Tax Reform | What You Should Know

2017 and 2018 have brought a number of tax changes to individuals and businesses, from the Tax Cuts and Jobs Act overhauling the tax code to South Dakota v. Wayfair changing what equates economic nexus from a sales tax perspective. The magnitude of these changes will certainly have an impact on 2018 filings.
 
Due to the number of changes and in the short timeframe they were passed, numerous questions still remain. Our Tax Reform Resource Center is here to help you navigate through these changes. To review and discuss these changes as it relates to your specific situation, please contact your Lurie advisor.

Business

Tax Rates

Corporate Tax Rate

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15% for $0-$50,000

25% for $50,001-$75,000

34% for $75,001-$10,000,000

35% for excess of $10,000,000

Personal service corporations are not entitled to use the graduated corporate rates below the 35% rate.

Reduces the corporate tax rate to a flat 21%. After Dec. 31, 2017 N/A

AMT

Corporate Alternative Minimum Tax

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Corporations with average gross receipts equal to or in excess of $7.5 million over the preceding three tax years are subject to the AMT. A taxpayer’s tax liability is the greater of their regular tax liability or their AMT liability.

Corporations receive a credit for AMT paid (the prior-year minimum tax credit), which they can carry forward and claim against regular tax liability in future tax years, to the extent such liability exceeds AMT in a particular year.

Corporate AMT is repealed.

An allowance is still available for a prior year minimum tax credit to offset the taxpayer’s regular tax liability for any tax year.

After Dec. 31, 2017 N/A

Methods of Accounting

Cash Method of Accounting

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Accrual method of accounting required on average if average gross receipts exceed $5 million. Some variation depending on industry. Taxpayers with average annual gross receipts of $25 million – permitted to use the cash method of accounting, regardless of entity structure or industry. Tax years beginning after Dec. 31, 2017 N/A

Accounting for Inventories

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Cash method taxpayers with average annual gross receipts of $10 million or less are not required to account for inventories. Some variation depending on industry. Taxpayers with average annual gross receipts of $25 million or less may now treat their inventories as either non-incidental materials or supplies or in accordance with their Applicable Financial Statements or books or records. Tax years beginning after Dec. 31, 2017 N/A

UNICAP

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Businesses with $10 million or more in average annual gross receipts must either include in inventory or capitalize certain direct and indirect costs related to real or tangible property produced by a taxpayer or real or personal property acquired by a taxpayer for resale. Taxpayers with average annual gross receipts of $25 million or less are exempt, regardless of entity structure or industry. Tax years beginning after Dec. 31, 2017 N/A

Cost Recovery

Bonus Depreciation | Temporary 100% Expensing for Certain Business Assets

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Additional depreciation (bonus depreciation) deduction in the year in which they placed certain “qualified property” in service, effective for property placed in service through 2019.

Amount of bonus depreciation generally was 50% of the adjusted basis of such property placed in service before 2018 and phased down to 40% in 2018 and 30% in 2019.

Qualified property that was eligible for bonus depreciation included original use, tangible personal property with a recovery period of 20 years or less, certain off-the-shelf computer software, water utility property, and qualified improvement property.

Bonus depreciation deduction of 100% of the adjusted basis for property both acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023.

Original use requirement removed.

Note: 100% deduction phases out by 20% each year from 2023 through 2026.

On or after Sept. 27, 2017 Dec. 31, 2026

Depreciation Deductions for Nonresidential Real Property and Residential Rental Property

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The MACRS recovery periods applicable to most tangible personal property range from three to 20 years and generally use the 200% and 150% declining balance methods in calculating depreciation – switching to the straight line method where it yields a larger depreciation balance in the first year.

Specialty designations resulting in a 15-year recovery period with eligibility for bonus depreciation included qualified leasehold improvement property and qualified retail property. Qualified restaurant property was allowed a 15-year recovery period but no bonus depreciation and qualified improvement property was allowed a 39-year recovery period but also eligible for bonus depreciation.

Eliminates the separate terms “qualified leasehold improvement property”, “qualified restaurant property”, and “qualified retail improvement property”.

Intends to, but due to a drafting omission fails to, provide a 15-year recovery period for all qualified improvement property. Due to the drafting omission, qualified improvement property defaults to a 39-year recovery period, ineligible for bonus depreciation.

Property placed in service after Dec. 31, 2017 N/A

Section 179 Expensing

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Allows businesses an immediate expense up to

$500,000 (adjusted for inflation – $510,000 for 2017) of the cost of any §179 property placed in service each tax year, subject to a $2M threshold.

Increases thresholds to $1M and increases the phaseout threshold to $2.5M, indexed for inflation beginning after 2018.

Assets eligible for §179 expensing to include roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems of nonresidential real property.

Placed in service after Dec. 31, 2017 N/A

Like-Kind Exchanges of Real Property

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No gain or loss is recognized to the extent that property held for productive use in the taxpayer’s trade or business, or property held for investment purposes, is exchanged for property of a like-kind that also is held for productive use in a trade or business or for investment.

Like-kind property limited to real property,

Exchanges completed after Dec. 31, 2017 N/A

Amortization of Research and Experimental Expenditures

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Taxpayers may elect either to deduct current research or experimental expenditures paid or incurred in connection with a present or future trade or business or to treat such expenditures as deferred expenses and amortize these costs over a period of not less than 60 months.

Specified research or experimental expenditures, including software development expenditures, are capitalized and amortized ratably over a five-year period (15 years if attributable to research conducted outside of the United States).

Expenditures paid or incurred in tax years beginning after Dec. 31, 2021 N/A

Pass-through Deduction (199A)

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Businesses organized as sole proprietorships, partnerships, limited liability companies and S corporations are generally treated as pass-through entities subject to tax at the individual owner or shareholder level rather than the entity level. Net income earned by owners of these entities is reported on their individual income tax returns and is subject to ordinary income tax rates, up to the top individual marginal rate of 39.6%.

Taxpayers who have domestic “qualified business income” (QBI) from a partnership, S corporation, or sole proprietorship are potentially entitled to a deduction equal to: (1) the lesser of the combined qualified business income amount of the taxpayer or 20% of taxable income (reduced by net capital gain), plus (2) the lesser of 20% of qualified cooperative dividends or taxable income (reduced by net capital gain). Tax years beginning after Dec. 31, 2017 Tax years before Jan. 1, 2026

Expenses

Limitation on Business Interest Expense Deduction

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Business interest is generally allowed as a deduction in the tax year in which the interest is paid or accrued, subject to a number of limitations.

Businesses with average annual gross receipts of greater than $25 million are limited in their net interest expense deductions to the sum of business interest income, 30% of adjusted taxable income, and floor plan financing interest.

Disallowed interest may be carried forward indefinitely.

Real property trades or businesses that use the ADS and farming businesses may elect to not be subject to the business interest deduction limit.

The interest deduction limit does not apply to certain regulated public utilities.

See article >

Tax years beginning after Dec. 31, 2017 N/A

Domestic Production Activities Deduction (DPAD)

Deductions for Income Attributable to Domestic Production Activities

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Taxpayers may claim a deduction equal to 9% of the lesser of the taxpayer’s qualified production activities income, which is derived from property that was manufactured, produced, grown, or extracted within the United States, or the taxpayer’s taxable income for the tax year.

DPAD repealed.

Tax years beginning after Dec. 31, 2017 N/A

Net Operating Loss

Net Operating Loss Deduction

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NOL is the amount by which a taxpayer’s current-year business deductions exceed its current-year gross income. NOLs may not be deducted in the year generated, but may be carried back two years and carried forward 20 years.

Limits the NOL deduction for NOLs arising in tax years beginning after Dec. 31, 2017, to 80% of taxable income (computed without regard to the NOL deduction), and provides that amounts carried over to later tax years are adjusted to take into account this limitation.

Eliminates NOL carrybacks and allows unused NOLs to be carried forward indefinitely with the exception of farming and property and casualty insurance companies.

Tax years beginning after Dec. 31, 2017 N/A

Miscellaneous

Qualified Opportunity Zones

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N/A

Temporary deferral of payment on capital gains allowed if gains are reinvested in a qualified opportunity fund that operates within a qualified opportunity zone. Additional tax benefits available depending on how long the investment is held.

See article >

Dec. 22, 2017 Dec. 31, 2026

Technical Termination of Partnership

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A sale or exchange of 50% or more of the total interest in a partnership’s capital and profits within a 12-month period causes the technical termination of the partnership. Generally, the partnership’s tax year closes, partnership-level elections cease to apply, and partnership depreciation recovery periods restart.

Repealed.

Tax years beginning after Dec. 31, 2017 N/A

Individual

Individual Income Tax Rates

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For tax year 2017, there are seven regular individual income tax brackets of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%, and five categories of filing status. The income levels for each bracket threshold are indexed annually based on increases in the Consumer Price Index (CPI). The Act has seven tax brackets: 10%, 12%, 22%,

24%, 32%, 35%, and 37%. These brackets apply to tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026

Tax years beginning after Dec. 31, 2017 Jan. 1, 2026

For example, below are rates for married filing jointly:

Standard Deduction

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Standard deduction varies depending upon a taxpayer’s filing status. For 2017, the standard deduction is $6,350 for single individuals and married individuals filing separate returns, $9,350 for heads of households, and $12,700 for married individuals filing a joint return. The amounts of the basic and additional standard deductions are indexed annually for inflation (CPI). Taxpayers may elect to claim itemized deductions in lieu of taking the applicable standard deductions. Taxpayers blind or 65 or older are eligible for an increased standard deduction. Increases the standard deduction to the following amounts:

$24,000 (joint return or a surviving spouse)

$18,000 (unmarried individual with at least one qualifying child)

$12,000 (for single filers)

The Act retains the enhanced standard deduction for the blind and elderly that is available under current law.

Tax years beginning after Dec. 31, 2017 Jan. 1, 2026

AMT

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Taxpayers must compute their income for purposes of the regular income tax, then recompute their income for purposes of the alternative minimum tax (AMT). A taxpayer’s tax liability is the greater of their regular tax liability or their AMT liability.

For individuals, estates and trusts, the AMT has a 26% bracket and a 28% bracket. In computing the AMT, only alternative minimum taxable income (AMTI) above an AMT exemption amount is taken into account, but AMTI represents a broader base of income than regular taxable income because many deductions and tax preferences are disallowed for AMT purposes.

Increase in AMT exemption amounts to:

$109,400 for married taxpayers filing jointly or for surviving spouses;

$70,300 for single taxpayers; and

$54,700 for married taxpayers filing separately.

Also, for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, the Act increases the phase-out of exemption amounts in §55(d)(3) as follows:

$1,000,000 for married taxpayers filing jointly or for surviving spouses;

$500,000 for single taxpayers and married taxpayers filing separately.

Tax years beginning after Dec. 31, 2017 Jan. 1, 2026

Personal Exemptions

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Personal exemptions are for the taxpayer, the taxpayer’s spouse, and any dependents. For 2017, taxpayers may deduct $4,050 for each personal exemption. The exemption amount is indexed annually for inflation (CPI). Additionally, a personal exemption phase-out (PEP) reduces a taxpayer’s personal exemptions for 2% for each $2,500 ($1,250 for married filing separately) by which the taxpayer’s AGI exceeds $261,500 (single), $287,650 (head-of-household), $313,800 (married filing jointly), and $150,000 (married filing separately). These thresholds apply to tax year 2017 (and also are indexed for inflation). Suspended. Tax years beginning after Dec. 31, 2017 Jan. 1, 2026

State and Local Tax Deductions

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Itemized deductions for state and local government income and property taxes paid. In lieu of the itemized deduction for state and local income taxes, individuals may claim an itemized deduction for state and local government sales taxes. Individual taxpayers may elect to deduct state and local sales, income, or property taxes up to $10,000 ($5,000 for a married taxpayer filing a separate return) Tax years beginning after Dec. 31, 2017 Jan. 1, 2026

Charitable Contributions

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For tax years beginning before 2018 and after 2025, the limitation on the deduction for cash contributions made to public charities, private operating foundations, and private distributing foundations is 50% of AGI. The deduction for cash contributions to private nonoperating foundations is limited generally to 30% of AGI.

For contributions made in tax years beginning before 2018, a taxpayer who receives the right to purchase tickets to an educational institution’s athletic events in exchange for a contribution to the educational institution is permitted to deduct 80% of the amount contributed.

For contributions made in tax years beginning before Jan. 1, 2017, a taxpayer is not required to substantiate a charitable contribution with a contemporaneous written acknowledgement from the charity if the donee organization files a return reporting required information on the donation.

Increases the AGI limitation on cash contributions from 50% to 60% and repeals the current 80% deduction for contributions made for university athletic seating rights.

Also repeals the exception to the contemporaneous written acknowledgement requirement for contributions of $250 or more when the donee organization files the required return, effective for contributions made in tax years beginning after Dec. 31, 2016.

Tax years beginning after Dec. 31, 2017 Jan. 1, 2026

Alimony Payments Deduction

Old Law New Law Effective Date Expiration Date
Alimony payments generally are allowed as above-the line deductions for the payor, and are included in the income of the payee. Above-the-line deduction for alimony payments eliminated. Divorce decrees, separation agreements, and certain modifications entered after 2018. N/A

Credits

Child Tax Credits

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An individual may claim a $1,000 tax credit for each qualifying child under the age of 17. The aggregate amount of child tax credits that may be claimed is phased out by $50 for each $1,000 of AGI over $75,000 for single filers and $110,000 for joint filers. Neither the $1,000 credit amount nor the AGI thresholds are indexed for inflation.

The taxpayer must submit a valid taxpayer identification number (TIN) for each child for whom the credit is claimed.

To the extent the child tax credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit (ACTC)) equal to 15% of earned income in excess of $3,000.

The taxpayer is not required to have a Social Security number (SSN) to claim the refundable portion of the credit.

Increased to $2,000 and provides a $500 nonrefundable credit for dependents other than qualifying children (generally retaining the current law definition of dependent).

Increases the threshold modified adjusted gross income amount where the credit begins to phase out to $400,000 for married taxpayers filing jointly, and to $200,000 for other taxpayers. This amount is not indexed for inflation.

Reduces the earned income threshold for the refundable portion of the credit to $2,500.

Maximum amount of refundable credit per eligible child is $1,400, and also indexes the maximum amount refundable for inflation.

Requires that a taxpayer provide the social security number of each qualifying child that is claimed on a tax return in order to receive the child tax credit.

Tax years beginning after Dec. 31, 2017 Jan. 1, 2026

Moving Expenses

Moving Expenses Reimbursements

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Qualified moving expense reimbursements provided by an employer to an employee are excluded from the employee’s income. Exemption is suspended except for active duty members of the Armed Forces who move pursuant to a military order and incident to a permanent change of station. Tax years beginning after Dec. 31, 2017 Jan. 1, 2026

Moving Expenses Deduction

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Deductions for moving expenses incurred in connection with starting a new job, regardless of whether or not the taxpayer itemizes their deductions. To qualify, the new workplace generally must be at least 50 miles farther from the former residence than the former place of work or, if the taxpayer had no former workplace, at least 50 miles from the former residence. Deduction is suspended except for active duty members of the Armed Forces who move pursuant to a military order and incident to a permanent change of station. Tax years beginning after Dec. 31, 2017 Jan. 1, 2026

Mortgage Interest Deduction

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Itemized deductions for mortgage interest paid with respect to a principal residence and one other residence of the taxpayer. Taxpayers who itemize their deductions may deduct interest payments on up to $1 million in acquisition indebtedness (for acquiring, constructing, or substantially improving a residence), and up to $100,000 in home equity indebtedness.

Reduces the mortgage interest deduction to interest on $750,000 of acquisition indebtedness interest. The $1 million limitation remains for older debt. The deduction is not limited to interest on a taxpayer’s principal residence.

Suspends the mortgage interest deduction for interest on home equity indebtedness

Debt incurred after Dec. 15, 2017 Tax years beginning after Dec. 31, 2025

Miscellaneous

Qualified Education Expenses

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Qualified education expenses paid under qualified tuition programs include qualified higher education but not elementary and secondary school expenses. Elementary and secondary school expenses of up to $10,000 per year are qualified expenses for qualified tuition programs. Distributions made after Dec. 31, 2017 N/A

Miscellaneous Itemized Deductions – 2 Percent Floor

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Deduction claimed is the portion of the sum of the expenses that exceeds 2% of the taxpayer’s adjusted gross income (AGI).

Qualified expenses fall into the categories of unreimbursed employee expense; tax preparation fees; and other expenses paid to produce or collect income that is included in the taxpayer’s gross income or expenses to manage, conserve, or maintain property held for producing income, or expenses to determine, contest, pay, or claim a refund of any tax.

Eligible educators (kindergarten through grade 12) can deduct up to $250 of qualified expenses, independently of the 2% miscellaneous itemized deductions.

Suspends all miscellaneous itemized deductions that are subject to the 2% floor under present law. Tax years beginning after Dec. 31, 2017 Jan. 1, 2026

Personal Casualty Losses Deduction

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Itemized deductions for personal casualty losses (i.e., losses not connected with a trade or business or entered into for profit), including property losses arising from fire, storm, shipwreck, or other casualty, or from theft.

Certain tax legislation provided for a special above-the-line deduction for personal casualty losses arising from specified natural disasters.

Limits the personal casualty loss itemized deduction for property losses (not used in connection with a trade or business or transaction entered into for profit) to apply only to losses incurred as a result of federally-declared disasters. Tax years beginning after Dec. 31, 2017 Jan. 1, 2026

Medical Expense Deduction

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Itemized deductions for out-of-pocket medical, dental and related expenses of the taxpayer, a spouse, or a dependent not compensated for by insurance. Deduction is allowed only to the extent the expenses exceed 10% of the taxpayer’s adjusted gross income. Medical expense deduction floor reduced to 7.5% of adjusted gross income and the minimum tax preference eliminated. Tax years beginning after Dec. 31, 2017 Jan. 1, 2019

Foreign

Deemed Repatriation of Foreign Corporate E&P

Global Intangible Low-Taxed Income

Foreign-Derived Intangible Income

Anti-deferral rule changes – Passive and Mobile Income

See article >

Estate & Gift

Estate & Gift Taxes

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For decedents dying and gifts made before 2018 and after 2025, the federal estate and gift tax unified credit basic exclusion amount is $5 million, adjusted for inflation from a base year of 2010 ($5.49 million for decedents dying and gifts made in 2017.) Increases the federal estate and gift tax unified credit basic exclusion to $10 million (adjusted for inflation from the same 2010 base year). Gifts made after Dec. 31, 2017 Jan. 1, 2026

Generation-Skipping Transfer Tax

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Transfers made before 2018 and after 2025, exemption amount is equal to $5 million, adjusted for inflation from a base year of 2010 ($5.49 million for transfers made in 2017). Increases exemption to $10 million (adjusted for inflation from the same 2010 base year). Transfers made after 2017 Transfers made before 2026

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