Tax Cuts and Jobs Act: Key provisions affecting businesses
The recently passed tax reform bill, commonly referred to as the “Tax Cuts and Jobs Act” (TCJA), is the most expansive federal tax legislation since 1986. It includes a multitude of provisions that will have a major impact on businesses.
Here’s a look at some of the most significant changes. They generally apply to tax years beginning after December 31, 2017, except where noted.
• Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
• Repeal of the 20% corporate alternative minimum tax (AMT)
• New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
• Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
• Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
• Other enhancements to depreciation-related deductions
• New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
• New limits on net operating loss (NOL) deductions
• Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
• New rule limiting like-kind exchanges to real property that is not held primarily for sale
• New tax credit for employer-paid family and medical leave — through 2019
• New limitations on excessive employee compensation
• New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation
Keep in mind that additional rules and limits apply to what we’ve covered here, and there are other TCJA provisions that may affect your business. Contact us for more details and to discuss what your business needs to do in light of these changes.
© 2017
Plan Ahead for Your 2015 Tax Filing
Experience can be a good teacher, but we shouldn’t learn everything through our mistakes. For example, if the IRS penalized you last April because you underpaid your taxes, you can fix that for this tax year. Consider having your employer deduct more from your wages, or at least going the estimated tax payment route.
We may be halfway through 2015 but there is still time for you to map out a strategy for this year. Here are 3 things you can start doing right now:
- Get organized.Getting organized might not cut your taxes, but good record keeping avoids the number 1 and number 2 hassles of tax preparation: 1) Bad records keeping makes it impossible to do a thorough and timely job on your tax return; and 2) The IRS requires documentation if you get audited.To get organized, at a minimum you should:
- keep last year’s tax return handy
- use personal finance software to keep track of tax-related income and expenditures
- throughout the year collect and group receipts and papers that affect your taxes and keep everything in a separate file
- safeguard the W-2s, 1099s, bank interest, mortgage statements, etc., that typically arrive in January
- plan to store your files for at least 3 years (7 years is optimum, since IRS audits can go back that far.)
- Itemize your tax deductions.
- Visit the IRS website and see Topic 500 - Itemized Deductions. You will need Form 1040, Schedule A and its accompanying instructions. Before you get to Schedule A, however, there are deductions like IRA contributions that don’t need to be itemized and can reduce your taxable income. You’ll find them in items 31 through 38 on IRS Form 1040A and 48 through 54 on Form 1040. For each deduction you’ll need to attach a corresponding IRS Form.Don’t forget to look into tax credits, which can also reduce your tax bill dollar-for-dollar. They are, however, less common than tax deductions.
- Gather the tax forms you need.
- Go right to the source on this one. The IRS has a complete catalog of forms and publications on its website. While there’s still time, it won’t hurt to review the forms and instructions for changes or additional documentation. Make a list of the forms you need; download them and shake your head in wonderment at the enormously complex tax code we live under.Above all, be on time.The end result of all that planning is that you have a complete and accurate tax return ready for submission on or before the tax-filing deadline. Even if unforeseen circumstances keep you from meeting the due date, you still must make a reasonable estimate of your tax liability and pay any balance due with your extension request. Even though the IRS holds all the cards, your ace in the hole will be your preparation and planning.…And Get Help.If after reading all the advice above, you’d rather leave tax planning to experts so that you can get on with your life and business, consider working with a knowledgeable tax advisor. Contact Dmitry Dukhon at Dukhon Tax to help you get organized, file your returns and answer any questions you may have. We can be an invaluable resource for you to make the process as smooth as possible.
Strategies for Avoiding or Reducing the new 3.8% Net Investment Income Tax
Dukhon Tax shares strategies for Avoiding or Reducing the new 3.8% Net Investment Income Tax
As of the beginning of 2013, new Code section 1411 imposes an additional tax of 3.8% on unearned net investment income. The so-called "Net Investment Tax" or "NIT" kicks in after certain thresholds effectively pushing up the top marginal tax rate for individuals, trusts, and estates. The tax is actually a Medicare tax that is newly imposed upon investment income as of 2013 by the "fiscal cliff deal" or The American Taxpayer Relief Act of 2012. Some people may not remember that specific government delay amongst the many we've had this year but it was the reason many people could not file their returns until mid to late February in 2013. Also, the legislature extended many favorable deductions, credits, and provisions of the tax code but also introduced some increased rates and additional taxes (such as the "NIT").
"Net investment income includes, but is not limited to: interest, dividends, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and business that are passive activities to the tax payer. Net capital gains are also included, as well, including gains from the sale of real estate and gains from the sale of interests in partnerships and S corporations as to which the taxpayer is a passive owner." Short-term capital gains are taxed at ordinary income rates but can be offset by long-term capital losses. Income from S corporations or partnerships in which the taxpayer actively participates is not included as well (more on that in just a bit).
How is net investment income computed?
In short, the tax is equal to 3.8% of the lesser of a) your net investment income for such taxable year or b) the excess (if any) of your MAGI over the threshold amount. Got that? Let's simplify this a bit. First, MAGI is modified adjusted gross income and, for purposes of this section, it's equal to Adjust Gross Income (see the bottom of your 1040) increased by your foreign income that would otherwise be reduced by your foreign income tax credit. Basically, you have to include your foreign source income regardless of the foreign tax credit. For most people, MAGI is equivalent to AGI. Now, the thresholds are $250,000 for married filers, $200,000 for individual filers, and $125,000 for married filing separate filers. Once your MAGI goes above those thresholds you become "open" to the tax. You must then compare your net investment income against the amount of MAGI over the threshold and the lesser of those two, multiplied by 3.8%, is your net investment tax. Easy enough, right?
Pitfalls and how to avoid them
For most people, this isn't a major concern. However, for individuals that invest in stocks, in real estate, have interest, and passive income, this can add up pretty fast. Your investment income may not be much but if your MAGI is high (for higher wage earners for example) then you're possibly subject to paying an extra 3.8% on every dollar of your other net investment income. If you have a modest stock portfolio or bought into a few partnerships, then you could see a noticeable increase in your tax over the prior year. If you're tax adviser has not mentioned this to you, it may be wise to make a phone call and see if this is something with which you should be concerned. Of course, the staff at Dukhon Tax and Accounting would be more than glad to help. Give us a call or e-mail: 617 651 0531 or [email protected].
Deductions
The reason we keep saying "net" when we talk about your investment income is that you are allowed deductions before you have to make the above calculations. Deductions allocable to rents and royalties are deductible, passive income deductions, investment interest are a few of the major ones. For example, the interest on a loan you took to invest in a partnership in which you are passive, that's a great deduction that will get you to the "net" amount of your investment income. Non-deductible items include many of your other miscellaneous itemized deductions and deductions attributable to non-passive trade or business.
Planning
The big question is: how can we be creative within the confines of the tax code and avoid this thing? There are several strategies, too numerous to list here, but the idea is to balance your current MAGI against your future MAGI with income shifting or other tax deferral strategies. Tax-exempt vehicles like municipal interest might be a great idea (compare your taxable to non-taxable net gains after the tax and it may cover the lower interest rates on the Muni-bonds). Tax deferred annuities may be something to consider; maybe your income is higher now and you want to try to push some of those gains out a few years. Retirement options like 401k and IRA are always a great choice. In some cases, ROTH conversions (turning a regular IRA into a Roth) may make sense for retirees who are expecting their RMDs to push them into the realm of NIT at retirement (not to mention the otherwise increased ordinary income tax rates). Installment sales are a good hedge against capital gain increases (which are also subject to the tax) and could provide savings of up to 8.8% in the event that you are subject to the new higher 20% capital gain rate AND the 3.8% Net Investment Tax versus the 15% otherwise favorable rate.
In conclusion, there's a lot to consider here and your tax adviser should be talking and thinking about these things. Once again, we welcome you to contact Dukhon Tax and Accounting to find out how we can help you reduce your tax liability and navigate the increasingly complex system of taxation we have in our great US of A.
All the best,
The Staff at Dukhon Tax