Last week, the House GOP unveiled the “Tax Cuts and Jobs Act,” a bill that would make significant changes to the Internal Revenue Code. 415 Group Partner Dan Kloha, CPA, explains some of the proposal’s key elements.
House Republicans released a tax bill on Nov. 2, which proposes major changes to the Internal Revenue Code. The proposal would overhaul components of the tax code, including:
- Corporate Tax Rate: The bill lowers the maximum corporate tax rate from 35 percent to 20 percent, beginning in 2018.
- Alternative Minimum Tax: The proposal repeals the existing individual AMT after 2017, but it includes special rules for ATM credit carryforwards.
- Increased Bonus Depreciation: The bill allows taxpayers to fully and immediately deduct 100 percent of the cost of qualified property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. It also expands the property that is eligible for this immediate expensing by repealing the requirement that the original use of the property begin with the taxpayer. Instead, the property would be eligible for the additional depreciation if it is the taxpayer's first use.
- Section 179 Expensing: Effective for tax years 2018 through 2022, the bill increases the business expensing limitation to $5 million and the phase out amount to $20 million. The new limitations would adjust for inflation.
- Net Operating Loss Deductions: The proposal allows taxpayers to deduct an NOL carryover or carryback of up to 90 percent of their taxable income. It generally repeals all carrybacks but for a special one-year carryback for small businesses and farms in the event of certain casualty and disaster losses arising in tax years beginning after 2017.
- Entertainment Expenses: The proposal disallows deductions for entertainment, amusement or recreation activities under all circumstances. In addition, no deduction would be allowed for transportation fringe benefits, benefits in the form of on-premises gyms and other athletic facilities, or for personal amenities provided to an employee that are not directly related to the employer's trade or business, except to the extent that the benefit is treated as taxable compensation to the employee.
- Pass-Through Tax Rate: After 2017, 25 percent maximum tax rate on a portion of pass-through entity net income distributions treated as business income (remaining portion of distributions treated as wage income subject to individual income tax rates). Owners or shareholders receiving distributions from active business activities may elect to: (1) treat 30 percent as business income and 70 percent as wage income, or (2) determine ratio of business income to wage income based on capital investment. Owners or shareholders receiving distributions from passive business activities would be able to treat 100 percent as business income.
- Standard Deduction: The bill increases the standard deduction beginning after 2017 to the following amounts:
- $24,400 (joint return or a surviving spouse)
- $18,300 (unmarried individual with at least one qualifying child)
- $12,200 (for single filers)
- Personal Exemptions: The bill repeals the deduction for personal exemptions, effective for taxable years beginning after Dec. 31, 2017.
- Mortgage Interest Deduction: The bill reduces the mortgage interest deduction to $500,000 for debt incurred after Nov. 2, 2017, and the interest would only be deductible on a taxpayer's principal residence.
- State and Local Tax Deduction: The bill eliminates the itemized deduction for state and local income and sales tax, and it allows individuals to write off the cost of state and local property taxes up to $10,000.
- Medical Expense Deduction: The bill eliminates the itemized deduction for medical expenses for tax years beginning after 2017.
- Alimony Payments Deduction: The bill eliminates the current above-the-line deduction for alimony payments, and it does not require the payee receiving alimony payments to include alimony payments into income. This provision affects divorce decrees, separation agreements, and modifications entered into after 2017.
- Moving Expenses Deduction: The bill eliminates the deduction for moving expenses incurred when starting a new job in a new location at least 50 miles from the taxpayer's former residence.
- Gain from Sale of a Principal Residence Exclusion: The bill continues to exclude gross income up to $500,000 ($250,000 for other filers) from the sale of a principal residence, but only if the taxpayer owned and used the home for five out of the previous eight years.
- Estate and Gift Taxes: The proposal increases the federal estate and gift tax unified credit applicable exclusion amount to $10 million, effective for decedents dying and gifts made after 2017. The bill repeals the federal estate tax, effective for decedents dying after 2023 (while retaining the provision allowing a "stepped-up" income tax basis at death). The bill lowers the federal gift tax rate to 35 percent for gifts made after 2023.
For more information, review the latest Wolters Kluwer Tax Briefing or contact us at 415 Group.
“In its current form, this bill is 429 pages long and the summary issued by the Committee on Ways and Means is 82 pages long, so it’s difficult to distill the entire potential impact. But with this article, we’ve highlighted some of the key components that our clients should be aware of.
From a business owner standpoint, this bill drops the maximum corporate tax rate from 35 percent to 20 percent, and it reduces the flow-through tax rate for qualified “business income” from 39.6 percent to 25 percent. That would have a huge impact for some of our clients.
Individuals may be focused on a few different items. The plan nearly doubles the standard deduction, while also eliminating personal exemptions. It also includes major changes to the mortgage interest deduction, medical expense deductions and state and local tax deductions. (See details below.)
It’s important to note that what’s outlined here will not be the final form. The proposal will likely undergo changes in the Senate. At 415 Group, we’ll continue to monitor the tax plan as it unfolds and keep our clients informed along the way.”