NAVIGATING CHANGETAX REFORM UPDATE

Tax Cuts and Jobs Act (TCJA)AgendaNavigating: Individual ChangesNavigating: Business ChangesQuestions & Answers

Outside of TCJAWhat you Need to Know• Dramatic overhaul of two page 1040• Wisconsin deductions and credits - still exist• Affordable Care Act - still exists

1

Individual Changes

Presented by Brian Wild, CPA

2

Topic Prior Law New LawTax Rates • The tax rates under the prior law

were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

• The maximum tax rate of 39.6% applied to single taxpayers with taxable income of $418,400 or more and married taxpayers with taxable income of $470,700 or more.

• The capital gains rate structure included rates of 0, 15%, and 20% with the 20% rate starting where the 39.6% rate started.

• The new rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

• The maximum rate of 37% applies to single taxpayers with over $500,000 of taxable income and married taxpayers with taxable income exceeding $600,000.

• There is no change to the capital gains rate structure. Thus, the top rate of 20% applies before individuals reach the 37% top rate for ordinary income ($479,000 for joint returns).

• These rates are effective Jan. 1, 2018 through Dec. 31, 2025.

Net Operating Losses (NOLs)

• NOLs could be carried back two years or carried forward 20 years. Special rules for farm NOLs.

• The carryback of NOLs is repealed effective for tax years ending after Dec. 31, 2017.

• NOLs generated for years beginning after 2017 cannot reduce taxable income by more than 80%. NOLs carryforward indefinitely. Special rules apply for farm NOLs.

Personal and Dependent Exemptions

• Personal exemptions were $4,050 for the taxpayer, spouse, and each eligible dependent.

• There are no personal or dependent exemptions under the new tax law.

• The repeal of these exemptions is effective through Dec. 31, 2025.

Shared Responsibility Penalty

• Individual taxpayers were subject to a penalty for not maintaining minimal essential health insurance coverage.

• For 2017 and 2018, this penalty was the greater of a flat dollar amount calculated for each family member or an excess income amount.

• The flat amount per adult was $695 for 2017 and 2018, while the fee was ½ of $695 for individuals under the age of 18. The excess amount was 2.5% of the excess of a taxpayer’s household income over a threshold.

• The new law reduces the individual shared responsibility penalty to zero for tax years starting Jan. 1, 2019.

3

Topic Prior Law New LawAlternative Minimum Tax (AMT)

• The AMT exemption under the prior law was $84,500 for married taxpayers who filed jointly, $43,250 for married taxpayers who filed separately, and $54,300 for all other individuals. The exemption was indexed for inflation.

• For the period starting Jan. 1, 2018 through Dec. 31, 2025, the AMT exemption amount has been increased to $109,400 for married taxpayers who file jointly and $70,300 for all other taxpayers (except married taxpayers who file separately.) The exemption phases out if adjusted gross income (AGI) exceeds $1 million for married taxpayers and $500,000 for all other taxpayers. The AMT exemption is indexed for inflation.

Estate and Gift Tax Exemptions

• Taxpayers were entitled to a unified estate and gift tax exemption, which was $5,490,000 in 2017.

• The new law doubles the estate and gift tax exemption to $10 million for gifts made and decedents passing after Dec. 31, 2017 and before Jan. 1, 2026.

• The $10 million exemption is indexed for inflation. The exemption is $11.18 million for 2018.

• Regulations will be provided at a future date to reconcile differences in the exemptions at the time of a decedent’s death and gifts made prior to death.

529 Plans • 529 plan distributions could be utilized tax free for qualified higher educational expenses, which included tuition, fees, books, supplies, and required equipment.

• 529 plans now allow for up to $10,000 in annual distributions for tuition of public, private, or religious elementary and secondary schools.

IRA Contributions that are Re-characterized

• An individual taxpayer was allowed to make a contribution to one type of IRA (Roth or traditional) and re-characterize it through a trustee-to-trustee transfer as a contribution to the other type of IRA. The re-characterization was treated as a contribution to the subsequent type of IRA as of the date of the original contribution in the previous IRA type.

• The tax law repeals the ability to re-characterize conversion contributions to Roth IRAs. This prohibits taxpayers from unwinding Roth conversions.

• The new law still allows taxpayers to re-characterize contributions to a Roth IRA as contributions to a traditional IRA presuming the conversation happens prior to the due date of the individual’s income tax return.

• This provision is in effect as of Jan. 1, 2018.

Tax Reform – Individual Changes

4

Topic Prior Law New LawStandard Deduction

• The standard deduction was available to taxpayers, who did not itemize deductions. It was $6,350 (single), $9,350 (head of household), and $12,700 (married filing jointly).

• Dependents who were claimed by another taxpayer had a standard deduction of the greater of $1,050 or $350, plus earned income.

• Effective Jan. 1, 2018, the standard deduction is:

• $18,000 for head of household. • $24,000 for married filing jointly. • $12,000 for all other taxpayers.• This increased standard deduction

is effective through Dec. 31, 2025.

Deduction for Qualified Business Income (QBI)

• No provision in the prior law. • Effective Jan. 1, 2018 through Dec. 31, 2025, there is a deduction for 20% of QBI from a partnership, S corporation, or sole proprietorship. This same deduction also applies to REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income.

• There are a number of limitations and restrictions outlined within the calculation of QBI. Certain trades or businesses are disallowed based on a taxable income threshold. These specified service businesses include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and “any trade or business where the principal asset is the reputation or skill of one or more of its employees.”

• The taxable income threshold is $157,000 (single) and $315,000 (joint). Once exceeded, the limitation on specified service businesses and the wage limit will be phased in.

5

Topic Prior Law New LawHome Mortgage Interest Deduction

• Interest on acquisition indebtedness of up to $1 million and interest on home equity indebtedness up to $100,000 was deductible as an itemized deduction.

• The new law reduces the ceiling of acquisition indebtedness to $750,000, unless the indebtedness was incurred before Dec. 15, 2017, where the limitation is still $1 million. This reduced ceiling is in effect from Jan. 1, 2018 to Dec. 31, 2025.

• The deduction for home equity indebtedness is suspended from Jan. 1, 2018 to Dec. 31, 2025.

State and Local Tax Deduction

• Property taxes and state and local taxes that were not otherwise deducted on Schedules C, E, or F were deductible as an itemized deduction.

• Under the new law, there is an overall limit of $10,000 for property taxes and state and local income taxes (or sales tax in lieu of income taxes). This provision applies from Jan. 1, 2018 to Dec. 31, 2025.

Charitable Donations

• Charitable contributions were deductible as itemized deductions.

• Cash contributions to public charities were subject to a 50% of AGI limitation.

• Taxpayers could deduct 80% of donations made to colleges and universities where the payment allowed the taxpayer the right to purchase seating or tickets to athletic events.

• The new tax law made the following changes:

• AGI threshold for cash contributions to public charities is increased to 60%.

• No charitable deduction is allowed for payments made to college institutions for the right to purchase tickets or seats at athletic events.

• The increased AGI threshold and denial for deduction for stadium seating rights are effective as of Jan. 2, 2018.

Medical Expenses

• Taxpayers could deduct out-of-pocket medical expenses that exceeded 10% of AGI.

• The new law reduces the AGI limitation to 7.5% for both regular tax and AMT purposes for 2017 and 2018.

Moving Expenses

• Taxpayers were allowed a deduction from AGI for moving expenses paid in connection with relocating for a new principal place of work. Reimbursements to members of the Armed Forces for moving expenses incurred pursuant to military orders to relocate were excluded from income.

• The tax law suspends the deductibility of moving expenses. The provisions related to members of the Armed Forces remain.

• This suspension of the moving deduction is applicable from Jan. 1, 2018 to Dec. 31, 2025.

Tax Reform – Individual Changes

6

Topic Prior Law New LawPersonal Casualty and Theft Losses

• Taxpayers could claim a deduction for losses incurred but not covered by insurance or other means of reimbursement. These losses were subject to a $100 limit and were further limited by a 10% AGI threshold.

• The new tax law limits the deduction to only losses that are attributed to federally-declared disasters. This revision is effective from Jan. 1, 2018 to Dec. 31, 2025.

Wagering Losses

• Gambling losses were deductible as itemized deductions to the extent of gambling winnings.

• The new provision clarifies that other expenses related to the gambling are also subject to the same limitation, including otherwise deductible expenses traveling to and from a casino. This provision applies from Jan. 1, 2018 to Dec. 31, 2025.

Discharge of Certain Student Loan Debt

• A taxpayer did not include in gross income amounts from the forgiveness of certain student loans, contingent upon him or her working in certain professions for a defined period of time.

• The new law includes discharges on account of death or disability in the allowable reasons for an exclusion.

• This provision applies to discharges of loans after Dec. 31, 2017.

Exclusion for Reimbursement of Qualified Moving Expenses

• Taxpayers who received reimbursement for qualifying moving expenses by their employer could exclude these reimbursements from gross income.

• The new law suspends the exclusion from gross income for periods starting Jan. 1, 2018 through Dec. 31, 2025.

• This suspension does not apply to members of the Armed Forces.

Miscellaneous Itemized Deductions

• Taxpayers were able to deduct as a miscellaneous itemized deduction subject to a 2% of AGI limitation on a number of expenses, including (but not limited to) tax preparation fees, appraisal costs for charitable contributions, hobby expenses, investment fees, unreimbursed employee business expenses, the loss on traditional or Roth IRAs upon full distribution, repayments of previously taxed income, and safe deposit box rental fees.

• The new law suspends all deductions that were subject to the 2% AGI limitation.

• This provision is in effect from Jan. 1, 2018 through Dec. 31, 2025.

7

Topic Prior Law New LawLimitation on Itemized Deductions

• Prior law applied a limitation on itemized deductions as the taxpayer exceeded certain income amounts. Total itemized deductions could not be reduced by more than 80% of the total deductions.

• The repeal of the overall limitation on itemized deductions is in effect from Jan. 1, 2018 through Dec. 31, 2025.

Deduction for Alimony Payments and Inclusion of Alimony Payments as Income

• Alimony paid was deductible by the payor spouse.

• Alimony received by a spouse was included in gross income.

• The new law repeals the deduction for alimony paid and the inclusion of alimony received for divorce decrees executed after Dec. 31, 2018.

Child Tax Credit • Individuals with qualifying children under the age of 17 were eligible for a $1,000 per child credit. This credit was allowed for regular tax and AMT purposes. Families with three or more children utilized an alternative formula for the calculation of their credit if it would produce a more favorable result than the earned income calculation.

• The new tax law increases the credit to $2,000 per qualifying child and raises the threshold at which the credit is phased out. The maximum refundable credit is capped at $1,400 per qualifying child.

• In order to qualify for this credit, the taxpayer must include a valid Social Security Number (SSN) for each child the credit is being claimed on. The SSN must be issued prior to the filing of the return to be eligible.

Family Tax Credit

• No family tax credit existed under the prior law.

• The new tax law allows for a $500 nonrefundable credit for qualifying dependents that are not qualifying children of the taxpayer.

• The requirements for a valid SSN for the child tax credit is not in effect for the family tax credit.

Tax Reform – Individual Changes

8

Business Changes

Presented by Matt Whalen, CPA

9

Topic Prior Law New LawTax Rates • Corporate tax rates under the prior

law were 15%, 25%, 34% and 35%. The maximum tax rate of 35% applied to corporations with taxable income over $10 million. There was an additional 5% tax assessed for taxable income over $100,000 that was capped at $11,750. A 4% additional tax was assessed on taxable income over $15 million that was capped at $100,000.

• Personal service corporations (PSCs) were taxed at a flat 35%.

• The new corporate tax rate is 21% effective for tax years starting Jan. 1, 2018.

• There is no separate rate for PSCs.• Fiscal-year C corporations compute

their tax liability for their year ending in 2018 using the blended rate approach of Sec. 15.

Net Operating Losses (NOLs)

• Net operating losses could be carried back two years or carried forward 20 years. Special rules apply for farm NOLs.

• The carryback of NOLs is repealed effective for tax years ending after Dec. 31, 2017.

• NOLs generated for years beginning after 2017 cannot reduce taxable income by more than 80%. NOLs carryforward indefinitely. Special rules apply for farm NOLs.

Corporate Alternative Minimum Tax (AMT)

• A corporation was subject to AMT if its tentative minimum tax was higher than its regular federal tax.

• The corporate AMT is repealed effective for tax years beginning after Dec. 31, 2017.

• New rules allow for accelerated use of any minimum tax credit (MTC) carryover.

Expansion of Eligibility for More Favorable Accounting Methods

• Generally, an exception for the requirement to utilize the accrual basis of accounting existed for taxpayers whose average annual gross receipts were $5 million or less.

• Taxpayers with inventories were exempted from accounting for those inventories for tax purposes if they had $1 million or less of average annual gross receipts.

• The uniform capitalization rules were required to be applied to a taxpayer unless its average annual gross receipts were $10 million or less.

• New provisions are effective for tax years beginning after Dec. 31, 2017.

• Taxpayers subject to Sec. 448 (other than tax shelters) with three-year average annual gross receipts of $25 million or less are eligible for the cash basis of accounting.

• The prior year exception defining small businesses is removed. Thus, if a business with gross receipts above the $25 million threshold drops below this threshold, it may change to the favored methods.

Tax Reform – Business Changes

10

Topic Prior Law New LawExpansion of Eligibility for More Favorable Accounting Methods (continued)

• Taxpayers who meet the $25 million gross receipts test are not required to account for inventories under Sec. 471. Taxpayers can use a method of accounting that treats inventory items as non-incidental materials and supplies or utilize the inventory method in their “applicable financial statement” (AFS), or if they have no AFS, use the accounting procedure per books.

• Small taxpayers (as defined under Sec. 448 with average annual gross receipts in the prior three-year period of $25 million or less) are excluded from all parts of Sec. 263A.

• The dollar threshold for long-term contract income recognition (Sec. 460(e)) for certain construction contracts is increased to $25 million.

Conversion from S Corporation to C Corporation

• The Sec. 481(a) adjustment due to a terminated S corporation election had to be ratably included in income over a four-year period starting with the year the election was terminated.

• The new law allows for a Sec. 481(a) adjustment for an eligible terminated S corporation that is attributed to the revocation of the S corporation election; it will be accounted for ratably over a six-year period (beginning with the year the termination of the election is effective).

• The new provision defines an eligible terminated S corporation to be any C corporation that was an S corporation at the date of enactment of the new law and it had terminated is S corporation election within two years of the law’s enactment date. In addition, the owners at the time of the S corporation revocation must be the same as of the date of this law’s enactment.

• This provision was effective upon the enactment of the tax reform law.

11

Topic Prior Law New LawDomestic Production Activity Deduction (DPAD)

• DPAD provided a 9% deduction of the qualified production activity income against taxable income.

• The new tax act repeals the DPAD effective for years beginning after Dec. 31, 2017.

Deductibility of Interest Expense

• Interest paid or accrued was deductible in determining taxable income.

• The deduction for business interest is limited to the sum of the following: business interest income, 30% of the adjusted taxable income (as defined in new law), and floor plan financing interest.

• Any business interest not allowed due to exceeding this amount may be carried forward indefinitely.

• Adjusted taxable income is determined for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2022 without regard to depreciation, amortization, or depletion.

• Limitations do not apply to taxpayers whose annual average gross receipts are $25 million or less.

Entertainment and Transportation Expenses

• Entertainment directly related to a trade or business was 50% deductible in the computation of taxable income.

• The tax act modifies the provision to disallow any deduction for:

• Activities generally considered to be entertainment, leisure, amusement, or recreation.

• Membership dues with respect to any club organized for business, pleasure, recreation, or social purposes.

• Facilities used in connection with the previous two items.

• The act also repeals the deductibility of qualified transportation fringe benefits (such as transit passes).

• Provisions are effective for amounts paid or incurred after Dec. 31, 2017.

• See employee-related matters below for further discussion.

Tax Reform – Business Changes

12

Topic Prior Law New LawBonus Depreciation

• Taxpayers could claim an additional first-year depreciation deduction for qualified property acquired and placed in service prior to Jan. 1, 2020. The amount of the additional deduction in 2017 was 50%, then 40% in 2018, 30% in 2019 and phased out completely in 2020. This bonus depreciation was allowable for AMT purposes as well. Taxpayers could elect out of bonus depreciation annually if their circumstances warranted it.

• Bonus depreciation could be claimed for luxury autos in the amount of $8,000 for 2017, with a $1,600 reduction every year starting in 2018.

• Taxpayers are allowed to claim a 100% first-year depreciation deduction on qualified property that is acquired and placed in service after Sept. 27, 2017. Starting in 2023, there will be a phase out of 20% each year until 2027 when the first year additional depreciation is 0%.

• The use of the qualified property does not have to originate with the taxpayer, which allows new and used property to qualify for bonus depreciation.

Expansion of Sec. 179 Expensing

• Prior law allowed for $500,000 of Sec. 179 expensing starting in 2015. The amount was indexed for inflation starting in tax years beginning after Dec. 31, 2015.

• The $500,000 deduction would be reduced by the amount that property acquisitions exceeded $2 million. This threshold was also indexed for inflation.

• The tax law increased the maximum Sec. 179 deduction to $1 million with the phase-out threshold for acquired property being $2.5 million. These amounts are indexed for inflation beginning after 2018.

• The provision expanded the definition of eligible Sec. 179 property to include specific tangible personal property utilized in a trade or business related to furnishing lodging.

• The definition of qualified real property that is eligible for Sec. 179 expensing now includes improvements to nonresidential real property such as roofs, heating, ventilation, air conditioning, fire protection, and alarm and security systems placed in service after Dec. 31, 2017.

Passenger Auto Depreciation Limits

• Passenger cars treated as listed property under Sec. 280F had a limit for the annual depreciation deduction. These limits were $3,160 for year one, $5,100 for year two, $3,050 for year three, and $1,875 for all subsequent years. These depreciation limits did not include any appropriate bonus depreciation.

• The new law increases the limitation on depreciation for listed property under Sec. 280F to $10,000 for the first year, $16,000 for the second year, $9,600 for the third year, and $5,760 for subsequent years. These limitations have been indexed for inflation. This provision is in effect for tax years beginning after Dec. 31, 2017. 13

Topic Prior Law New LawLike-Kind Exchanges (LKEs) of Real Property

• LKEs allow for non-recognition of gain in exchanges of property of a like-kind within established periods of time. These exchanges could include depreciable tangible property, intangible/nondepreciable personal property, or real property.

• The new law restricts the non-recognition of gain in a LKE to exchanges of real property effective for exchanges completed by Dec. 31, 2017. An exemption is allowed for exchanges where the property disposed of by the taxpayer is disposed on or before Dec. 31, 2017 or the property received in the exchange is received on or before Dec. 31, 2017.

Qualified Improvement Property

• Prior law had special provisions related to qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property that qualified the taxpayer to utilize a 15-year recovery period.

• There were limitations on whether bonus depreciation would apply, which was dependent on whether the property also met the definition of qualified leasehold improvement property.

• A technical correction is required in order for qualified improvement property to be treated as intended, i.e., 15-year recovery property. The act eliminates the specific definitions of qualified leasehold improvements, qualified restaurant improvements, and qualified retail improvements. This new provision applies for property acquired and placed in service after Dec. 31, 2017.

• The new provision also allows taxpayers to utilize Sec. 179 on qualified improvement property without having to take into account whether the property is subject to a lease, whether it was placed in service more than three years after the original placed in service date of the building which is improved, or whether the improvement was for a restaurant building.

• Any restaurant building property that was placed in service after Dec. 31, 2017 that does not meet the definition of qualified improvement property will not qualify for Sec. 179.

Tax Reform – Business Changes

14

Topic Prior Law New LawCredit For Paid Family and Medical Leave

• No provision in prior law. • Eligible employers can claim a credit of 12.5% of wages paid to eligible employees presuming the rate of pay for the eligible employee is at least 50% of their standard wages. The credit is increased by 0.25% for every 1% increase in the rate of pay, up to 100% (which would result in a 25% credit).

• Note that family and medical leave is defined by Sec. 102(a)(1)-(e) of the Family and Medical Leave Act of 1993. Employer-provided leave that is treated as vacation leave, personal leave, or other sick leave would not qualify as family or medical leave for purposes of the credit.

• The provision is in effect for Jan. 1, 2018 to Dec. 31, 2019.

• The credit is not available to the extent mandated under state or local law.

Employer-Provided Food and Beverages from Onsite Eating Facility

• Employers could provide a de minimis fringe benefit to employees by offering food and beverage through an onsite eating facility for the convenience of the employer. These fringes were not includible in the employee’s gross income and were deductible.

• For periods starting after Dec. 31, 2017 and before Jan. 1, 2026, the 50% limitation on meals is expanded to include food and beverage facilities onsite for the benefit of the employer.

• After Dec. 31, 2025, the cost of providing food and beverages to employees by way of an onsite eating facility are nondeductible.

Exclusion for Reimbursement of Qualified Moving Expenses

• Taxpayers who received reimbursement for qualifying moving expenses by their employer could exclude these reimbursements from gross income.

• The new law suspends the exclusion from gross income for periods starting Jan. 1, 2018 through Dec. 31, 2025. This suspension does not apply to members of the Armed Forces.

15

Topic Prior Law New LawEmployee Achievement Awards

• Employee achievement awards of tangible personal property that are under a specific dollar threshold could be deductible by the employer and not included in the income of the employee.

• The new law redefines tangible personal property and excludes cash, gift cards/certificates, vacations and related expenses, tickets to entertainment events, stocks/bonds/securities, and other similar items.

• The intent is to narrow the scope of the definition of eligible achievement awards.

Stock Options • Employees generally recognized income tax in the year an employer transferred stock to the employee and the right to have stock was transferable or not subject to substantial risk of forfeiture.

• A new election is available for a qualified employee to defer the inclusion in income for qualified stock in certain situations.

Settlements Related to Sexual Harassment and Sexual Abuse

• A deduction was allowed for ordinary and necessary business expenses, which could include legal settlements.

• The new law disallows a deduction for any legal settlement and the legal fees related to a sexual harassment or abuse case if those payments are subject to a nondisclosure agreement.

Tax Reform – Business Changes

16

Sources: American Institute of Certified Public Accountants, Tax Membership

Questions & Answers

17

Have more questions? Contact us! At Northland CPAs we take quality seriously. Our CPAs are highly trained professionals that can bring a fresh perspective to your finances… this unique expertise has allowed us to

become a leading accounting firm in the region. Part of what we do as CPAs is help families and businesses achieve balance. We’re here to help you save time, money, and anxiety so you can spend your energy

on things that matter to you. Our people are more than “number crunchers” – we are analysts, educators, leaders, listeners, and trusted advisors, both on and off the job.

Jordan Lenzner, CPA

Mike Hauser, CPA

Shannon Campy, CPA

Amy Wheeler, EA

Ben Hauser, CPA

Mandy Hein, CPA

Matt Whalen, CPA

Brian Wild, CPA

NORTHLANDCPAS.COM