TAX ALERT: Tax Cuts and Jobs Act Becomes Law

Today, President Trump signed into law the Tax Cuts and Jobs Act (H.R. 1) bill. This Tax Alert is an update to the Tax Alert which was published on December 18, 2017. It should be noted that under the new law most of the individual provisions are effective January 1, 2018, but will expire by December 31, 2025 (unless renewed by Congress in that time).
  • Under the conference agreement, the highest tax rate of 37% is phased in at $500,000 for single filers and $600,000 for married filers. The seven tax rates are the following: 10%, 12%, 22%, 24%, 32%, 35%, and 37%;
  • The Alternative Minimum Tax (AMT) is maintained increasing the exemption $109,400 for married taxpayers filing a joint return ($70,300 for single filers);
  • Doubles the standard deduction to $24,000 for married taxpayers who file jointly and $12,000 for single filers;
  • Repeals the personal exemptions for dependents and increases the Child Tax Credit to $2,000 up to $1,400 of which is refundable; notably, phase-out amounts are increased to $400,000 for married taxpayers filing a joint return (half this amount for single filers);
  • Repeals the individual mandate imposed under the Affordable Care Act (Obamacare) to obtain health insurance starting in 2019;
  • Allows use of 529 College Savings Account to pay for private school tuition for grades K – 12, limited to $10,000 per student, per year;
  • For itemized filers, below are some of the notable changes:
    • ​All state and local income and property taxes deductions are limited to $10,000; prepayment of income taxes for years 2018 and beyond in 2017 are not deductible in the year in which is paid, rather the year in which the payment relates to;
    • Home Mortgage interest deduction – limited to indebtedness on $750,000 for joint returns; for single filers $375,000; in addition, the deduction for interest on equity debt is suspended for debt incurred after December 15, 2017;
    • Medical expenses deduction – reduces the threshold to 7.5% of Adjusted Gross Income for tax year starting after 2017 and prior to 2019;
    • Charitable Deductions – increase in the percentage limit for charitable contributions of cash to public charities from 50% to 60%;
    • Repeals all itemized deductions that are subject to the two-percent floor under present law.
  • Exclusion of gain on sale of a principal residence ($500,000 for married filers) is left unchanged;
  • Estate & Gift Taxes – doubles the estate and gift tax exemption (to $11 million) for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026.
  • Owners of pass through entities receive a 20% deduction on qualified business income (i.e. taxable income related to non-service oriented businesses, and excluding investment type income); specified service trades (i.e. accounting, health, law, consulting services, or any business where the principal asset of the business is the reputation or skill of one or more of its employees) the deduction is phased out at $315,000 – $415,000 for joint filers (half for single filers); for all other qualified business income the overall deduction is limited to 50% of the W-2 wages paid in relation to the qualified business; alternatively formula is available for capital-intensive businesses, 25% of wages paid plus 2.5% of the value of the business’s tangible-capital assets;
  • Limitation on Pass-through Losses – excess active trade or business losses from pass-through entities are limited to $500,000 for married filers (half for single filers); the disallowed loss can be carried forward indefinitely;
  • Bonus depreciation – 100% accelerated depreciation on eligible property placed in service after September 27, 2017 through December 31, 2022; further, original use requirement is removed;
  • Section 179 expensing – increased to $1 million with investment limitation of $2.5 million;
  • Interest Expense Deduction is capped at 30% of adjusted taxable income; with exemption for businesses with average annual gross of $25 million or less; disallowed business interest can be carried forward indefinitely;
  • Residential and nonresidential real property depreciation maintained at 27.5 years and 39 years respectively only if partnership does not elect out of the interest deductibility limitation; but if one elects out of interest deductibility limitation, 30-year residential real property and 40-year nonresidential real property depreciation lives apply;
  • Reduces the highest corporate tax rate to 21%;
  • Net operating losses – limits the deduction to 80% of taxable income;
  • Eliminates corporate AMT;
  • Eliminates Sec. 199, domestic production activities deduction (DPAD);
  • Repeal of technical termination for partnerships;
  • S Corporations that revoke their S Corporation election within 2 years of the enactment of the bill will be treated as taking the distributions from E&P first;
  • Carried interest holding period is now 3 years in order to obtain long term capital gain treatment;
  • Cash Method of Accounting – C-corporations & partnerships with C-corporation partners with average gross receipts of $25 million or less can use this method;
  • Accounting for Inventories/UNICAP Rules – taxpayer with average gross receipts less than $25 million are exempt Section 263A capitalization requirement;
  • Construction Contract Accounting – taxpayers with average gross receipts of less than $25 million are exempt from using Percentage of Completion accounting method;
  • Section 1031 “like-kind” exchanges are retained only for real property;
  • Repatriation of foreign E&P associated with cash and cash equivalent to be taxed at 15.5% and 8% for illiquid assets.
Sax will keep you advised of new developments and/or clarifications to the new tax law as they happen. For any questions or further information, please contact a Sax advisor at (973) 472-6250.

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