Tes’ Take: Tax Cuts And Jobs Act – Areas To Watch

Tes Macaraya is a partner and head of tax at Martini Iosue & Akpovi

The House and Senate are rushing to reach a compromise on the proposed Tax Reform legislation. While the details remain in flux, the following is a list of some significant areas for which changes appear to be likely. Please contact us by phone at (818) 789 1179 or email me (tmacaraya@miacpas.com) or Mary Akpovi (makpovi@miacpas.com) to discuss how these changes may impact your tax planning.

Individuals – Income And Gain on Sale

  • Possible elimination of capital gain treatment for dispositions of self created property, such as inventions, designs, secret formulas, processes, except for music compositions and copyrights of musical works.
  • Home sale exclusion $500,000 (joint) and $250,000 (others). Own and use as residence would be required in 5 out of previous 8 years, instead of 2 out of 5 years. Exclusion may be available only once every 5 years.
  • Like-kind exchange treatment may no longer be allowed for tangible personal property, but would continue to be allowed for qualifying real property.
  • Tax basis of securities sold would be determined using the first-in, first-out method as a default, unless average cost is elected.

Individuals – Tax Rates And Special Tax Treatments

  • The top tax rate applicable to individuals may be reduced from the current 39.6% rate.
  • Alternative Minimum Tax on individuals may be repealed, or exemption amounts may be increased gradually.
  • Net operating loss changes. NOL carrybacks may be eliminated. The amount of taxable income that can reduce by NOL carryover may be limited to less than 100%.
  • Pass-through entities (partnership, S corporation, or sole proprietorship) – may be allowed a new deduction of 23 percent or some other percent of “qualified business income”. The deduction would not apply to most professional service businesses such as accounting, legal, medical, etc. Complex limitations, including threshold limitations may apply (Senate bill). The House bill, instead of a deduction, applies a special tax rate to a portion of pass-through income, subject to complex limitations.
  • Estate and gift tax (as well as GST) lifetime exclusion may be increased to $10 million and indexed. House bill repeals these taxes effective 2024; Senate changes sunset in 2026 with no repeal.

Individuals – Deductions

  • Miscellaneous itemized deductions may be severely limited or eliminated. Examples include unreimbursed employee business expenses, investment management fees, tax preparation fees and other professional fees.
  • Alimony may no longer be deductible or taxable (House bill).
  • Moving expense deduction may be eliminated except for members of the armed forces.
  • Personal (non-business) casualty losses, except for 2017 disaster relief legislation, may no longer be deductible.
  • Medical expense deduction eliminated (House) or modified (Senate).
  • Mortgage interest – allowed only on principal residence; on new mortgage loans up to a proposed loan amount of $500,000 to $750,000. Old limits may apply to refinancing of existing loans.
  • Student loan interest deduction may be repealed.
  • State and local income or sales tax deduction for individuals may be disallowed completely or limited after 2017.
  • Deduction of real property tax on personal residence may be limited to $10,000.
  • Charitable contribution limitation percentage may be increased from 50% of AGI to 60% of AGI.
  • Standard deduction may be increased to $24,000 (married joint return); $18,000 head-of-household; and $12,000 for all others).
  • Personal exemptions may be repealed.

Business – Income

  • The top corporate tax rate may be reduced to a rate yet to be determined, possibly 20% or 21%.
  • Corporate Alternative Minimum Tax – potential repeal or modification.
  • Accounting method reform. Availability of cash method may be expanded to included taxpayers with average annual gross receipts of $15 million (up from $5 million) for corporations or for a partnership with a corporate partner.
  • Inventory accounting. Exemption from requirement to keep inventories may be allowed for taxpayers with average annual gross receipt of $15 million, who agree to treat inventories as non-incidental materials and supplies or conform to financial accounting treatment of inventories.
  • Accounting for long-term contracts. The $10 million average annual gross receipts exception to the requirement to use the percentage-of-completion method for long-term contracts would be increased to $15 million for contracts entered into after 2017, and qualifying businesses would be permitted to use the completed contract method, or any other permissible exempt contract method.
  • Uniform Capitalization Rules – capitalization and inclusion of certain expenses in inventory costs. A comprehensive exemption is proposed for businesses meeting a $15 million average of 3-prior year annual gross receipts, and also applies the exemption to real or personal property acquired for resale or manufactured by the business, provided it meets the $15 million threshold.
    Contributions to capital of a corporation would be included in the corporation’s gross income unless exchanged for stock. (House bill only).

Business – Deductions

  • Entertainment expense deduction may be eliminated completely.
  • On-premises business meals deduction may be further limited or eliminated.
  • Employee transportation fringe benefit deduction (parking and mass transit) may be eliminated.
  • Loss limitations for non-corporate taxpayers. Newly defined “excess business losses” of a taxpayer other than a C corporation (for example, losses from sole proprietorship or pass-through entities) in excess of a threshold amount ($500,000 married joint; $250,000 others) may be disallowed currently and carried forward.
  • Increased Section 179 expensing. The limitation on the amount that could be expensed would be increased to $1 million (from the current $500,000) and the phase-out amount would be increased to $2.5 million (from the current $2 million). The House bill cap is $5 million, and the phase-out amount is $20 million.
  • Temporary 100% cost recovery of qualifying business assets placed in service in 2018 through 2022, and decreasing percentages in 2023 through 2026 (Senate bill).
  • Deprecation rules for luxury automobiles may be liberalized.
  • Nonresidential real property and residential rental property would both have 25 year depreciable life (down from 39 year and 27.5 years).
  • Qualified leasehold improvements, qualified restaurant and retail improvements would all have 10 year cost recovery period (down from 15 years).
  • Limitation on deduction of business interest. Every business, regardless of form, would generally be subject to disallowance of a deduction for net interest expense in excess of 30% of the business’s “adjusted taxable income.” However, there would be an exemption for taxpayers with average annual gross receipts during the three preceding years under $15 million.

Retirement Plans

  • Repeal of the rule allowing rollover of traditional IRA into a ROTH IRA.

 

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