The new tax law expands into many areas. Most of the changes are effective for tax years 2018-2025, but we will note where dates are different. Following are the changes that will affect most of our clients.
The new tax rates alone will lower most individual’s tax liabilities. The highest rate for 2017 is 39.6%.
For those that do not itemize (or may not anymore because of the state and local income tax deduction limitation), the standard deduction is increasing to:
Both the personal and dependency have been suspended
These credits partially make up for the loss of the exemptions for many taxpayers. The credit is a dollar-for-dollar tax savings, rather than the exemption which was a deduction from income. Many individuals could not previously take the $1,000 child tax credit because the income threshold was much lower.
Some higher income taxpayers may be able to take this credit, when previously their exemptions were partially phased-out.
Alimony will no longer be a deduction for the payor or taxable income to the recipient, for divorces that take place after 12/31/2018. Anyone already divorced through 12/31/18 with alimony in the decree can still take this deduction.
The tax rates for all C-corporations is reduced to 21%. Because the majority of our business clients are pass-through entities (S-corps and partnerships) many are asking if they should convert to a C-corp.
The main drawback that still exists to C-corps is the double taxation. Even though the tax rate on net income is lower than the individual rate, any drawings distributed to the owners are taxed again at the capital gains rate. For most of our small business clients, this creates an effective rate just as high as the individual rate.
Many of our clients will be able to take advantage of a new deduction for pass-through entities and self-employed individuals. The IRS regulations need to come out before we can go into too much detail on how the deduction will be determined and who is eligible. However, for those that can, 20% of the qualified business income will be a deduction.
Depreciation, Section 179, and Bonus Depreciation
Bonus depreciation is no longer restricted to “new” assets only. Purchases of used equipment will now qualify.
There are differences as to when you can take Section 179, and when bonus depreciation is allowed. We will maximize the tax benefit available when we prepare your return.
Other Changes to Business Taxes