While the political debate at times was shrill, the Tax Cuts and Jobs Act (“TCJA”) stands to reshape how small businesses and corporations are taxed. The TCJA will fundamentally impact business entities commonly used by large corporations and small business owners alike. How small businesses and corporations ultimately adapt in the long-term will remain to be seen. In the short-term, the TCJA will reduce taxes paid by Utah businesses, families, and individuals. There is something for almost every business and individual taxpayer in the TCJA.
We provide the following summary of key provisions within the TCJA:
The TCJA reduces the C-corporation tax income rate from 35% to 21%. The corporate alternative minimum tax is also permanently eliminated under the TCJA.
Small business owners who use LLCs and S-Corporations will also receive a corporate tax break under TCJA. LLCs and S-Corporations, common business entities. The TCJA establishes a 20 percent deduction of qualified business income from certain pass-through businesses. Specific service industries, such as health, law, and professional services, are excluded. However, joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries. This provision expires December 31, 2025.
Marginal Tax Rates
The TCJA keeps the seven tax brackets while reducing the rates for five of them. The new rates start at 10 percent and rise to 12, 22, 24, 32, 35 and 37 percent. The highest rate–37 percent–applies to individuals whose income exceeds $500,000. For joint filers, the threshold is $600,000. This rate is being lowered from 39.6 percent. The new income tax brackets and other provisions are indexed by the chained CPI measure of inflation. The majority of individual income tax changes would be temporary, expiring on December 31, 2025. Several, such as the adoption of chained CPI and functional repeal of the individual mandate, are permanent.
The TCJA increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers in 2018 (compared to $6,500, $9,550, and $13,000 respectively under current law).
State, Local, and Charitable Tax Deductions
Deductions for charitable donations are retained. The mortgage interest deduction is retained for the first $750,000 in principal value. The TCJA limits state and local tax deductions to a combined $10,000 for income, sales, and property taxes. Deductions for taxes paid or accrued in carrying on a trade or business remain unlimited.
Capital Investment Deductions
The TCJA allows full and immediate expensing of short-lived capital investments for five years. It also increases the section 179 expensing cap from $500,000 to $1 million.
Child Tax Credit
Small business owners with children will enjoy a 100% increase of the child tax credit under the TCJA. The new bill doubles the child tax credit to $2,000 per child with $1,400 being fully refundable.
Alternative Minimum Tax
The alternative minimum tax rate is secondary tax once a threshold of income is reached. Many small business families have been unpleasantly surprised by the AMT. The TCJA eliminates the AMT for corporations, but keeps it for individuals. While the AMT was not eliminated, the TCJA significantly raises the exemption to $500,000 for single taxpayers and $1 million for couples. Raises the exemption on the alternative minimum tax from $86,200 to $109,400 for married filers, and increases the phase out threshold to $1 million.
Individual Mandate Tax
Beginning in 2019, the TCJA eliminates the Affordable Care Act’s individual mandate by reducing the penalty to $0.
Student Loan Interest
Individuals with student loans need not worry here; the TCJA keeps the student loan interest deduction intact.
The TCJA doubles the estate tax exemption from $5.6 million to $11.2 million, which expires on December 31, 2025. The exemption will increase with inflation. This provision helps beneficiaries of multi-generation family farmers.
How the TCJA will impact Utah businesses and families who own small businesses will evolve over the next 12 months. Moreover, the global and national economic and debt impact the TCJA will have is unclear. To remain revenue neutral, the TCJA assumes an economic impact that boosts overall GDP in the years to come. To be sure, the TCJA presents an opportunity especially for small businesses to consult legal and tax professionals to recalibrate their tax planning.
Our assessment is that most corporations, small business owners, and families will see significantly lower taxes under the TCJA. This includes improved deductions and credits and correlating reductions in both business and personal income taxes. Some benefits of the TCJA require little to no planning. Because it represents a historical change to federal tax laws, the TCJA should prompt new tax planning by corporations, small business owners, and individuals. Our assessment is responsive tax planning should take place in the first half of 2018 for maximum benefit.
A final note. The TCJA is one piece of larger global, national, and local puzzles. Thus, corporations and small businesses when planning for the TCJA should calculate for trends and events which impact their respective industries when possible.
Please email your comments or inquiries on the Tax Cuts and Jobs Act to firstname.lastname@example.org.
Johnstun Law focuses on providing established businesses and entrepreneurs with the day-to-day legal services needed to succeed. For more information on how we can help your business succeed, call us at 801-980-5300, or via contact form.
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