Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act sits somewhere around 1100 pages long, and although we’re certain it’s an exciting read we thought we’d bring you some of the highlights in installments.
The two main questions we’ve been asked over the last few weeks have been “How is my business going to be effected?” and “What is going to happen to the itemized deductions?”
We’ll be posting updates on Facebook and here on the website as we digest the upcoming changes for 2018.
In the meantime, don’t hesitate to email in your questions to [email protected]!
Tax Breaks for Business
This is a very brief summary of how businesses are going to be effected by the new Tax Reform. Section 199A which effects sole proprietors, S-Corps and partnerships is anything but simple to digest and may not apply to all businesses. So over the coming months we’ll be getting to grips this brand new section of tax code!
Although there are basically two types of business, C Corporations and pass-through entities (Sole proprietorships, S corporation and partnerships).
Operating as a sole proprietorship, S corporation or partnership (pass-through entities) all have single level taxation in common. Basically, when income is earned at the business level, it is generally not taxed at that level; rather, the income of the business is ultimately taxed only once, at the individual level.
Owners of a "C corporation" are subject to double taxation. When income is earned it is first taxed at the business level, at a top tax rate of 35% under current law and then again when the corporation distributes the income to the shareholder, the shareholder pays tax on the dividend, at a top rate of 23.8%.
So under current law, the top effective tax rates paid by C corporations versus other business types are:
• C corporations: 50.47% (35% + (65% * 23.8%)).
• Sole proprietors/shareholders in an S corporation/partners in a partnership: 40.8%
Under the Tax Cuts and Jobs Act
Both C Corporations and Pass-Through Entities will see a tax reduction in 2018.
C Corporations tax rate which currently 35% will be reduced to 21%. The effective combined rate on corporate owners would become 39.8% (21% + (79%*23.8%)
To keep the playing field even Section 199A was created for pass-through entities.
Section 199A will allow owners of sole proprietorships, S corporations and partnerships stand-alone rental properties reported on Schedule E to take a deduction of 20% against their qualified business income from the business. The result of this provision reduces the effective top rate from 40.8% to 29.6% (37%*20% deduction). This pass through deduction is complicated by a threshold and certain high earning service providers, for example doctors, lawyers and accountants will not be allowed to take the deduction.
Standard Deductions and Itemized Deductions
One of the biggest concerns with the tax reform was how itemized deductions were going to be treated.
The good news, the standard deductions.
The new increase in the standard deduction will help those who don’t have enough expenses to be able to itemize them on their return.
Married couples' standard deduction increases to $24,000
Single filers’ standard deduction increases to $12,000
Heads of household standard deduction increases to $18,000
The Property Tax and Mortgage Interest Deduction
The Property Tax Deduction will be capped and cannot exceed $10,000 and the Mortgage Interest Deduction is will limited to mortgages debt of $750,000 or less in 2018.
So what’s next?
Watch this space for more information and a Q&A section concerning the upcoming changes. In the meantime you can always send us your questions to [email protected]