6 Big Factors You Need To Know About The New Tax Law Right Now
Guest Post from Tom Pierce, Audit and Tax Accountant
Ostrow Reisin Berk & Abrams, Ltd.
We’re entering a “busy season” for all CPAs, but this year is already bringing about a different kind of busy beyond tax return preparation. Thanks to the new tax bill that’s been passed in Washington, our firm is spending a lot of time answering questions from both homeowners and business owners – the most common is,“What does this tax reform really mean for me?”
That’s why I’d like to take some time to highlight the most important changes that may potentially impact you going forward.
#1: The Corporate Tax Rate Drops Dramatically
One of the most discussed items going into the tax reform debate was the corporate tax rate and how much they would lower it. Based on the outcome, those corporations should be quite happy with the results.
Whereas the top tax rate for a corporation was previously 39%, corporations will see that tax rate slashed significantly starting in 2018. The top corporate tax rate will now be 21%. That’s likely to result in many corporations paying less in taxes and having more spending power.
Note that when we say “corporate,” we’re typically referring to organizations that are structured as C corporations. These can often be large businesses such as Google and Amazon.
#2: Individual Tax Rates Lowered Too
Of course, lawmakers couldn’t just lower corporate tax rates as there would be a large number of people who would receive no benefit. Knowing this, Congress also lowered individual tax rates as part of their reform. As a result, most individuals will see a lower tax rate, which can lead to lower taxes.
#3: Qualified Business Income Deduction For Certain Small Businesses
We mentioned the 21% top tax rate for corporations, but what about small businesses? Small businesses that are set-up as flow-through entities (i.e. Partnerships, S-Corps and Sole Proprietors) can potentially benefit from what’s called a qualified business income tax deduction, which is a 20% deduction from qualified income. Sounds terrific, right? It can be, but there are a lot of limitations on this deduction, which includes income phase-outs, service industry issues and wage limitations. It is a complicated calculation so reach out to your accountant to determine if you qualify.
#4: Entertainment Deduction Is On The Way Out
Know how you might take a client out to a game and then deduct it as an entertainment expense? Under the old tax laws, this deduction was limited to 50% but starting in 2018, you are no longer allowed to deduct any entertainment expenses. In other words, if you’re using entertainment functions as a way to build customer relationships, plan accordingly with this in mind.
#5: Less Tax Benefit In Home Ownership
From the point of view of a homeowner, there are some direct effects from the tax reform. One of the biggest items that you may not receive – from a tax perspective –
the benefit of home ownership. The reason for this stems from a few different factors:
The first factor is the limitation on certain itemized deductions. The first limitation is in relation to the amount of mortgage interest that can be deducted. Previously, the interest allowed on a deduction was capped on mortgages over $1 million but now that limitation has been lowered to $750,000. The other limitation is that they put a $10,000 cap on the combined total of real estate taxes and state/local income taxes. Both of these amounts were previously allowed to be deducted without limitations.
The other factor is that lawmakers have nearly doubled the standard deduction. Which means for people who are married filing jointly, the deduction is now $24,000. What everyone needs to know is that every taxpayer gets the choice of the standard deduction or the total of their itemized deductions (typically the sum of mortgage interest, real estate taxes, state taxes and charity). Now that the standard deduction has been doubled and certain itemized deductions have been limited, a lot of taxpayers will now take the standard deduction because it will be higher. This means that there are a lot of people who will no longer receive the benefit from their mortgage interest or real estate taxes.
To be clear, this is not to say that there is no value in owning a home. What we are saying is that from a tax point of view, the benefits of owning a home have been limited for certain people.
#6: A Win For Homeowners: The Gain Exclusion
Despite the tax limitations we’ve mentioned above, there is one tax advantage for homeowners that lawmakers left intact. We are referring to the exclusion of gain of the sale of your primary residence. If you are single, the gain exclusion is $250,000 and if you’re married, the gain exclusion is 500,000. What this means is that if your home has appreciated in value but under the threshold, you do not have to pay taxes on the sale of your home as long as you’ve lived in the home for two of the last five years.
So if you’re considering moving in the near future, keep this exclusion in mind and how it might benefit you.
A Few Extra Things To Keep In Mind For…
Small Business Owners
You should be working with your accountant now to figure out how all of these changes will affect you. This is especially true in regards to the new qualified business income tax deduction as there are a lot of qualifications that need to be met in order to take advantage of it.
Depending on how complex your situation is, you should also be working with your accountant to gain an understanding of what may lie ahead for you and plan accordingly.
Are you going to pay less in taxes? Do you need to adjust your withholding with your employer or change your estimated tax payments?
Not only can an accountant help you answer questions like the ones above but they should also be able to see if there are any areas that you can take advantage of with all of these changes.
If you're thinking about buying or selling, it’s a good idea to reach out to your accountant and your attorney to understand which laws are still in place and what changes lie ahead. Should you speed up or slow down the process? If you will have a huge gain on the sale of your current property, do you want to sell it now or do you want to wait and rent it out? Will you still receive any benefit on your taxes from home ownership or will you be one of the many who now takes the standard deduction?
It is always good to be prepared and know how your situation will change as a result of the tax reform. Work with your accountant to see what opportunities lie ahead.
As a skilled accounting professional with Ostrow Reisin Berk & Abrams, Ltd., Tom Pierce handles audit and tax related matters for a variety of clients, particularly for individuals and small business owners. Tom takes great pride in his ability to communicate and simplify complicated issues, always proactively seeking out effective solutions for his clients’ various needs.