The revised tax reform bill was revealed late Friday afternoon. The House plans to vote on the bill Tuesday, December 19, and then the Senate will vote. Below are some highlights of the final tax reform bill:
- Lowering of Tax Rates. New brackets are 10%, 12%, 22%, 24%, 32%, 35%, and a top bracket of 37% starting at $600,000 of Taxable Income
- Pass-through entities will receive a deduction of up to 20% of the income from the pass-through
- Standard deduction will be raised to $24,000 for Married taxpayers, $12,000 for Single and $18,000 for Head of Household
- The deduction for Personal Exemptions is repealed
- The Child Tax Credit rises to $2,000
- Cash Charitable contributions limit raised to 60% of Adjusted Gross Income (AGI)
- For 2017 and 2018 medical expense threshold is reduced to 7.5%
- 529 Plans can be used to pay for elementary or secondary school expenses including tuition
- State income taxes and property taxes are limited to a combined amount of $10,000. Additionally the bill prevents the deduction of taxes prepaid for a later year effective for the 2017 tax year.
- Mortgage interest limited to loans below $750,000. Loans in place are exempted. Home equity interest will no longer be deductible.
- The Alternative Minimum Tax (AMT) exemption is raised but AMT will continue
- 2% Miscellaneous Itemized Deductions have been repealed
- The phase out of itemized deductions has been repealed
- Moving expenses will no longer be deductible
- Alimony is no longer deductible or picked up as income for agreements starting in 2019. Any old divorce settlements will continue to use the currently existing rules.
Note: Almost all of the items listed above will expire and return to the 2017 law after tax year 2025.
- Corporate tax rate will be a flat 21%
- Corporate AMT has been repealed
- Section 179 expensing is increased to $1,000,000. Some qualified real property is now eligible such as roofs, HVAC, fire alarm systems and security systems.
- Bonus depreciation percentage raised to 100% for assets added between September 27, 2017 and December 31, 2022. After that it decreases 20% each year till it is 0. Used property now qualifies for bonus depreciation. Taxpayers can elect out or elect to use a 50% rate.
- The definitions of Qualified Leasehold Improvement, Qualified Restaurant and Qualified Retail Improvement Property are repealed. Replacing these with a more general Qualified Improvement Property definition subject to 15 year depreciation life. The recovery life for buildings will not change.
- Research and Experimentation costs will no longer be deductible in the year incurred but will be capitalized and amortized over five years. This includes self-developed software. No acceleration if the project is abandoned, amortization must continue.
- Revenue recognition must match financial statements. Advanced Payments may qualify for a one year deferral.
- Interest expense will be limited to 30% of adjusted income plus interest income. Disallowed amount will be carried over. There is a small taxpayer exception.
- Net Operating Loss deductions will be limited to 80% of income. No carryback but no expiration of carryforward.
- Like kind exchanges limited to real estate. Exception for exchanges started in 2017 and completed in 2018.
- Entertainment expenses are no longer deductible and all meals subject to the 50% limitation. Meals provided for the convenience of the employer will not be deductible after 2025.
- The Domestics Production Activities Deduction (DPAD) is repealed
- No deduction for payments related to sexual harassment if a non-disclosure provision is included
- Capital gain related to a Profits Interests will need to have been held for three years to avoid being characterized as short term gain
Note: Unless noted all business provisions do not expire.
- Lifetime exemption for Estate and Gift tax provisions has doubled to about $11,000,000 and will continue to be adjusted for inflation
- The mandate for Health Care Coverage is repealed beginning 2019
If you have any questions or would like additional information please contact your trusted advisor.