Bloom & Co. is a strong supporter of local nonprofit organizations. We would like to introduce you to one of our newest clients: St. Louis BWorks. St. Louis BWorks has been helping St. Louis children discover their potential since 1988.
Our program gives kids the chance to earn a free bike while they learn about bicycle safety and maintenance from our volunteers. They learn to work independently and as a group to solve problems. Graduates earn their own bike, helmet, light and lock.
In 1996 we introduced a program through which children can earn a complete desktop computer system. The six-week course gives them the technical skills they need to use and maintain it, all while seeing first-hand the true power of responsibility and commitment.
Founded in 2011 to promote verbal, visual and cultural literacy through creative expression. Young people in the program work with volunteer editors to write and illustrate their own books. Through games and revisions students learn to “be more”.
how can you help? you can donate your time by volunteering, donating bicycles or computers which will be used in our programs, or support us with your monetary gifts. contact us at: firstname.lastname@example.org
As a 501c(3) organization, St.Louis BWORKS is dependent on the generosity of its volunteers and individual and corporate donation. Your donations will help us work with even more kids in new, innovative areas.