When it comes to the federal tax code, about the only thing most individuals and business owners understand is that everyone has to pay taxes. The questions about how much, how often and when, are complicated issues that accountants can help resolve.
Thanks to the recently passed Tax Cuts and Jobs Act, arguably the most significant change to the Internal Revenue Code in decades, the tax code just became a little more simplified for individuals and corporations. The law reduces tax rates for individuals and corporations and repeals many deductions until at least 2025. The changes take effect after December 31, 2017.
The changes include cuts and benefits for both individuals and corporations. Here are a few highlights of the significant changes affecting both individuals and corporations.
Individual Income Tax Changes
- Maintains the same number of tax brackets, but reduces the tax rate for the top bracket from 39.6% to 37%. In addition, the Act adjusts the taxable income ranges for the tax brackets in a manner that reduces the effective tax rate for most taxpayers.
- Provides a 20% deduction for qualified business income, which is generally income from a partnership, sole proprietorship, S corporation, as well as certain non-capital gain REIT dividends or publicly traded partnership income. Business that provide services in certain fields such as health, law, consulting, financial services and brokerage services are excluded from this preferential treatment.
- Approximately doubles the standard deduction (for those that do not itemize deductions).
- Suspends personal exemption deductions (currently, $4,050 each for taxpayer, spouse, and any dependents).
- Increases the child tax credit to $2,000 (refundable up to $1,400), and provides for a $500 nonrefundable credit for the care of qualifying dependents other than children (for example, parents).
Business Tax Changes
- Reduces the corporate tax rate to a flat 21%.
- Repeals the corporate alternative minimum tax.
- Allows corporations to expense fully and immediately 100% of the cost of qualified property acquired and placed in service after September 2017 and before January 1, 2023.
- Increases the Section 179 expense amount from $500,000 to $1 million and the phase-out amount from $2 million to $2.5 million.
- Disallows deduction for net interest expense in excess of 30% of the business’s adjusted taxable income (a comparable rule would apply to partnerships). Disallowed losses are carried forward.
- Provides that tax-free like-kind exchanges will only be available for real property.
- Creates a 21% excise tax for tax-exempt organizations on the payment of compensation in excess of $1 million (as well as certain parachute payments) if paid to one of the five highest paid employees.
- Repeals the deduction for entertainment expenses.
To learn specifically how the new tax law will affect your future personal or business taxes, contact a CPA at BWLK’s Salem office (330-332-4646) or East Liverpool location (330-385-2160).