Ask the Experts: Q&A on The Tax Cuts and Jobs Act
Ask the Experts: Q&A with Surgent Professional Education on The Tax Cuts and Jobs Act
What questions are you hearing most from CPAs about the Tax Cuts & Jobs Act?
Practicing accountants have been asking about the pass-through 20% deduction more than anything else. This new §199A deduction is complex, and unfortunately, regulations have not yet been issued to allow authoritative answers to some of the more complex, nuanced issues being confronted by CPAs. At Surgent, we’re continually updating our materials to keep our customers apprised of the latest guidance on the pass-through deduction and the other relevant aspects of tax reform. In addition, CPAs are asking questions regarding choice of entity, entertainment expenses (particularly relating to food and beverage), and the new alimony rules.
The tax reform law includes a new section which creates a deduction for Qualified Business Income; what exactly does it mean?
In a nutshell, the new deduction is 20 percent of Qualified Business Income (QBI). QBI is the net amount of items of income, gain, deduction and loss with respect to a trade or business. Rather detailed income limitations apply. Taxpayers with taxable income over the threshold amount of $157,500 ($315,000 for a joint return) are also subject to limitations based on W-2 wages and unadjusted basis in acquired qualified property. QBI does not include any guaranteed payment or employee compensation and similarly does not take into account investment related income.
Which business entities allow taxpayers to take advantage of the 20% deduction?
The deduction is generally 20 percent of a taxpayer’s QBI from a partnership, S corporation, or sole proprietorship. Multi-member LLCs treated as partnerships, Schedule E real estate investors, trusts and estates with an interest in a pass-through entity, qualified cooperatives, and real estate investment trusts are also eligible to take advantage of §199A. A C corp is unable to utilize the deduction, but rates for C corps dropped from 35 percent to 21 percent.
A qualified trade or business is any trade or business except a specified service trade or business or the business of an employee. A specified service trade or business means any trade or business involving the performance of services in the fields of health; law; engineering; architecture; accounting; actuarial science; performing arts; consulting; athletics; financial services; and brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities. Any trade or business where the principal asset is the reputation or skill of one or more of its employees is a specified service trade or business. This distinction for a specified service trade or business is incredibly important. One not so beneficial result is no §199A deduction is allowed for a specified service trade or business where 2018 taxable income is $207,500 ($415,000 for a joint return) or more. Sorry accountants, lawyers and doctors.
What do you think will be the most far-reaching impact of The Tax Cuts and Jobs Act for individuals?
At the risk of sounding like a broken record, the §199A deduction will have a pronounced effect on the income taxes of individuals due to its pass-through nature. Its tentacles have already spread. For example, forward thinking investment professionals are discussing strategies with clients involving investing in pass-through businesses in order to take advantage of the deduction. A 20 percent cut of QBI is long money to anyone.
In addition, the tax reform law created a real incentive for a potential alimony payor to have the divorce or separation agreement executed by the end of 2018. For a divorce or separation agreement executed after December 31, 2018, alimony will not be deductible by the payor or included in the income of the payee. A rush to divorce court (with alimony payor spouse as petitioner) will undoubtedly ensue.
What about for businesses?
It is difficult to understate the tax savings to C corps inherent with the rate drop to a flat 21 percent. There is obvious potential there to redirect former tax payments to investors. That story has not yet unfolded. Speaking of which, the repatriation of accumulated offshore earnings of multinational companies at 15.5 percent for cash holdings and 8% for non-cash holdings provides additional capital and its attendant potential to these same companies.
Moreover, tax reform increased bonus depreciation to 100 percent for property placed in service after September 27, 2017 and before January 1, 2023. The law also increased the §179 expense limit to $1 million with the cost of qualifying property phase out threshold set at $2.5 million. These are incredibly generous shots in the arms of collective businesses nationwide.
Finally, in an unabashed attempt at formulating public policy, the tax reform law created a new credit for employer-paid family and medical leave. The law allows businesses a general business credit of 12.5 percent of the amount of wages paid to qualifying employees on family and medical leave if the rate of payment is 50 percent of the wages normally paid to the employee. The credit is increased by .25 percentage points (not above 25 percent) for each percentage point by which the rate of payment is over 50 percent. The change is effective for wages paid in tax years beginning after December 31, 2017 but is not applicable to wages paid in tax years beginning after December 31, 2019.
- by Nick Spoltore, Surgent Professional Education