InnOvation Capital & Management, LLC
IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
JANUARY 24 , 2018
Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.
We closed out the 2017 publication of IntelDigest by discussing the new tax legislation. We start the New Year by expanding on the same subject … the Tax Cuts and Jobs Act of 2017 (TCJA). this issue, we will review the technical aspects of the tax law changes, which begin with the 2018 tax year. Next week, we’ll concentrate on the consequences of these changes.
Here is a general listing of new tax provisions which would affect many of our clients and colleagues:
Estate and Gift Taxes
TCJA doubles the estate tax exclusion amount. For estates of decedents who die in 2018 and later, the basic exclusion amount is $11,200,000, indexed for inflation (compared to $5,490,000 in 2017). The combined exclusion for married couples rises to $22,400,000.
The top tax rate remains at 40%, and the annual exclusion for gifts increases to $15,000. The estate tax exclusion reverts to pre-TCJA levels in 2026.
Taxes on Businesses
The maximum corporate tax rate is cut to 21% (previously 35%)
Businesses can now deduct the cost of depreciable assets in one year instead of amortizing over several years, through changes in Bonus Depreciation and Section 179 Expense deductions (effective through 2023).
Many businesses are organized as pass-through entities, including proprietorships, partnerships, limited liability companies, and Subchapter S corporations. These may include real estate companies, hedge funds, and private equity funds. For such pass-through businesses, the standard deduction is raised to 20% (effective through 2025).
TCJA eliminates the corporate Alternative Minimum Tax (AMT), which had forced many companies to pay at a 20% tax rate when tax strategies and credits had lowered the regular tax below that level. The new law allows greater spending on research and development by some companies.
A major feature of TCJA is allowing multinational companies to repatriate large cash stockpiles which had been kept outside the U.S. The total amount held by American companies overseas has been estimated at $2.6 Trillion! Under the repatriation provision, companies will have a limited time to bring those assets home and pay a tax rate of 15.50% on cash (8% on equipment).
TCJA also provides for a shift in corporate income taxation from a worldwide system (where multinationals are taxed on all foreign income earned) to a modified territorial system, where U.S. corporations will not pay U.S. taxes on certain foreign income.
TCJA does place limits on interest deductions. A corporate deduction for interest expense is now capped at 30% of income.
And, there are new limits on carried interest profits which are often claimed by hedge funds and other private equity funds. Such investments are taxed at the top individual rate for short-term holdings. In order to qualify for a rate of 23.80%, investments must be held for three years.
Other business provisions have been modified slightly by TCJA:
Standard Mileage Rates for business miles driven increases to 54.50 cents per mile.
The Work Opportunity Tax Credit (WOTC) is extended through 2019, encouraging employers to hire long-term unemployed individuals (unemployed for 27 weeks or more). The credit is approximately 40% of the first $6,000 of wages paid to a new hire.
The Research & Development Tax Credit is available to businesses with less than $50 million in gross receipts, and can be used to offset alternative minimum tax. Certain start-up businesses which may not have any income tax liability will be able to offset payroll taxes with this credit.
Other provisions remain which encourage small employer Health Insurance Plans and employer-provided transportation, mass transit, and parking benefits.
Taxes on Individuals
The primary structural changes on individual tax returns come “below the line,” meaning that they appear AFTER Adjusted Gross Income (AGI) is calculated. Significant changes have been made to the Standard Deduction, Itemized Deductions, and Personal Exemptions, effective through 2025.
TCJA doubles the Standard Deduction to $12,000 for a single filer and $24,000 for Married Filing Joint returns. At the same time, all Personal Exemptions are eliminated!
For smaller families, these changes … along with lower tax rates … will generally result in a tax savings. However, families with several children will generally pay more because of the loss of the Exemptions.
TCJA also puts a $10,000 cap on State and Local Taxes (SALT), which will force some taxpayers to adopt the Standard Deduction, and others to pay higher taxes. Many taxpayers have Itemized Deductions which far exceed even the new higher Standard Deduction. They pay a combination of State and Local income taxes, real property taxes, personal property taxes, and sales taxes which can amount to $15,000-30,000. Add in mortgage interest and charitable contributions and deductible medical expenses, and these taxpayers MUST itemize. So, the $10,000 cap on SALT is a burden on many taxpayers.
On the positive side, the tax rates have been lowered in most tax brackets, and exemption amounts have been increased for the Alternative Minimum Tax (AMT) on individuals.
The Child Tax Credit and the credit for Child and Elder Care have been improved. The Child Tax Credit increases from $1,000 to $2,000 per qualifying child, and eligibility has been expanded to include families with income up to $400,000 (Married Filing Joint). Taxpayers can also use a credit (up to $500) for non-child dependents, such as elderly parents.
Section 529 college savings plans can now be used for tuition in private and religious K-12 schools, and even for home-schooling.
Retirement Accounts
Participants in employer-sponsored retirement plans may now make Elective Deferrals up to $18,500 per year.
Other retirement provisions have been expanded to allow more taxpayers to participate in qualified plans, IRAs, and the retirement saver’s credit for moderate-income workers.
Next week, in IntelDigest, we will discuss the practical impact of the Tax Cuts and Jobs Act on the American economy.