In this introduction to Tax Reform, Jeff Dvorachek, CPA, provides an overview of the big changes individuals and businesses can expect.
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In December of 2017, the President signed into law what is now called the TAX CUTS AND JOBS ACT OF 2017. It provided sweeping tax law changes to both individuals and businesses. Some say it is the largest tax reform since 1986. If you remember back to 1986, that is when Ronald Reagan was President.
Unlike some tax bills that just affect a relatively small amount of people, this tax reform bill is going to affect almost every single individual and almost every single business. Although some parts of the bill were effective for 2017, the bulk of it will take effect in 2018 and beyond.
HOW DOES THE TAX BILL IMPACT INDIVIDUALS?
In summary, this tax bill has made fundamental changes to how individuals are going to report their income, deductions, and even file their returns. This tax bill changes little things, such as the tax rates. It changes other things, such as the standard deduction, which basically doubles it. It changes how we are going to do itemized deductions. It is going to change the child tax credit and how much it is and who is eligible for it. It is also going to change how we fund education, how we pay for alimony, and potentially deduct it or not deduct it. It is going to drastically change the Alternative Minimum Tax, which we know as a separate level of tax that was supposed to only affect the ultra-rich, and over the years, has affected more and more people.
HOW DOES THE TAX BILL IMPACT BUSINESS OWNERS?
Business owners are also going to be impacted in a large way. There is a flat tax now that corporations will be paying at a rate of 21%. Prior to that, there was a number of different rates that corporations were paying. So, as they were talking about doing a flat tax, this is really the first wave to get to that whole flat tax.
It is also going to affect depreciation and how businesses write off assets. Whether it’s bonus depreciation, whether it’s what is called a section 179 – which is kind of a direct write off of assets–or whether it’s vehicle depreciation. This bill is going to also fundamentally change how businesses take write-offs when they buy fixed assets. They may not need to take a seven-year write off anymore. They may be able to write it off right in the first year. It is also going to affect how companies account for meals and entertainment. Meals and entertainment have always been 50% deductible and 50% not deductible. Some of those rules have changed. Entertainment now is 0% deductible. Meals are still up in the air, but everyone thinks that it will still be 50% deductible.
The largest thing is going to be for the small business owners. Most of the new employers that start up new businesses either start up as S-Corporations, or startup as Partnerships, or as other small businesses. There is a new deduction available starting in 2018, and it is called the “Qualified Business Income Deduction,” and it could be worth up to 20% of the profit of a business. There are many limitations, of course as with any tax law, but when they tried to make the code simpler, this particular part of the Regulations actually made it a lot more difficult.
ARE THESE CHANGES PERMANENT?
Unfortunately not. Most of the individual provisions are going to sunset in 2026. It’s just the way the government had to pass it to fit within their budgetary constraints.
The corporate tax cuts, for the most part, are permanent.