How the sweeping tax reform will affect you or your business.

On December 22nd, 2017, the most sweeping tax reform in more than 30 years was signed by President Trump.  There are many updates to both individual and business tax law. Below are summaries of the Act’s major tax provisions and changes that will impact individuals, businesses and foreign operations. If you have any questions or concerns as to your household or business, please give us a call at 216.524.8900.

INDIVIDUAL PROVISIONS

PROVISION SUMMARY EXPLANATION
Individual Tax Rates Seven tax rates of 10%, 12%, 22%%, 24%, 32%, 35%, and a new top rate of 37%. The 37% top rate is slightly lower than the current top tax rate.

Rate          Joint Return                       Single

10%          $0 – $19,050                   $0 – $9,525

12%          $19,050 – $77,400         $9,525 – $38,700

22%          $77,400 – $165,000       $38,700 – $82,500

24%          $165,000 – $315,000     $82,500 – $157,500

32%          $315,000 – $400,000     $157,500 – $200,000

35%          $400,000 – $600,000    $200,000 – $500,000

37%          Over $600,000                Over $500,000

Standard Deduction $24,000 for married couples filing joint, $12,000 for single taxpayers and $18,000 for head of household.
Pass-Through Tax Rates Adds a new business deduction of 20% of qualified pass-through business income subject to a number of limitations and qualifications.
Child/Non-Child Dependent $2,000 per child credit with up to $1,400 being refundable. Credit begins to be phased-out for families making over $400,000.  Additionally, a $500 nonrefundable credit is available for certain non-child dependents.
Itemized Deduction for State Income Taxes and Property Taxes The bill sets an overall cap on these deductions at $10,000 annually and allows taxpayers to decide between property taxes, income taxes, or sales tax for this $10,000 limit.  Additionally, a provision was added so there could be no prepayment of future year’s income taxes in 2017.
Mortgage Interest Limits the mortgage interest deduction for mortgages exceeding $750,000 on new mortgages of principal residences or second homes.  The effective date is for loans on or after 12/15/2017.Deduction for “home equity interest” is repealed for tax years after 2017.
Charitable Contributions Increases the AGI threshold for charitable contributions to 60% from 50%.Repeals the 80% deduction for amounts paid for the seating rights for college sporting events.
Casualty Losses Itemized deduction repealed in 2018, except for losses in declared disaster areas.
Medical Expenses Medical expense deduction retained. 7.5% of AGI applies for 2017 and 2018, and rises to 10% of AGI thereafter.Also, eliminates individual ACA mandate for health insurance. Effective after 12/31/2018.
Alimony Repeals the alimony deduction for the payer and inclusion in income for the recipient.Effective date would be for divorce decrees executed after 12/31/2018.
AMT AMT would be retained but the exemption would be increased to $109,400 for married couples and to $70,300 for single taxpayers.Additionally, the AMT exemption would begin to phase-out at $1,000,000 for married couples and $500,000 for single filers.Applies in 2018.
401(k)/IRA Contributions Retains current law regarding 401K and IRA plans.
ROTH IRA Eliminates the option to re-characterize a ROTH IRA conversion back to a traditional IRA.  Effective for 2018.
Personal Exemptions The deduction for personal exemptions is suspended for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026.
Capital Gains Retains current treatment and rate structure for capital gains and qualified dividends.
Miscellaneous Itemized Deductions The deduction for miscellaneous itemized deductions subject to the 2% floor is suspended for tax years beginning after Dec. 31 2017 and before Jan. 1, 2026.  These deductions include employee business expenses, tax preparation fees and investment advisory fees.
Moving Expenses For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for moving expenses is suspended, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station.
529 Plans For distributions after Dec. 31, 2017, “qualified higher education expenses” also includes tuition at an elementary or secondary public, private, or religious schools up to a $10,000 limit per tax year.
FIFO Stock Sale Proposal The proposed law on first-in-first-out stock sales has not been enacted.  Taxpapyers can still specifically identify stock lots when selling their shares to take advantage of potential losses
Estate Tax Exemption Estate tax exemption doubled from current levels. Effective for decedents dying after 12/31/2017.

BUSINESS PROVISIONS 

Corporate Tax Rates Regular corporate rate reduced to a flat 21%,Personal Service Corporation rate reduced to flat 21%.Effective in 2018.
Corporate AMT Corporate AMT is repealed. Effective in 2018. 
Interest Deduction for Companies with over $25 million Limited in their interest deduction based on 30% of adjusted taxable income. Any unused interest expense above 30% threshold would be disallowed, and would carry forward for an unlimited amount of years. There are exceptions that apply for “real estate businesses” and for “floor plan financing” for auto dealers.Effective in 2018.
Bonus Depreciation 100% bonus depreciation for additions placed in service after September 27, 2017. Applies to new and used property.
Section 179 Expensing Limitation would be increased from $500,000 to $1,000,000.Phase-out amount for annual additions would be increased from $2,000,000 up to $2,500,000.Effective in 2018.
Net Operating Losses (NOLs) Disallows NOL carrybacks except for a special 2 year carryback for farming.NOLs can be carried forward indefinitely but will be limited to 80% of taxable income.Effective in 2018.
Accounting Method Reforms for Small Businesses ($25 million or less of annual gross receipts) Permits use of the cash method (even if the small business had inventories).Removes the Uniform Cost Capitalization for Inventory (UNICAP) rules for small businesses.Permits use of the completed contract method or other method for long-term contracts for contractors.Effective in 2018.
Like-Kind Exchanges (§1031 Exchanges) Limits the use of like-kind exchanges to real property and eliminates the use of like-kind exchanges with personal property.Applies to exchanges after December 31, 2017.
Luxury Auto Limits For passenger automobiles placed in service after Dec. 31, 2017, in tax years ending after that date, for which the additional first-year bonus depreciation deduction not claimed, the maximum amount of allowable depreciation is increased to: $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period.
Domestic Production Activities Deduction For tax years beginning after Dec. 31, 2017, the DPAD is repealed.
Employer Fringe Benefits For amounts incurred or paid after Dec. 31, 2017, deductions for entertainment expenses are disallowed, eliminating the subjective determination of whether such expenses are sufficiently business related; the current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or otherwise on the premises of the employer; and deductions for employee transportation fringe benefits (e.g., parking and mass transit) are denied, but the exclusion from income for such benefits received by an employee is retained.
Excessive Employee Compensation For tax years beginning after Dec. 31, 2017, the exceptions to the $1 million deduction limitation for commissions and performance-based compensation are repealed. The definition of “covered employee” is revised to include the principal executive officer, the principal financial officer, and the three other highest paid officers. If an individual is a covered employee with respect to a corporation for a tax year beginning after Dec. 31, 2016, the individual remains a covered employee for all future years.Under pre-Act law, exceptions applied for: (1) commissions; (2) performance-based remuneration, including stock options; (3) payments to a tax-qualified retirement plan; and (4) amounts that are excludable from the executive’s gross income.

Employer-Paid Family and Medical Leave

For wages paid in tax years beginning after Dec. 31, 2017, but not beginning after Dec. 31, 2019, the Act allows businesses to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave if the rate of payment is 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%.

Dividends-Received Deduction

For tax years beginning after Dec. 31, 2017, the 80% dividends received deduction is reduced to 65%, and the 70% dividends received deduction is reduced to 50%.

Partnership Technical Termination

For partnership tax years beginning after Dec. 31, 2017, the Code Sec. 708(b)(1)(B) rule providing for the technical termination of a partnership is repealed. The repeal doesn’t change the pre-Act law rule of Code Sec. 708(b)(1)(A) that a partnership is considered as terminated if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership. (Code Sec. 708(b), as amended by Act Sec. 13504)

FOREIGN OPERATIONS

Repatriation/Foreign Source Dividends

Under pre-Act law, U.S. citizens, resident individuals, and domestic corporations generally were taxed on all income, whether earned in the U.S. or abroad. Foreign income earned by a foreign subsidiary of a U.S. corporation generally was not subject to U.S. tax until the income was distributed as a dividend to the U.S. corporation.For tax years of foreign corporations that begin after Dec. 31, 2017, and for tax years of U.S. shareholders in which or with which such tax years of foreign corporations end, the current-law system of taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when these earnings are distributed is replaced. The Act provides for an exemption by means of a 100% deduction for the “foreign-source portion” of dividends received from specified 10% owned foreign corporations by domestic corporations that are U.S. shareholders of those foreign corporations.No foreign tax credit or deduction is allowed for any taxes paid or accrued with respect to a dividend that qualifies for the deduction. There is also a provision in the Act that disallows the deduction if the domestic corporation did not hold the stock in the foreign corporation for a long enough period of time.

Taxation of Foreign Earnings and Profits

Under the Act, U.S. shareholders owning at least 10% of a foreign subsidiary generally must include in income, for the subsidiary’s last tax year beginning before 2018, the shareholder’s pro rata share of the net post-86 historical E&P of the foreign subsidiary to the extent such E&P has not been previously subject to U.S. tax.The portion of the E&P comprising cash or cash equivalents is taxed at a reduced rate of 15.5%, while any remaining E&P is taxed at a reduced rate of 8%.At the election of the U.S. shareholder, the tax liability is payable over a period of up to eight years The payments for each of the first five years equals 8% of the net tax liability. The amount of the sixth installment is 15% of the net tax liability, increasing to 20% for the seventh installment and the remaining balance of 25% in the eighth year.

 

 

Businesses should utilize these tax-saving strategies before it’s too late!

by: Franco DiLiberto, CPA

The end of the year is quickly approaching and that means businesses and business owners should be thinking about taxes.  Businesses have many money-saving strategies at their disposal and many times it’s just a matter of scheduling a meeting with an advisor to discuss options.  As always, the sooner you can initiate these strategies, the better as the holidays will be here soon.

It’s for this reason, that we have put together our list of the Top 5 tax-saving strategies that businesses should be considering:

  1.  Defer Income and Accelerate Deductions

Businesses need to evaluate their current and future tax situation to decide whether or not to defer income or accelerate deductions. If possible and reasonable, deferring income and accelerating deductions for business owners is an effective way to reduce taxable income for the current year.  If you expect to be in a similar or lower tax bracket in 2017, you may want to consider delaying billings and sending invoices to customers until 2017.  

In addition, paying off and prepaying certain bills for cash basis businesses is another way to lower income in the current year.  

  1.  Make a Purchase to Utilize Section 179 and Bonus Depreciation

Yes, the highly popular accelerated depreciation methods of Section 179 and bonus depreciation offer tremendous tax savings for businesses.  The Section 179 deduction was permanently extended in 2016, and bonus depreciation was extended through 2019.  

Section 179 allows businesses to expense the cost of new and used qualified property that is purchased and placed into service in the current tax year.  Bonus depreciation is a 50% depreciation deduction on qualified new property purchased and placed into service in the current tax year.

The maximum Section 179 deduction allowed for 2016 remains at $500,000 and phase out limitations occur if asset purchases exceed $2 million.  For instance, buying a heavy SUV, pickup truck, or van before year end is an option for business owners to reduce their taxable income.  

To qualify for a full or partial Section 179 expense, the heavy vehicle must weigh over 6,000 pounds and be used at least 50% in the business.  Also, the vehicle can be bought outright or financed with certain leases and loans.

  1.  Utilize the “De Minimis Safe Harbor” Election

For tax year 2016, the IRS allows businesses to immediately expense the cost of tangible property below the threshold of $2,500 for businesses without an audited financial statement.  The threshold is $5,000 for businesses with an audited financial statement.  This threshold reduces the administrative burden for small businesses to comply with capitalization requirements.  In addition, this new tax relief allows businesses to immediately deduct assets that were traditionally capitalized, such as computers and high-end furniture.

Before year end, businesses should review their capitalization policies and consider documenting the $2,500 safe harbor election policy.  Also, assuming the safe harbor election is made, businesses should review their asset purchases to ensure that all items under $2,500 have been properly expensed rather than capitalized or included in Section 179 or bonus depreciation.

  1.  Research & Development Credit

The R&D credit was permanently extended in 2016, and it continues to offer tax incentives to business innovations.  Expenses associated with qualified research is eligible for this credit.  Qualified research is defined as developing or improving a business component with regard to its performance, functionality, reliability and quality.  The business component must be intended for sale, lease, or license.  Business owners should consider this credit and also be aware that, for 2016, small businesses with less than $50 million in sales may claim the credit against alternative minimum tax liability (AMT), which eliminates a major restriction on the use and applicability of this credit in the past.

  1. Ohio Business Deduction and 3% Business Tax Rate

For Ohio businesses, do not forget about the 100% business deduction for 2016.  The deduction is limited to $250,000 for single and married filing joint taxpayers and limited to $125,000 for married filing separate.  Eligible individuals for this deduction are owners and investors in Ohio businesses structured as sole proprietorships and pass-through entities, including partnerships, S-Corporations, and limited liability companies.  

In addition, Schedule E rental properties are eligible for this deduction.  Finally, any potential business income is taxed at a maximum 3% business tax rate, providing further relief to taxpayers.

Don’t wait until the end of the year to identify which options you would like to take for your business!  Whether you’re a current client or prospect, our team of experts will discuss the best options for your business.  If you have questions on any of these deductions or would like to discuss your specific business situation, contact us by email at info@hobe.com or call at 216.524.8900.  

Tax Extenders are now permanent!

by: Franco DiLiberto, CPA

Taxpayers are receiving a bundle of early Christmas gifts as Congress has avoided a shutdown by passing a major $680 billion tax bill that will extend and also make permanent several tax breaks. The following are the major tax provisions that have been made permanent, providing taxpayers with relief and a great level of certainty now and in the future:

Businesses:

Research and Development Credit (R&D)

  • The new tax bill permanently extends this credit and also adds one important modification.  Beginning in 2016, small businesses with less than $50 million in sales may claim the credit against alternative minimum tax liability (AMT), meaning that taxpayers will no longer be restricted from claiming the R&D credit due to an AMT limitation.

Section 179 Depreciation

  • The new tax bill permanently extends Section 179 expensing of the cost of new and used qualified property in the current tax year.
  • The maximum deduction allowed for 2015 remains at $500,000.  Businesses with asset purchases exceeding $2 million will have a dollar-for-dollar phase out of the $500,000, completely eliminating the deduction if purchases are above $2.5 million.
  • Beginning in 2016, the maximum deduction and phase out amounts will be indexed for inflation.
  • An additional modification in 2016 includes the treating of air conditioning and heating units as eligible for expensing.

Built-in Gains Tax Period for S-Corporations

  • The new tax bill permanently sets the period of 5 years for which an S-Corporation must hold its assets following conversion from a C Corporation to avoid the tax on built-in gains.

 

Individuals:

Child Tax Credit (CTC)

  • The CTC is a $1,000 credit that can be claimed for each qualifying child of the taxpayer.
  • This credit remains subject to adjusted gross income (AGI) limitations.  The phase out begins when AGI exceeds $75,000 for single taxpayers and $110,000 for married filing jointly.
  • If the CTC exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit, known as the additional child tax credit.  The new tax bill permanently allows this refundable credit if earned income exceeds the permanent threshold of $3,000.

American Opportunity Credit (AOTC)

  • The AOTC is a $2,500 credit that be claimed each year for four years of post-secondary education.
  • The credit remains subject to adjusted gross income (AGI) limitations.  The phase out begins when AGI exceeds $80,000 for single taxpayers and $160,000 for married filing jointly.  The credit is disallowed for married filing separate taxpayers.
  • A new provision disallows taxpayers from claiming the credit for 10 years if they fraudulently claim the credit.

(Just a reminder that the AOTC cannot be claimed by taxpayer who is claimed as a dependent on another person’s tax return.)

Earned Income Tax Credit (EITC)

  • The EITC is a credit eligible for taxpayers with low to moderate incomes.  The credit increases as the number of qualifying children increases.
  • A new provision increases the amount for families with 3 or more qualifying children.
  • A new provision increases the phase out range for married filing jointly taxpayers.

Educator Expenses Above-the-line Deduction

  • The new bill has made permanent the $250 deduction for teachers on money they spend for books, supplies, and other materials in their classrooms.

(Beginning in 2016, the $250 will be indexed for inflation and include professional development expenses.)

Itemized Deduction of State and Local General Sales Tax

  • The new bill permanently extends the option to claim sales tax as an itemized deduction in the event that the sales tax exceeds state and local income taxes paid for the tax year.

Tax-free Distributions from Individual Retirement Plans for Charitable Purposes

  • The new tax bill permanently allows individuals who are at least 70 ½ years old to exclude from gross income qualified charitable distributions from Individual Retirement Accounts (IRAs).  The exclusion may not exceed $100,000.

______________________________________________________________________________

The following are non-permanent extensions of tax provisions as a result of the new tax bill:

Businesses:

Bonus Depreciation

  • Bonus Depreciation will be extended 5 years through 2019.
  • The Bonus Depreciation percentage is 50% for property placed into service during 2015, 2016, and 2017.  The percentage is reduced to 40% in 2018 and 30% in 2019.
  • The new tax bill modifies the AMT rules to increase the amount of unused AMT credits allowed while claiming bonus depreciation.

Just a reminder that bonus depreciation is not allowed for used property.

Work Opportunity Credit

  • The provision extends through 2019 the work opportunity tax credit.
  • The provision also modifies the credit beginning in 2016 to apply to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) and increases the credit with respect to such long-term unemployed individuals to 40 percent of the first $6,000 of wages.

 

Individuals:

Debt Forgiveness from Personal Residence

  • The discharge of debt on a taxpayer’s personal residence is excluded from income.  This provision has been extended through 2016.

The itemized deduction of mortgage interest premiums is extended through 2016.

The large majority of energy incentive credits for individuals and businesses have been extended for two years.

As for the Affordable Care Act/Obamacare, the medical device tax and the Cadillac tax is delayed for two years.

As you can see, virtually all of the major tax deductions and credits have extended, some permanent and others temporarily.  In addition, many of these deductions and credits have been modified in ways that provide more tax relief to individuals and businesses.
Be prepared to take advantage of the tax breaks now and in the future.  Have questions or need assistance on the application and eligibility of these tax breaks as it pertains to you?  We are here to assist you with our expertise and high value services.  Contact us at 216.524.8900 or our form to discuss your individual situation.

 

There’s still time to cut your 2015 business tax bill

by: Pat Lysobey, CPA

Before you close the books on 2015, we’ve compiled a few important ways to lower your business tax bill.  You only have a few weeks, so no time to waste!  Let us know if you have questions or need to find out if you can take advantage of any of these below.

  1. Buy a heavy SUV, pickup, or van

Big SUVs, pickups, and vans are useful for hauling people and stuff around for your business, and they also offer major federal income tax advantages. Thanks to the Section 179 expensing deduction, you can probably claim a current-year write-off for up to $25,000 of the cost of a new or used heavy SUV that is placed in service before the end of your business tax year.

50% first-year bonus depreciation for new (not used) vehicles expired at the end of 2014, but we expect Congress to restore this valuable break for new vehicles that are placed in service by Dec. 31, 2015. If that happens, your allowable first-year depreciation write-off for a new vehicle can be even higher.

To qualify for these tax-saving deals, you must buy a “heavy” vehicle. That means one with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. You must also use the vehicle over 50% for business.

  1. Defer income and accelerate deductible expenditures through year end

If you are a cash basis sole proprietorship, LLC, partnership, or S corporation, your share of net income generated by the business is reported on your Form 1040 and taxed at your personal rates. Since the 2016 individual federal income tax rate brackets will not be much different from this year’s brackets, consider the time-honored strategy of deferring income into next year while accelerating deductible expenditures into this year–if you expect to be in the same or lower bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2015 until 2016.

On the other hand, if your business is doing well, you might expect to be in a significantly higher tax bracket in 2016 (say 35% versus 25% for this year). In this scenario, take the opposite approach: accelerate income into this year (if possible) and postpone deductible expenditures until next year. That way, more income will be taxed at this year’s lower rate instead of at next year’s higher rate.  Since you may be subject to the alternative minimum tax, you should consult with your tax adviser before making any of these moves.

Now, how do you defer taxable income and accelerate deductions with two weeks to go?

If you expect your business income will be taxed at the same or lower rate next year, here are specific cash basis accounting moves to defer some taxable income until 2016.

  • Charge recurring expenses that you would normally pay early next year on major credit cards and not store credit cards. You can claim 2015 deductions even though the credit card bills won’t actually be paid until 2016.
  • Pay expenses with checks and mail them a few days before year end. The tax rules say you can deduct the expenses in the year you mail the checks, even though they won’t be cashed or deposited until early next year. For big-ticket expenses, consider sending checks via registered or certified mail, so you can prove they were mailed this year.
  • Before year end, prepay some expenses. As long as the economic benefit from the prepayment does not extend beyond the earlier of: (1) 12 months after the first date on which your business realizes the benefit or (2) the end of the next tax year. For example, this rule allows you to claim 2015 deductions for prepaying the premium for property insurance coverage for the first half of next year.
  • On the income side, the general rule for cash-basis businesses is that you don’t have to report income until the year you receive cash or checks in hand or through the mail. To take advantage of this rule, consider waiting until near year end to send out some invoices to customers. That will defer some income until 2016, because you won’t collect until early next year.
  1. Utilize the “De minimis Safe Harbor” Election

Take advantage of the “de minimis safe harbor” election to write-off supplies and small equipment. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an audited financial statement (AFS). If there is no AFS, the cost of a unit of property can’t exceed $2,500.

  1. Stay tuned for news about restored depreciation breaks

Last year’s super-favorable depreciation rules will not apply this year, unless  Congress resurrects them. The good news: we strongly expect that to happen. If it does, the following beneficial depreciation rules will be available for asset additions that are placed in service before the end of your business’s current tax year. Be prepared to act fast around year end to take advantage.

Generous Section 179 deduction rules

Under current tax law, the maximum Section 179 deduction is only $25,000, and the deduction cannot be claimed for off-the-shelf software. We expect Congress to restore the generous $500,000 cap (from tax years 2010-2014) and the allowance for off-the-shelf software for 2015 in end-of-the-year legislation.

Real property expenditures have traditionally been ineligible for the Section 179 deduction privilege. However, there was an exception for so-called qualified real property that your business placed in service in tax years that began in 2010-2014. Specifically, your business could claim a Section 179 deduction of up to $250,000 for the following types of real property expenditures:

  • Interiors of leased non-residential buildings.
  • Restaurant buildings.
  • Interiors of retail buildings.

As the tax law currently reads, no Section 179 deduction is allowed for real property expenditures in tax years beginning in 2015. However, we also expect Congress to restore the $250,000 Section 179 deduction for 2015.

  1. Get ready for 50% first-year bonus depreciation?

As the tax law currently reads, no 50% bonus depreciation is allowed for assets placed in service in calendar year 2015. However, we expect Congress to restore the break for 2015 shortly.

  1. Stay tuned for news on other business ‘extenders’

Beyond the depreciation tax provisions, there is a list of other popular business tax breaks that Congress habitually allows to expire before ultimately extending them for another year or two. The tax credit for R&D expenditures is probably the most important example of these so-called “extenders.”

Meanwhile, be prepared to act fast around year end to take advantage of breaks that are extended for this year.  And let us know what you need to help your 2015 tax bill before the clock strikes midnight.  Contact us at 216.524.8900 or email your Hobe & Lucas contact.