Today, President Trump signed the Tax Cuts and Jobs Act into law. While the House and the Senate originally had measurable differences in their respective plans, Congress came together with a unified plan that garnered enough support to pass before receiving the president’s signature. You can learn more about the new law in How to Prepare for the Potential Tax Reform Bill, a post from earlier this week.
Now that we have the largest, most significant tax legislation passed since 1986, you are probably wondering what this means for you and your business. Let’s look at how this law impacts:
- Your 2017 Tax Return. Aside from a few specific provisions, such as the availability of bonus depreciation after Sept. 27 of this year and a reduced medical expense threshold, filing your 2017 tax return is likely to be business as usual, both for personal and entity returns.
- Tax Planning Opportunities. If you itemize and have state and local income taxes, it is imperative that you talk with a tax advisor to be sure you’ve paid in enough to cover your 2017 tax liability; otherwise, you could permanently miss out on that deduction. If you itemize and are planning to make charitable contributions before the end of the year, you’ll want your tax advisor to analyze if there is a benefit to accelerating or deferring those contributions. Additionally, 2017 is the last year for miscellaneous itemized deductions subject to the 2 percent floor. If you typically claim those deductions, make sure to pay all those you have incurred by Dec. 31. This is not an exhaustive list of opportunities either, so you should rely on your tax professional for a comprehensive analysis.
- Employees. Though you won’t file your 2018 tax return until early 2019, you will likely feel the effects of your reduced tax bill with changes in withholding from your paychecks. The IRS has said the new tables could come out as early as Feb. 2018. After the tables are released, HR departments and payroll services will need to adjust their systems. Once the new Form W-4 is released, employees should consider adjusting their information to further account for any specific impacts of the law. The best case scenario would have employees taking home more with each paycheck before spring 2018 arrives.
- Business Owners. A 100 percent bonus depreciation is immediately available (and retroactive to dates after Sept. 27 of this year) for qualifying property placed in service. In addition to the increase in the percentage, used property will also now qualify for bonus depreciation. Beginning Jan. 1, 2018, expanded 179 expensing of assets is also available, and depreciation rates for passenger autos are significantly increased. Additionally, businesses that were previously not eligible to use the cash method of accounting for tax reporting purposes may now qualify. Talk to your tax advisor about what these provisions will mean to your business.
- Flow-Through Entities and Sole Proprietors. A new deduction of up to 20 percent of your business income is available depending on several factors, including your taxable income, type of business, W-2 wages and capital assets. If you choose to pay 2018 estimates based on the prior year safe harbor, your 2018 estimates will not change. However, you may be able to reduce your estimated payments to reflect the new tax brackets and the available business income deduction. Since the availability of the business deduction depends on several factors including your taxable income, W-2 wages and basis of qualifying assets, you’ll want a reasonable estimate of your 2018 operations before reducing from prior year safe harbor estimates.
- C Corporations. The tax rate has been reduced to 21 percent effective Jan. 1, 2018. You will likely want to consider adjusting your 2018 estimated tax payments to increase company’s current cash flow.
Some of the provisions are permanent and others will expire after a set number of years. But one thing that is for certain is that new opportunities and strategies will become available as a result of all these changes. Make sure you work with your trusted tax advisor to make the most of the new tax law.
Disclaimer: These tax planning strategies are based on the tax bill passed by Congress on Wednesday, December 20th. Topics are subject to change. This list in no way fully encompasses all proposed tax changes. Always ensure you are reviewing the latest information available. Contact your tax advisor for further clarification.