After any major tax reform, it typically takes a full tax cycle to truly understand its implications for business owners and individuals. That is certainly true of the Tax Cuts and Jobs Act (TCJA) of 2017. With the 2018 filing season at its midpoint, what lessons have we learned, and how will they inform tax strategy moving forward?
One thing we know for sure is that the TCJA is complicated to implement. U.S. regulators are still grappling with TCJA provisions that require further clarification. As we await final rules, we know enough to see who benefited the most, and those who didn’t fare quite as well. The lessons we learn require advance tax strategies that can improve your results moving forward.
With that in mind, the following are examples of those businesses which benefited, and others that came out on the other side.
- Domestic businesses, such as manufacturers and distributors with significant labor costs because they generally qualify for reduced tax rates
- Real estate developers also qualify for reduced tax rates
- Owners of residential rental properties as the new rules allow for more immediate expensing of certain fixed asset additions
- Certain small service businesses as they are exempt from the income limitations disallowing the reduced tax rates
- Businesses that acquired fixed assets as the immediate expensing rules were loosened
- Larger service businesses (e.g., physician groups, law and accounting firms), which were excluded from tax reductions
- Professional athletes and entertainers, who did not qualify for reduced tax rates
- Financial service firms, which did not qualify for tax reductions
- Investment advisors employed by financial service firms, who can no longer deduct their business and entertainment expenses
- Businesses with large debt loads can be impacted by limitations on business interest expenses
- Entrepreneurs with various businesses that make and lose money can be impacted by loss limitations
Counterintuitive Tax Planning
With the right strategic tax planning, some so-called “losers” can still reap the benefits of the new tax reform. For example, we worked with a physician group whose owners also owned a pharmacy. By separating the pharmacy from the health care practice, we shifted the practice to the winner category.
Some business owners may want to rethink their compensation strategy by optimizing their salaries to achieve the highest qualified business deduction (QBD). Many owners have historically kept their salaries low because of payroll taxes. Given TCJA changes, making sure the business has enough wages to deduct the highest possible QBD can reap significant tax savings.
TCJA Impact: The Individual Taxpayer
The standard deduction for married individuals was increased to $24,000. We are finding situations where individuals are not receiving the benefit of their charitable contributions, real estate taxes and mortgage interest because their total deductions fall below the standard deduction. With advance planning, we can help create bunching of deductions that will allow higher overall deductions in alternating tax years.
While the overall maximum tax rate was reduced from 39.6% to 37%, the TCJA eliminated a number of deductions to offset the reduction. The limitation of the state and local tax (SALT) deduction to $10,000 has had a significant effect on taxpayers.
Other eliminated deductions include “miscellaneous itemized deductions” such as employee unreimbursed expenses, personal tax preparation and legal fees, and investment expenses. For principal residence mortgages obtained after 2017, only interest can only be deducted on $750,000 of debt.
Looking Ahead: Strategic Tax Planning
Whether you fall in the winner or loser category, or a combination of the two, my primary advice for business owners and individuals is have your tax professional prepare projections for 2019 to see how you will be impacted. At Daszkal Bolton, we like to prepare various scenarios so that taxpayers can have choices to optimize their tax situation for 2019 and beyond. We have also seen situations where a business owner’s prior choice of entity may not be the best structure for the future.
This is an exciting time for our clients and our firm. We look forward to helping our clients optimize their individual tax situation. Please schedule an appointment so that we can help you Conquer New Ground.