Posts Tagged ‘tax reform’

The Deep Dive: Significant Changes to Itemized Deductions

By Josie Dillon, CPA
Manager, Tax Services
JDillon@sponselcpagroup.com

The Deep Dive takes a closer look at individual aspects of the new tax law and how they might affect you or your business.

The Tax Cuts and Jobs Act (TCJA) has brought many changes for individual income tax filers, including significant changes to some of the more popular deductions.

As was the case under previous law, individual tax filers can still subtract from adjusted gross income (AGI) their option of either a standard deduction or the sum of their itemized deductions to arrive at taxable income. However, the Tax Act has nearly doubled the “standard deduction” amount. The standard deduction for 2018 is $24,000 for joint filers; $18,000 for heads of household; and $12,000 for singles or married taxpayers filing separately. The standard deduction figures will be indexed for inflation after 2018. Given these increases, fewer taxpayers will benefit from itemizing deductions.

In addition to the increase in the standard deduction amounts, the new tax law also made changes to several itemized deductions which are explained in more detail below.

Limitation on State and Local Taxes Paid

The new tax law has placed limits on an individual’s ability to deduct state and local taxes as an itemized deduction. Before the changes were effective, individuals were permitted to claim the various types of taxes – real property taxes, personal property taxes, state and local income taxes, and state and local sales taxes (if elected) – as itemized deductions.

For tax years 2018 through 2025, the new tax law limits deductions for taxes paid by individual taxpayers in the following ways:

  • The new law limits the aggregate deduction for state and local real property taxes; state and local personal property taxes; state and local, and foreign, income, war profits, and excess profits taxes; and general sales taxes (if elected) for any tax year to $10,000 ($5,000 for married filing separately). Important Note: The $10,000 limit doesn’t apply if the taxes are paid or accrued in carrying on a trade or business or in an activity meant for the production of income.
  • The new law also completely eliminates the deduction for foreign real property taxes unless they are paid or accrued in carrying on a trade or business or in an activity engaged in for profit.

See previous Sponsel CPA Group article regarding the deductability of prepaid real estate taxes as a result of the new tax law.

Mortgage Interest Deduction

For tax years beginning after 2017 and before 2026, the TCJA modifies the mortgage interest deduction rules, as follows:

  • Acquisition Indebtedness – The deduction for mortgage interest on a principle or second residence is limited to underlying indebtedness of up to $750,000 (down from the $1 million under prior law). The lower $750K limit does not apply to any acquisition indebtedness incurred on or before December 15, 2017. Additionally, the $1 million limitation continues to apply to taxpayers who refinance existing qualified residence indebtedness that was incurred on or before December 15, 2017, so long as the indebtedness resulting from the refinancing doesn’t exceed the amount of refinanced indebtedness.
  • Home Equity Indebtedness – Taxpayers can no longer claim a mortgage interest deduction for interest paid on home equity indebtedness. Under prior law taxpayers could claim a deduction for the interest paid on home equity indebtedness with a loan value up to $100,000. Home equity indebtedness is any indebtedness (other than acquisition indebtedness) secured by a qualified residence. Acquisition indebtedness is any indebtedness incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and it is secured by such residence.

Charitable Contribution Deduction

For contributions made in tax years beginning after December 31, 2017 and before January 1, 2026 taxpayers can deduct cash contributions to public charities and certain private foundations up to 60% of their AGI (under prior law the deduction was limited to 50% of AGI).

In addition, some experts are predicting a significant decline in charitable contributions as many taxpayers will no longer receive a tax benefit as their total itemized deductions will not exceed the increased standard deduction amount. However, there are still some planning opportunities for charitably inclined taxpayers looking to optimize their deductions. For instance, “qualified charitable distributions” directly from a taxpayer’s IRA remain unaffected by the Tax Act, and “donor advised funds” allow for charitable deductions in one year, with the funds available for distribution to charities in subsequent years.

Other Changes to Itemized Deductions

  • Medical expenses are deductible after they exceed 7.5% of AGI for tax years 2017 and 2018. Previously, the AGI floor was 10% for most taxpayers.
  • Casualty and theft losses have been suspended except for losses incurred in a federally declared disaster.
  • There is no longer a deduction for miscellaneous itemized deductions, which were formerly deductible to the extent they exceeded 2% of AGI. This included such deductions as tax preparation costs, investment expenses, union dues and unreimbursed employee expenses.
  • The overall limitation on itemized deductions that formerly applied to taxpayers whose AGI exceeded specified thresholds has been suspended.

Sponsel CPA Group is here to help you manage these significant changes and maximize your benefits. If you have any questions about the new tax reform law, please call Josie Dillon at (317) 613-7841 or email JDillon@sponselcpagroup.com.

Click here for detailed article on “Modifications to Deductions of Losses” 
Click here for detailed article on “Business Expense Deduction Limitations”
Click here for detailed article on the “Pass-Through Income Deduction”
Click here for detailed article on “Changes to Fringe Benefit Rules for Employers”
Click here for detailed article on “New Favorable Depreciation Provisions”
Click here for summary of “Key Provisions Affecting Individual Taxpayers”
Click here for summary of “Key Provisions Affecting Business Taxpayers”

The Deep Dive: Modifications to Deductions of Losses

By Ryan Hodell, CPA
Staff, Tax Services
RHodell@sponselcpagroup.com

Each Thursday for the next few weeks, Sponsel CPA Group will present The Deep Dive, a closer look at individual aspects of the new tax law and how they might affect you or your business. 

The Tax Cuts and Jobs Act made some modifications to the way taxpayers can utilize losses, implementing new limitations that may catch some taxpayers. Net Operating Losses (NOLs) can no longer be carried back, with a couple exceptions. And a new disallowance of “excess business losses” could limit how much is deducted in the year trade and business losses occur, resulting in NOL treatment for any disallowed portion.

NOL Modifications

The new law has repealed the two-year and special carryback provisions for NOLs that first occur in tax years ending after December 31, 2017. The exception is that there are still provisions for two-year carrybacks on certain farming losses and NOLs for property and casualty insurance companies. All other NOLs occurring after this date must be carried forward.

The new law also modified how the NOLs can be used in future years. Instead of being limited to carrying the loss forward for 20 years, most NOLs occurring after the effective date are now carried forward indefinitely. However, these NOLs can only offset up to 80% of taxable income, calculated prior to deducting any NOL. If an NOL is limited under these provisions, the remainder will continue to carry forward.

Example of the 80% Limitation: In 2018, a calendar-year taxpayer has a $90,000 NOL. It has no other NOL carryovers. It carries forward the NOL to 2019, a year in which it has taxable income of $100,000. The taxpayer’s 2019 NOL deduction is limited to $80,000 ($100,000 x 80%). The remaining $10,000 can’t be deducted in 2019, but it can be carried forward indefinitely.

To further complicate matters, any NOLs that first occurred in 2017 or earlier will continue to follow the old rules. They will not be subject to the 80% limitation. This creates a need for separate record keeping of NOLs for these different periods.

New Limitations on Excess Business Losses

Under pre-Tax Cuts and Jobs Act law, a taxpayer’s farm loss could be limited to a given threshold if they received an applicable subsidy in that year. This was known as “excess farm losses.” The new law eliminates this provision for farm losses and instead disallows a taxpayer’s “excess business loss.”

For tax years beginning after December 31, 2017 and before January 1, 2026, non-corporate taxpayers can’t deduct excess business losses. Taxpayers must look at their aggregate trade and business losses to determine if there is any excess that will be disallowed. If these losses exceed $500,000 for married filing joint (and $250,000 for single), then any excess is disallowed and converted to an NOL to be carried to future years. Although the new provision states this is for non-corporate taxpayers, further language clarifies that this includes losses from S corporations and partnerships.

Example: If a taxpayer had $400,000 in losses flowing to their return from an S corporation, and their spouse had $200,000 of losses from a sole proprietorship, then they would add these together for $600,000 in combined business losses. The combined loss is then subtracted from the threshold amount ($500,000 – MFJ), and the $100,000 in excess business losses would be converted to an NOL that would carry forward to future years. Since this is now an NOL, it would also be subject to the new 80% NOL limitation in future years that was discussed above.

In effect, the new law limits the ability of non-corporate taxpayers to use trade or business losses against other sources of income, such as wages and other compensation, fees, interest, dividends and capital gains. The result is that the business losses of non-corporate taxpayers for a tax year can offset no more than $500,000 (MFJ), or $250,000 (other individuals), of a taxpayer’s non-business income for that year.

Summary

Both of these new provisions make excess losses less valuable because they can no longer eliminate all of the taxable income in a given year. They also can’t provide immediate benefit by being able to carry them back to a prior tax year. This can make it even more important to manage the usage of other deductions now available to taxpayers, such as accelerated depreciation expensing provisions, to ensure maximization and timing of deductions.

Sponsel CPA Group is here to help you manage these complex provisions and maximize your benefits. If you have questions about tax reform changes, please call Ryan Hodell at (317) 613-7868 or email RHodell@sponselcpagroup.com.

Click here for detailed article on “Business Expense Deduction Limitations”
Click here for detailed article on the “Pass-Through Income Deduction”
Click here for detailed article on “Changes to Fringe Benefit Rules for Employers”
Click here for detailed article on “New Favorable Depreciation Provisions”
Click here for summary of “Key Provisions Affecting Individual Taxpayers”
Click here for summary of “Key Provisions Affecting Business Taxpayers”

The Deep Dive: Business Interest Expense Deduction Limitations

Lindsey AndersonBy Lindsey Anderson, CPA
Manager, Tax Services
landerson@sponselcpagroup.com

Each Thursday for the next few weeks, Sponsel CPA Group will present The Deep Dive, a closer look at individual aspects of the new tax law and how they might affect you or your business. 

The Tax Cuts and Jobs Act introduced a new limitation to businesses for the deduction of interest expense for amounts paid or incurred after December 31, 2017.

Under the new law, the deduction for allowed business interest for any tax year cannot exceed the sum of the following:

  • 30% of the taxpayer’s “adjusted taxable income” for the tax year;
  • the taxpayer’s “business interest income” for the tax year; plus
  • the taxpayer’s “floor plan financing interest” for the tax year.

In order to fully understand the calculation for the deduction limitation, we need to define a few terms:

  • “Adjusted taxable income” is defined as the taxpayer’s taxable income with exclusions for the following:
    • Items of income, gain, deduction or loss that aren’t properly allocated to the trade or business
    • Business interest or business interest income
    • Deductions allowed for depreciation, amortization or depletion for tax years beginning before January 1, 2022
    • Net operating loss deductions
    • Qualified business income deductions allowed under Code Section 199A.
  • “Business interest income” is defined as interest which is included in the taxpayer’s gross income for the tax year that is properly allocated to the trade or business. Investment interest income does not constitute business interest income.
  • “Floor plan financing interest” is defined as interest paid or accrued on debt used to finance the acquisition of motor vehicles held for sale or lease, and is secured by the inventory acquired. Examples of companies this would apply to are car dealerships, boat dealerships and farm machinery/equipment retailers.

Any business interest that isn’t deductible because of the business interest limitation is treated as business interest paid or accrued in the following tax year, and may be carried forward indefinitely.

Small Business Exception to the Business Interest Deduction Limitation

There is a small business exception to the limitation on deducting business interest expense. The limitation does not apply to a taxpayer whose average annual gross receipts for the three tax year periods ending with the prior tax year do not exceed $25 million.

Treatment for Partnerships and S-Corporations

The interest expense disallowance is generally determined at the tax filer level. However, a special rule applies to pass-through entities (e.g. partnerships and S-corporations), which requires the determination to be made at the entity level; for example, at the partnership level instead of the partner level.

While the limitations on the business interest expense deduction can be complex, Sponsel CPA Group is here to help you navigate how this will affect your tax outlook, and create a plan to minimize your tax exposure.

If you have any questions about tax reform changes, please call Lindsey Anderson at (317) 613-7843 or email landerson@sponselcpagroup.com.

Click here for detailed article on the “Pass-Through Income Deduction”
Click here for detailed article on “Changes to Fringe Benefit Rules for Employers”
Click here for detailed article on “New Favorable Depreciation Provisions”
Click here for summary of “Key Provisions Affecting Individual Taxpayers”
Click here for summary of “Key Provisions Affecting Business Taxpayers”

The Deep Dive: New Favorable Depreciation Provisions

Liz BelcherBy Liz Belcher, CPA
Manager, Tax Services

Each Thursday for the next few weeks, Sponsel CPA Group will present The Deep Dive, a closer look at individual aspects of the new tax law and how they might affect you or your business. 

The Tax Cuts and Jobs Act (TCJA) has made a number of favorable changes in the availability of expensing allowances for depreciable property. These include increasing the IRC Section 179 expensing limit; expanding bonus depreciation to include both new and used property; and allowing for 100% write off for the year the qualified property is placed in service.

More Favorable Bonus Depreciation Provisions

Under prior law, taxpayers were able to claim a 50% first-year bonus depreciation deduction for qualified new assets. In addition, used property did not previously qualify for bonus depreciation.

Under TCJA, bonus depreciation has been significantly improved. For qualified property placed in service after September 27, 2017 and before January 1, 2023, the first-year bonus depreciation percentage is increased to 100%. In addition, the 100% deduction is allowed for both new and used qualifying property. In later years, the bonus depreciation is scheduled to be reduced as follows:

  • 80% for property placed in service in 2023;
  • 60% for property placed in service in 2024;
  • 40% for property placed in service in 2025;
  • 20% for property placed in service in 2026;

Enhancement of Section 179 Deduction

When 100% bonus depreciation is not available, the Section 179 deduction can provide similar benefits. Permitted expensing, which allows a taxpayer to immediately deduct the cost of qualifying property, is increased to a maximum deduction of $1 million for property placed in service after 2017, and the phase-out threshold is increased to $2.5 million. For later tax years, both the $1 million and the $2.5 million amounts will be indexed for inflation.

The expense election has also been expanded to cover (1) certain depreciable tangible personal property used mostly to furnish lodging or in connection with furnishing lodging, and (2) the following improvements to nonresidential real property made after it was first placed in service: roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; security systems; and any other building improvements that aren’t elevators or escalators, don’t enlarge the building, and aren’t attributable to internal structural framework.

Depreciation of Qualified Improvement Property

Under the new law, “qualified improvement property” is depreciable using a 15-year recovery period and the straight-line method. Qualified improvement property is defined as any improvement to an interior portion of a building that is nonresidential real property placed in service after the building was first placed in service, except for any improvement for which the expenditure is attributable to (1) the enlargement of the building, (2) any elevator or escalator, or (3) the internal structural framework of the building.

The new law also eliminates the separate definitions of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property that were in place under prior law. Most significantly, the newly defined class is eligible for both bonus depreciation and Section 179 expensing.

If you have any questions about tax reform changes, please call Liz Belcher at (317) 613-7846 or email lbelcher@sponselcpagroup.com.

Click here for detailed article on the “Pass-Through Income Deduction”

Click here for detailed article on “Changes to Fringe Benefit Rules for Employers”

Click here for summary of “Key Provisions Affecting Individual Taxpayers”

Click here for summary of “Key Provisions Affecting Business Taxpayers”

The Deep Dive: Changes to Fringe Benefit Rules for Employers

Brandon CanganyBrandon Cangany, CPA
Senior, Tax Services
bcangany@sponselcpagroup.com

Each Thursday for the next few weeks, Sponsel CPA Group will present The Deep Dive, a closer look at individual aspects of the new tax reform and how they might affect you or your business.  Click here for last week’s column.

Business Deduction is Denied for Entertainment Expenses – The Tax Cuts and Jobs Act eliminates the 50% deduction for business-related entertainment expenses for amounts paid or incurred after December 31, 2017. Under the new law, no deduction is allowed for: (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues for any club organized for business, pleasure, recreation or other social purposes, or (3) a facility used in connection with any of the above items.

However, the restrictions on deducting entertainment expenses don’t apply to nine types of expenses listed in Code Sec. 274(e), including the following:

  • Expenses for goods, services and facilities that are treated as compensation to an employee on the employer’s income tax return and as wages of the employee for withholding purposes.
  • Expenses paid or incurred by the taxpayer, in connection with the performance of services for another person, under a reimbursement or other expense allowance arrangement, if the taxpayer accounts for the expenses to that person.
  • Expenses for recreational, social or similar activities (including related facilities) primarily for the benefit of the taxpayer’s employees, other than highly-compensated employees.

As a result of the tax law change, Sponsel CPA Group recommends that taxpayers set up an “entertainment” account (separate from their meals account) within their general ledger in order to capture the now non-deductible entertainment expenses.

Business Deduction is Limited for Employer Provided Meals – The new law provides that the 50% limit on the deductibility of business meals is expanded, for amounts paid or incurred after December 31, 2017, to meals provided through an in-house cafeteria or otherwise on the premises of the employer. Under prior law, these expenses were 100% deductible by the taxpayer. For tax years beginning after December 31, 2025, the new law will disallow an employer’s deduction for expenses associated with meals provided for the convenience of the employer on the employer’s business premises, or provided on or near the employer’s business premises through an employer-operated facility.

Business Deduction is Denied for the Cost of Providing Qualified Transportation Benefits – The new law provides that no deduction is allowed, for amounts paid or incurred after December 31, 2017, for the expense of a qualified transportation fringe benefit (e.g., parking and mass transit), but the exclusion from income for such benefits received by an employee is retained. In addition, no deduction is allowed for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer for travel between the employee’s residence and place of employment, except as necessary for ensuring the employee’s safety.

If you have any questions about tax reform changes, please call Brandon Cangany at (317) 613-7899 or email bcangany@sponselcpagroup.com.

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