Category Archives: Tax reform

Congress Passes Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act, which was passed in both houses of Congress earlier this week, was signed into law by President Trump on December 22, 2017. The majority of the provisions contained in the sweeping reform legislation go into effect as of January 1, 2018. Read on for a few recommendations on actions to be taken before the end of 2017 followed by an overview of items included in the act.

Initial Recommendations:

For Individuals

  • Pay state income taxes due before December 31, 2017.
  • Accelerate your charitable contributions into 2017 since all brackets will benefit.
  • If you make charitable contributions to the athletic department of your favorite university in order to be entitled to purchase tickets to athletic events, definitely make those contributions before December 31, 2017.
  • Prepay 2% itemized deductions due (such as investment advisory fees, tax preparation fees, professional licenses, etc.) before December 31, 2017.
  • Prepare for additional estate gifting beginning January 1, 2018.

For Businesses

  • Consider a change of accounting methods for business below $25MM to a cash basis method or completed contract accounting (as opposed to percentage of completion)
  • Consider accelerating equipment purchases for immediate write-offs.
  • Close 1031 exchanges on personal property before 12-31-17
  • Pay for business entertainment in 2017
  • Pay for R&D expenditures in 2017
  • Consider timing of terminated partnerships—technical termination rules go away in 2018
  • Consider choice of business entity.

Items Affecting Individuals:

Tax Rates – The act keeps the seven tax brackets but reduces the rates for five of them. The new bracket rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The maximum rate is for income above $600,000 married filing jointly and $300,000 for singles.

Standard Deduction and Personal Exemptions – The standard deduction is increased to $24,000 for married filing jointly and $12,000 for singles. Personal exemptions are repealed.

Mortgage Interest – The mortgage interest deduction is capped at interest on $750,000 of mortgage debt each for a principal residence and a second home. The deduction for interest on home equity lines of credit is repealed.

Taxes – The act puts a $10,000 cap on deductions in connection with state and local income, property, and sales taxes. It also provides that no deduction will be allowed in 2017 for prepayment of tax for years beginning after December 31, 2017.

Medical Expenses – The threshold for deducting medical expenses is temporarily reduced from 10% to 7.5% (for the 2017 and 2018 tax years only).

Child Tax Credit – The per-child tax credit is doubled, rising from $1,000 to $2,000 per qualifying child. The phase out threshold is increased to $400,000 for married filing jointly and $200,000 for those filing singly.

Credit for Non-Child Dependents – The act temporarily allows parents to take a $500 credit for each non-child dependent whom they support, such as a child 17 or older, an ailing elderly parent, or an adult child with a disability.

Pass-Through Income – The act includes a 20% deduction on Qualified Business Income from sole proprietors, S-Corporations, LLCS, and partnerships (subject to limitations).

Alternative Minimum Tax – The act reduces the number of filers who would be hit by this tax by raising the income exemption levels to $70,300 for singles and $109,400 for married filing jointly.

Affordable Care Act Individual Mandate – The individual mandate is repealed as of 2019.

College Athletic Fund Contributions – These contributions, made in exchange for preferential seating, are no longer deductible.

Alimony Deduction – This is repealed after 2018.

Estate Tax – This tax remains at 40% but the exemption is doubled to $10.98 million per individual.

Miscellaneous Tax Breaks – The act preserves some smaller, but popular, tax breaks, including deductions for student loan interest and classroom supplies bought with a teacher’s own money. It also keeps the tax-free status of tuition waivers for graduate students.

Items Affecting Businesses:

Corporate Tax Rate – The corporate tax rate is reduced from a top graduated rate of 35% to a flat 21%.

Corporate Alternative Minimum Tax – The act repeals this tax.

Full Expensing for Certain Business Assets – The bill provides 100% expensing of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. It also increases (tenfold) the Sec. 179 expensing limitation ceiling and phase out threshold to $5 million and $20 million, respectively, both indexed for inflation.

Interest Expense – For tax years beginning after December 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. Farming businesses can elect out of these rules if they use ADS to depreciate any property used in the farming business with a recovery period of ten years or more.

Net Operating Losses (NOL) – For NOLS arising in tax years ending after December 31, 2017, the two-year carryback and the special carryback provisions are repealed, so losses can only be carried forward. However, a two-year carryback applies in the case of certain losses incurred in the trade or business of farming.

Foreign Provisions – The act includes several international tax changes including a repatriation provision—US shareholders owning at least 10% of a foreign subsidiary will include in income the share of the post-1986 historical earnings and profits (E&P) of the foreign subsidiary, to the extent that E&P have not been previously subject to US tax. The portion of E&P attributable to cash or cash equivalents would be taxes at a 12% rate and the remainder would be taxed at a 5% rate.

Farms Property – For property placed in service after December 31, 2017, in tax years ending after that date, the cost recovery period is shortened from seven years to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which commences with the taxpayer. Additionally, the required use of the 150% declining balance depreciation method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property) is repealed. The 150% declining balance method continues to apply to any 15-year or 20-year property used in the farming business to which the straight-line method does not apply, and to property for which the taxpayer elects the use of the 150% declining balance method.

Cash Method of Accounting – The act increases the cash accounting method applicability threshold for most business up to $25 million in revenue, including businesses with inventory.

Percentage of Completion Requirements – The act increases the percentage-of-completion method applicability threshold to business with average revenue of $25 million or more.

Deduction for Entertainment – This deduction is repealed; previously entertainment was 50% deductible.

Research and Development Expenses – Must be capitalized and amortized over five years.

Technical Termination of Partnership Rules – The act repeals these.

Top Tax Developments of 2014 with Impact on 2015

Michael Blitstein, CJBS

Michael Blitstein, CJBS

by Michael W. Blitstein, CPA

2014 was a notable year for tax developments on a number of fronts. Selecting the top tax developments for 2014 requires judgment calls based upon uniqueness, taxpayers affected, and forward looking impact on 2015 and beyond. With respect to David Letterman, the following list of 2014 tax developments reflects this prioritization in no particular order.

Passage of the Extenders Package
2014 was not a year for major tax legislation in Congress. In fact, Congress even failed to pass its usual two-year extenders package, instead settling on a one-year retroactive extension to January 1, 2014. As one senator put it, “This tax bill doesn’t have the shelf life of a carton of eggs,” referring to the fact that the 50-plus extenders provisions expired again on January 1, 2015. Instead, it has been left to the 114th Congress to debate the extension of these tax breaks in 2015 and beyond, and for taxpayers to guess what expenses in 2015 will again be entitled to a tax break.

Affordable Care Act
In many ways, 2014 was a transition year for the Affordable Care Act. One of the most far reaching requirements, known as the “individual mandate”, took effect on January 1, 2014. Unless exempt, individuals who fail to carry minimum essential health coverage will make a shared responsibility payment in 2015. Another key provision, the “employer mandate”, was further delayed to 2015. Employer reporting for 2014 is voluntary. The IRS also developed new forms for reporting many new requirements.

Repair Regulations
In 2014, the IRS finished issuing the necessary guidance on the treatment of costs for tangible property under the sweeping “repair” regulations. The most important development was the issuance of final regulations on the treatment of dispositions of tangible property, including the identification of assets, the treatment of dispositions, and the computation of gain and loss. The complexity of the repair regulations has not gone unnoticed by many tax professionals, who have asked the IRS to simplify some of the provisions.

IRS Operations
IRS predicted a complex and challenging 2015 filing season due to cuts in the Service’s funding. This dictates the Service having to do more with less because of budget cuts. The IRS is funded $1.5 billion below the amount requested. IRS could face another round of budget cuts under the new Republican controlled Congress for 2016.

Net Investment Income Tax
Many higher income individuals were surprised to learn the full impact of the net investment income tax (“NII”) on their overall tax liability during the 2014 filing season when their 2013 returns were filed. Starting in 2013, taxpayers with qualifying income have been liable for the 3.8 percent net investment income tax. Recent run ups in the financial markets, combined with the fact that the thresholds are not adjusted for inflation, have increased the need to implement strategies that can avoid or minimize the NII tax.

Retirement Planning
A number of changes were made during 2014 affecting IRAs and other qualified plans, which cumulatively rise to the level of a “top tax development” for 2014:

  • Distributions from a qualified retirement plan account are now able to have the taxable and non-taxable portions of the distribution directed to separate accounts.
  • 401(k) plans can now offer deferred annuities through target date funds.
  • A Tax Court ruling held that a taxpayer is limited to one 60-day rollover per year for all IRA accounts rather than one 60-day rollover per year for each IRA account. The IRS stated that the new interpretation of the rollover rules would be applied to rollover distributions received on or after January 1, 2015.
  • A 2014 Supreme Court decision found that inherited IRA accounts were not retirement assets and therefore not subject to creditor protection under the Bankruptcy Code.
  • The IRS announced the 2015 cost-of-living adjustments for qualified plans. Many retirement plan contribution and benefit limits increase slightly in 2015.

Identity Theft
Although clearly not confined to the area of Federal tax, identity theft has been a major issue for both the IRS and taxpayers. In 2014, the IRS put new filters in place and took other measures to curb tax related identity theft. The agency also worked with software developers, financial institutions and the prepaid debit card industry to combat identity theft.

Tax Reform
Although 2014 was clearly not the year for tax reform, the foundations for serious tax reform discussions were laid in 2013 and 2014. Looking ahead to 2015 and beyond, it is possible that Congress will complete some form of tax reform in 2015 or 2016.  The major difference of opinion, however, surrounds whether or not the reform would only address corporate tax provisions or also include individual provisions. Many leaders have called for tackling comprehensive tax reform on both the business and individual side. The Senate Finance Committee expects to hold tax reform hearings in 2015.

Conclusion
So what does this all mean? To continue the theme from the last few years, the tax world is ever evolving with increased complexity. Both current and long term planning is as essential as ever. Other 2014 developments may prove more significant to your particular situation.  Be sure to seek advice from a dental specific tax accountant to discuss your unique circumstances.

Michael W. Blitstein, CPA is a partner with the firm of CJBS, LLC, in Northbrook, Illinois. For more than 30 years, Michael has worked closely with the dental community and is intimately familiar with the unique professional and regulatory challenges of creating, running and maintaining a successful dental practice. Michael advises his clients on tax, business and retirement planning, developing short and long-term strategic plans designed to achieve success for dental practice principals and their businesses.

He can be reached at michael@cjbs.com

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