Over the past year, I’ve had a number of clients and friends ask me how the Tax Cuts and Jobs Act (TCJA) of 2017 is going to impact their 2018 Federal Tax Returns. The short answer is that some folks’ taxes are going to go up, and others will go down. No help? Well, the real answer is more involved than I have space for here, but I am going to hit some of the high points of the changes in the new tax code. For more involved answers, seek out your accounting or tax professional.
The Tax Cuts and Jobs Act of 2017 is the first major revision of the Federal tax code since the Tax Reform Act of 1986, which was passed by a significant bi-partisan majority in Congress and signed by President Reagan. Where the 1986 Tax Reform did much to simplify the tax code, reduce the number of brackets, close loopholes, and bring about more tax fairness, the 2017 TCJA has made life more complicated for taxpayers and the professionals who help them with their tax returns.
Since the TCJA was passed by a bare majority in the 2017 Senate, Senate rules limit the negative impact of this act on the Federal budget, which means that unless Congress and the President act to make them permanent, most of the changes enacted as part of the TCJA will disappear on December 31, 2025.
So, let’s hit some of the high points.
For business owners, the TCJA is a mixed bag. First, business entertainment expense deductions are gone. The deduction for meals is continues at 50 percent, and meals on employer premises for the employer’s convenience will continue, but at the 50 percent rate versus the previous 100 percent rate. After 2025, meals for employees on employer premises will no longer be deductible.
The limits for expensing section 179 property increased from $500,000 to $1,000,000, and the business income phase-out threshold for this deduction increased to $2,500,000. The TCJA also expanded the definition of section 179 property to include some selected improvements to non-residential real property.
The TCJA also increased bonus depreciation from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. And, capital gains deferment under section 1031 exchanges was maintained for real property, but was eliminated for other types of property.
The last topic I’ll touch upon is the new Section 199A Qualified Business Income (QBI) deduction for taxpayers with income from sole proprietorships, S corporations and partnerships.
Beginning with tax years after Dec. 31, 2017, and before Jan.1, 2026, individuals (including couples), trusts and estates with qualified business income, qualified REIT dividends or qualified PTP income may be entitled to a deduction of up to 20 percent of this income. For taxpayers whose taxable income exceeds $157,500 (single) or $315,000 (married), the TCJA provides a number of restrictions based on the taxpayer’s type of business, sources of income, and assets owned by the taxpayer.
The short version of this paragraph is that if you own a Schedule C business, are a partner in a partnership or a shareholder in an S Corporation, and your taxable income is below the thresholds mentioned above, you should be entitled to the QBI deduction. If your taxable income is above the thresholds, consult with your tax or accounting professional.
As I mentioned at the start, I only had enough space in this column to just hit the high points of changes brought about with the Tax Cuts and Jobs Act of 2017. If you have some time and would like to get more information, you can go to the IRS’ webpage for this topic at https://www.irs.gov/tax-reform to read up on all of the changes, or just call your local tax or accounting professional to get more information about those changes that will impact your particular tax situation.
Paul Montague is an enrolled agent with Paul Montague Tax Preparation, LLC. He can be reached at (360) 910-1218.