2017 Tax Reform – What Does it Mean for You and Your Business
November 7, 2017 - By: SC&H Group
The House released its version of Tax Reform, which has already been amended since its release just a few days ago. The Senate is expected to release its version, which will then get us to the reconciliation process before proposed legislation is sent to the President. In other words, while we have the House’s blueprint, we expect that it will change.
The Senate’s version will have differences and the final product, should one be achieved, could look very different from what the House produced last week. Timing is subject to change, but the stated goal is a reconciled bill will be given to the President to be signed by the end of 2017.
That said, given what is now known and what was in the original 9-page blueprint for Tax Reform, here are some key changes and ideas around what to do, or not do, while we wait for final legislation.
What Does The Tax Reform Blueprint Mean for Your Business?
- C corporations would see their graduated rates disappear and be replaced with a flat rate of 20%. Personal service corporations would see their rate drop to a flat 25%
- Many business tax credits would be eliminated
- Interest deductions could be limited for many businesses
- The taxes owed on pass through entity income could be reduced to 25%, or perhaps something a little more than that depending on the business, whether or not the owner is active or passive in the business, etc.
- Depreciation – enhanced deductions would be created in 2018 – 100% bonus, in essence, including the ability to use immediate expensing on used property. Section 179 would be enhanced for small businesses as well
- Repeal of corporate AMT
- Entertainment deductions would be eliminated as would certain other employee fringe benefits, though the 50% deduction for business meals would be retained
- More businesses could utilize the cash method of accounting, avoid UNICAP and long term contract accounting method regulations
- Like-kind exchanges for non-real estate assets would be curtailed
- The domestic production activity deduction (Section 199) would be repealed – this affects manufacturers and construction companies, along with software developers primarily
- Nonqualified deferred compensation would be dramatically curtailed and eliminate tax deferral for most NQDC plans starting in 2018
- Substantial changes would occur as it relates to international taxation matters, especially for businesses with foreign subsidiaries and affiliates
- Reconsider your timeline on converting to an S corporation for 2018 at this time. You have until March 15, 2018 to make that decision for 2017 and new C corporation rates may impact your thought process here
- Defer income into 2018 and accelerate deductions in to 2017 – applies to all businesses as all would see their maximum rates reduced in 2018
- Interest deductions could be limited for some businesses in 2018 and forward. Look at your capital structure to determine if you have options available going forward to avoid having business interest deductions limited
- There are a number of credits that would expire or be terminated. The R&D credit and the low income housing credit would survive, while most others would disappear. Look for options to maximize those credits in 2017 and utilize carryovers
- Maximize the use of Sections 199 and 1031 in 2017. Complete any planned like-kind exchanges on property other than real estate prior to year end if feasible
- Avoid AMT if at all possible, as in 2018 it would be repealed under the House version of Tax Reform
- Be cautious about deferring compensation for 2018 under a NQDC plan. You would not want to be taxed on compensation you don’t receive, in most cases.
What Does The Tax Reform Blueprint Mean for You?
- Most individuals would see their marginal or effective tax rates fall in 2018
- Many itemized deductions would disappear or be substantially limited after 2017. Mortgage interest deduction would be substantially reduced as would the deduction for real estate taxes. The following itemized deductions would be eliminated: State and local income taxes, gambling losses, employee business expenses, medical expenses, casualty losses, and alimony deductions for divorce agreements entered into after 2017
- Personal exemptions would be repealed
- The standard deduction would be almost doubled in size for most taxpayers
- Education tax incentives would be consolidated and some would be repealed
- AMT would be repealed
- The estate tax would be phased out, then repealed
- The child credit would be enhanced, a new family credit would be created for non-child dependents
- Various credits would be repealed including the adoption credit
- Various education provisions would also be repealed including the $5,250 exclusion for education assistance, student loan interest deduction and the tuition deduction
- Capital gain and dividend taxation would stay the same
- Defer income into 2018 and accelerate deductions into 2017 wherever possible – even if Reform doesn’t happen or is delayed, you still benefit from customary tax deferral
- Avoid AMT in 2017 if at all possible, as it could be repealed in 2018. If you can avoid AMT, prepay real estate and state income tax deductions in 2017, as these deductions would be limited/eliminated in 2018 for most taxpayers
- Maximize the benefit of student loan interest and tuition deductions in 2017
- Hold off on substantial gifting plans until we know where the estate tax is headed. Annual exclusion gifts and other more customary gifting still make sense regardless
- Mortgage interest would be limited to your principal residence only, with a cap of $500,000 of qualifying mortgage debt. If you have two personal residences, see if you can shift debt to maximize deductions going forward. Home equity loan interest would no longer be deductible, unless you can utilize the interest tracing rules and obtain a business or investment interest deduction
- Prepay items that might not be deductible in 2018 such as medical expenses, moving expenses and other miscellaneous itemized deductions
As these reforms and repeals are rolling out SC&H Group’s Tax Team is keeping a close eye on these updates to provide recommendations and guidance throughout the process. If you have any questions about the Tax Reform blueprint and potential implications to follow please Contact Us.