Jim L. Hamilton, CPA, has spent 21 years with Weiss & Company LLP as a tax partner who leads the firm’s Tax Planning & Compliance Department, he has seen his share of tax reform laws over the years and is working with his staff to help his clients interpret the new rules. He sat down recently to talk about how the 2017 tax reform affects individuals and businesses, and what new rules taxpayers should pay close attention to.
We are entering the first tax season after the Tax Cuts and Jobs Act of 2017. Has tax reform made filing simpler?
For many individuals, the process will be simpler. Many taxpayers who were previously itemizing, especially those without mortgages, are now going to be taking the standard deduction. The standard deduction has increased to $24,000 for married filing jointly, $18,000 for head of household, and $12,000 for all other taxpayers. The downside is that charities fear that, with more people opting for the simpler standard deduction, donations may decline over the long term.
While businesses came out ahead financially – many businesses will benefit from reform, through lower taxes and new rules – they will find that the filing process might be more cumbersome. There are many gray areas within the new rules, and many of those rules are extremely complicated.
For those taxpayers who do still itemize, what should they know about changes to deductions?
Many people are unaware of changes to itemized deductions – several previous deductions have been eliminated or changed.
One big change is that SALT, (state and local tax and property tax deductions), will be limited to a maximum of $10,000. This could significantly impact those living in high-tax states, like Illinois, New Jersey and California.
Mortgage interest, moving forward, is now only deductible up to $750,000, down from $1 million. Home purchases made prior to December 15, 2017 will be grandfathered in. Additionally, the deduction for interest on home equity debt has been suspended and will not be grandfathered in.
Taxpayers going through life changes should know that moving expenses can no longer be deducted, except for members of the military. Also, starting this year, alimony is no longer deductible, though existing agreements are grandfathered in.
Another big change is that miscellaneous itemized deductions have been suspended. That means things like investment advisory fees, tax return preparation fees, and employee business expenses are no longer deductible.
The upside is that the deduction for charitable donations has been raised to 60 percent of adjusted gross income, and the floor on the deduction for medical expenses was lowered to 7.5 percent of adjusted gross income. That means the bar is lower for some taxpayers who have had major medical bills to deduct those expenses.
How did businesses become the big winners of tax reform?
The biggest beneficiary of this tax law was large corporations. Their tax rates went down, from 35 percent to 21 percent.
Pass-through entities such as S corporations or LLCs will benefit from a 20 percent deduction. It’s the first benefit I can remember where there is no expenditure required on the business’s behalf. That said, the final regulations that were issued by the IRS last week are 247 pages long, so there are many rules and gray areas to consider. The biggest question is what qualifies as a service business – services businesses can take the deduction, but their income must be below $315,000 for married joint filers or $157,500 for single filers.
Tax reform also really helped manufacturers and distributors. If a business invests in new equipment, as an incentive they can depreciate it all in the first year through bonus depreciation. We also expect this to spur an increase in merger and acquisition activity. Real estate also benefitted quite a bit.
Companies that spend money on qualified research will also benefit through an R&D credit. You don’t have to invent something new, you just have to spend money on something that improves your business, whether it’s a product, like software, or a new process. With the new tax rates, you get a larger percentage. We are doing many more R&D studies and calculations for our clients.
But what new rules should businesses be aware of?
One change is that business entertainment is no longer deductible. Meals are still deductible at 50 percent, but where businesses used to take a deduction for when they took their clients out to golf or to a football game in a suite – they can no longer do that. How much impact that will have, I don’t know, since we believe companies will still look to entertain clients.
Tax reform now also limits business losses to $250,000 for individual taxpayers and $500,000 for joint returns. The excess non-deductible business loss will be added to the taxpayer’s net operating loss to be carried forward to future years.
Additionally, net operating losses will no longer be carried back but will be carried forward, subject to a deductibility limit of 80 percent of taxable income.
What are you and your team doing to prepare for this tax season?
Our tax team trains extensively year-round, but during tax season, we’re especially diligent. We have tax department meetings twice a month, where we share ideas, offer guidance, and talk about what’s new. We also work to train and educate the rest of the firm, making sure everyone is up to speed on the latest IRS rules and firm positions.
We are also continually conducting research to establish answers to the gray areas in the code. For as many years as I have been in tax accounting, I still get a question nearly every day that I don’t know the answer to, but I know how to find the answer. That challenge is what I love most about this business.
We know that 2019 will be a very challenging year. There are still a lot of gray areas in the new rules. But I’ve been through this before, with tax law changes during the Bush, Clinton, and Reagan administrations, and I look forward to helping guide our clients through this next one.