January 14, 2018
Accounting Today, the leading publication for the accounting industry, published a
last month for business owners on changes to the tax law due to the
Tax Cuts and Jobs Act
. We thought it would be helpful to share this checklist with you. We will, of course discuss these provisions with you and how they may impact you.
Individual Provisions on the Checklist
Some of the changes included on the checklist for individuals are:
- Standard vs. itemized deductions – The standard deduction increased in 2018 for all filers. Due to the increase in the standard deduction and reduced usage of itemized deductions, you may want to consider filing a new Form W-4 so that your withholding is reflective of your actual tax liability under these new rules.
- Medical expense deduction – The threshold for the medical expense deduction is lowered to 7.5% of adjusted gross income (AGI) for regular tax and Alternative Minimum Tax purposes. It reverts back to 10% in 2019.
- The SALT cap – The state and local tax deduction is capped at $10,000. This includes both state income or sales taxes and property taxes. Some states have passed legislation intended to provide a workaround that may be challenges by the IRS.
- Casualty loss deduction – There is no casualty loss deduction unless for a federally declared disaster. The taxpayer is required to include the FEMA number and the location of property when the claiming loss deduction.
- Charitable contributions – The deduction limit is increased to 60% of AGI. There is no deduction if the contribution secures athletic event seating rights. Taxpayers need proof of any contribution of $250 or more, even if the charity has reported contribution to IRS.
- Mortgage interest deduction – Any mortgage modification that included cash out, even if just for closing costs – may result in loss of the grandfathered $1 million debt limit and become a $750,000 debt limit. No home equity interest deduction can be claimed unless the taxpayer can document the expenses to buy, build or improve the home.
- Miscellaneous itemized deductions – The deduction for miscellaneous itemized deductions subject to the 2% of AGI floor was repealed through 2025, including unreimbursed employee business expenses, investment expenses, tax preparation fees, and hobby expenses.
- 20% deduction for owners of pass-through businesses – There is a need to determine qualified business income, and taxpayers may also need to determine if theirs is a specified service trade or business, if there are W-2 wages, and the unadjusted basis of qualified property immediately after acquisition.
- Moving expenses – The deduction and exclusion are eliminated for everyone except members of the Armed Forces.
- The Kiddie Tax – Children are now taxed at the estate and trust tax rates, rather than the parents’ tax rate.
- The Alternative Minimum Tax (AMT) – The increase in the AMT exclusion amounts and lower regular tax rates may mean that fewer middle-income taxpayers will be caught by the AMT, but more higher-income taxpayers will be caught.
- Carried interests – There is a new three-year holding period for carried interests to obtain long-term capital gain treatment.
- The Affordable Care Act – The individual mandate expires for 2019.
Business Provisions on the Checklist
Some of the changes included on the checklist for businesses are:
- Business expensing – There are higher expensing limits for capital purchases under Code Sec. 179 and bonus depreciation (currently 100%). Higher expensing may reduce the 20% deduction for owners of pass-through businesses.
- Business interest – There are new limits on deducting business interest based on a 30% of Adjusted Gross Income (AGI) limit, unless the business is under $25 million in average gross receipts
- Businesses with under $25 million in average gross receipts – Businesses with under $25 million in average gross receipts, can use the cash method of accounting, if they have no requirement for inventories, and are exempt from the uniform capitalization (UNICAP) rules. You may need to file a Form 3115 for a change of accounting method.
- Net Operating Losses (NOL) – There is no carryback of net operating losses to prior years unless for farming and certain insurance companies.
- Entertainment and meal expenses – There is no deduction for entertainment expenses. The 50% deduction for meal expenses can still be taken if the taxpayer can identify the meal expense separately from the entertainment expense.
- Sexual harassment settlements – There is no deduction for sexual harassment or abuse settlements if the settlement includes a non-disclosure agreement.
- Paid family and medical leave – There is a new credit for paid family and medical leave.
- Transportation exclusions – Many transportation fringe benefit exclusions have been eliminated.
- Sale of partnership interests – If there has been a sale of a partnership interest, partners and partnerships should check certification requirements that there is no foreign interest involved in the sale to avoid a 10% withholding requirement.
- Attorney advanced litigation costs – There is no longer a current deduction for litigation costs advanced by an attorney.
- Out-of-state sellers – Many states have implemented the Supreme Court’s Wayfair decision requiring out-of-state sellers to collect sales tax.
Martin C. McCarthy, CPA, CCIFP
McCarthy & Company, PC
This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).