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TCJA expands use of cash-basis accounting method and ties income inclusion reporting for tax purposes to reporting for financial purposes.

The recently-enacted Tax Cuts and Jobs Act (TCJA) includes a number of changes to the rules governing the choice of accounting methods by taxpayers.

In certain situations, the Act raises the gross receipts limit used to determine which taxpayers can use the cash method of accounting:

  • The exception from the uniform capitalization (UNICAP) rules for small taxpayers is expanded for tax years beginning after Dec. 31, 2017, to apply to taxpayers whose average annual gross receipts for the immediately preceding three years didn't exceed $25 million (up from $10 million under pre-TCJA law), and is made available to both producers and resellers of both real and personal property, rather than just resellers (as under pre-TCJA law).
  • The TCJA provides that, for tax years beginning after Dec. 31, 2017, taxpayers that have average annual gross receipts of $25 million or less during the preceding three years (up from $10 million under pre-TCJA law) aren't required to account for the cost of goods sold using inventories under Code Sec. 471 (and, thus, aren't required to use the accrual method of accounting), but rather may use a method of accounting for inventories that either (1) treats inventories as non-incidental materials and supplies, or (2) conforms to the taxpayer's financial accounting treatment of inventories.
  • The TCJA provides that, in tax years beginning after Dec. 31, 2017, corporations and partnerships that have a corporation as a partner satisfy the gross-receipts test for the tax year if the taxpayer's average annual gross receipts are under $25 million for the three tax-year period ending with the tax year that precedes the tax year for which the taxpayer is being tested. The $25 million limit is adjusted for inflation for tax years beginning after 2018. Under pre-Tax Cuts and Jobs Act law, the three-year testing period ended with the tax year before the tax year for which the taxpayer was being tested, and a corporation or partnership having a corporation as a partner didn't satisfy the gross receipts test unless the average annual gross receipts of the entity for three-tax-year period ending with the earlier tax year did not exceed $5 million (unadjusted for inflation).
  • The TCJA provides that, in tax years beginning after Dec. 31, 2017, a farming business owned by a C corporation (or partnerships with such a C corporation as a partner) is exempt from the rule requiring such corporations to use the accrual method if the corporation meets an inflation-adjusted $25 million gross-receipts test for the tax year. This limit replaces both the non-inflation-adjusted $25 million limit for family corporations and the $1 million limit for non-family corporations in effect before the TCJA.

The Act requires (or allows) taxpayers in certain circumstances to recognize income for tax purposes no later than the year in which it's recognized for financial reporting purposes:

  • The Tax Cuts and Jobs Act provides that, for an accrual basis taxpayer, the all events test with respect to any item of gross income (or portion thereof) in tax years beginning after Dec. 31, 2017, won't be treated as met any later than (and, thus, these taxpayers must recognize income no later than) the tax year in which the income is taken into account as income on (1) an applicable financial statement (AFS) or (2) under rules specified by IRS, another financial statement.
  • The Tax Cuts and Jobs Act allows taxpayers in tax years beginning after Dec. 31, 2017, to defer the inclusion of income associated with certain advance payments to the end of the tax year following the tax year of receipt if that income also is deferred for financial statement purposes.

These changes may have an impact on your choice of accounting method, and cause you to want you to review and, possibly, revise those choices.

We hope this information helps you understand these changes. Please call us if you wish to discuss how they or any of the many other changes in the TCJA could affect your particular tax situation, and the possible planning steps you might consider in response to it.entity for the three-tax-year period ending with the earlier tax year did not exceed $5 million (unadjusted for inflation).

New 20% deduction for "qualified business income" ("pass-through" income) under the Tax Cuts and Jobs Act.

This deduction should provide a substantial tax benefit to individuals with "qualified business income" from a partnership, S corporation, LLC, or sole proprietorship. This income is sometimes referred to as "pass-through" income.

The deduction is 20 percent of your "qualified business income (QBI)" from a partnership, S corporation, or sole proprietorship, defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business. The business must be conducted within the U.S. to qualify, and specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business). The trade or business of being an employee does not qualify. Also, QBI does not include reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership's business.

The deduction is taken "below the line," i.e., it reduces your taxable income but not your adjusted gross income. But it is available regardless of whether you itemize deductions or take the standard deduction. In general, the deduction cannot exceed 20% of the excess of your taxable income over net capital gain. If QBI is less than zero it is treated as a loss from a qualified business in the following year.

Rules are in place (discussed below) to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction.

For taxpayers with taxable income above $157,500 ($315,000 for joint filers), an exclusion from QBI of income from "specified service" trades or businesses is phased in. These are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners. Here's how the phase-in works: If your taxable income is at least $50,000 above the threshold, i.e., $207,500 ($157,500 + $50,000), all of the net income from the specified service trade or business is excluded from QBI. (Joint filers would use an amount $100,000 above the $315,000 threshold, viz., $415,000.) If your taxable income is between $157,500 and $207,500, you would exclude only that percentage of income derived from a fraction the numerator of which is the excess of taxable income over $157,500 and the denominator of which is $50,000. So, e.g., if taxable income is $167,500 ($10,000 above $157,500), only 20% of the specified service income would be excluded from QBI ($10,000/$50,000). (For joint filers, the same operation would apply using the $315,000 threshold, and a $100,000 phase-out range.)

Additionally, for taxpayers with taxable income more than the above thresholds, a limitation on the amount of the deduction is phased in based either on wages paid or wages paid plus a capital element. Here's how it works: If your taxable income is at least $50,000 above the threshold, i.e., $207,500 ($157,500 + $50,000), your deduction for QBI cannot exceed the greater of (1) 50% of taxpayer's allocable share of the W-2 wages paid with respect to the qualified trade or business, or (2) the sum of 25% of such wages plus 2.5% of the unadjusted basis immediately after acquisition of tangible depreciable property used in the business (including real estate). So if your QBI were $100,000, leading to a deduction of $20,000 (20% of $100,000), but the greater of (1) or (2) above were only $16,000, your deduction would be limited to $16,000, i.e., it would be reduced by $4,000. And if your taxable income were between $157,500 and $207,500, you would only incur a percentage of the $4,000 reduction, with the percentage worked out via the fraction discussed in the preceding paragraph. (For joint filers, the same operations would apply using the $315,000 threshold, and a $100,000 phase-out range.)

Other limitations may apply in certain circumstances, e.g., for taxpayers with qualified cooperative dividends, qualified real estate investment trust (REIT) dividends, or income from publicly traded partnerships.

Obviously, the complexities surrounding this substantial new deduction can be formidable, especially if your taxable income exceeds the threshold discussed above. If you wish to work through the mechanics of the deduction, please give us a call.

The Tax Cuts and Jobs Act (TCJA) has effectively lowered the cost of acquiring capital assets by making substantial changes to the income tax rules for bonus depreciation and other "cost recovery." There's a lot to discuss, and there's a good chance that one or more of these changes will change your tax bill.

Bonus Depreciation

Before the TCJA, taxpayers were allowed to deduct 50% of the cost of most new tangible property (other than buildings and some building improvements) and most new computer software in the year placed in service (with adjustment of the regular depreciation deductions allowed in that year and later years). The "50% bonus depreciation" was to be phased down to 40% for property placed in service in calendar year 2018, 40% in 2019 and 0% in 2020 and afterward.

But for property placed in service and acquired after Sept. 27, 2017 (with no written binding contract for acquisition in effect on Sept. 27, 2017), the TCJA raised the 50% rate to 100%. (Appropriately, 100% bonus depreciation is also called "full expensing" or "100% expensing".)

Additionally, the post-Sept. 27, 2017 property eligible for bonus depreciation can be new or used. Also, certain film, television and live theatrical productions are now eligible.

On the other hand the TCJA repealed the eligibility of "qualified improvement property" (certain improvements to buildings other than residential rental buildings). And the TCJA excluded from bonus depreciation public utility property and property owned by certain vehicle dealerships.

The 2018/2019/2020 phase down (above) doesn't apply to post-Sept 27, 2017 property. Instead, 100% depreciation is decreased to 80% for property placed in service in calendar year 2023, 60% in 2024, 40% in 2025, 20% in 2026 and 0% in 2027 and afterward.

Code Sec. 179 Expensing

Before the TCJA, most smaller taxpayers could immediately deduct the entire cost of section 179 property up to an annual limit of $500,000 adjusted for inflation. For property placed in service in tax years that begin in 2018, the inflation adjusted limit was scheduled to be $520,000. The annual limit was reduced by one dollar for every dollar that the cost of all section 179 property placed in service by the taxpayer during the tax year exceeded a $2 million threshold adjusted for inflation. For property placed in service in tax years that begin in 2018, the threshold was scheduled to be $2,070,000. But for tax years beginning after 2017, the TCJA substitutes as the annual dollar limit $1 million (inflation-adjusted for tax years beginning after 2018) and $2.5 million as the phase down threshold (similarly inflation adjusted).

Before the TCJA, section 179 property included most tangible personal property as well non-customized ("off-the-shelf") computer software. Generally, the only buildings or other land improvements that qualified were restaurant buildings and certain improvements to leased space, retail space or restaurant space that were treated as section 179 property under an election. The TCJA, for tax years beginning after 2017, eliminated these categories and substituted as an elective category the much broader qualified improvement property category (that is no longer eligible for bonus depreciation, see above). Also, taxpayers can, for buildings other than rental real estate buildings, elect to treat as section 179 property previously ineligible building components that are roofs, heating, ventilation and air conditioning property, fire protection and alarm systems, or security systems.

And items (for example refrigerators) used in connection with residential buildings (though not the buildings themselves) are eligible to be section 179 property.

Other Rules for Real Property Depreciation

If placed in service after 2017, qualified improvement property, in addition to no longer qualifying for bonus depreciation and being newly eligible as section 179 property, has a 15 year depreciation period (rather than the usual 39 year period for non-residential buildings).

Apartment buildings and other residential rental buildings placed in service after 2017 generally continue to be depreciated over a 27.5 period, but should the alternative depreciation system (ADS) apply to a building either under an election or because the building is subject to one of the conditions (for example, tax-exempt financing) that make ADS mandatory, the ADS depreciation period is 30 years instead of the pre-TCJA 40 years.

For tax years beginning after 2017, if a taxpayer in a real property trade or business "elects out" of the TCJA's limits on business interest deductions, the taxpayer must depreciate all buildings and qualified improvement property under the ADS.

Vehicles

The TCJA triples the annual dollar caps on depreciation (and Code Sec. 179 expensing) of passenger automobiles and small vans and trucks. Also, because of the extension of bonus depreciation, the increase, allowed only to vehicles allowed bonus depreciation, of $8,000 in the otherwise-applicable first year cap is extended through 2026 (with no phase-down).

Computers and Peripheral Equipment

Under the TCJA, computer or peripheral equipment placed in service after 2017 isn't treated as "listed property" whether or not used in a business establishment (or home office) and whether or not an employee's use is for employer convenience. So an item doesn't have to pass a more-than-50%-qualifed-business-use test to be eligible for Code Sec. 179 expensing and to avoid mandatory use of the ADS.

Farm Property

For items placed in service after 2017, the TCJA shortens the depreciation period for most farming equipment and machinery from seven years to five and allows many types of farm property to be depreciated under the 200% (instead of 150%) declining balance method.

If a taxpayer elects to not have a farming business be subject to the TCJA's limits on business interest deductions, the taxpayer must depreciate under the ADS the business's buildings and other assets property that have a depreciation period of 10 years or more.

Elective rules that sometimes make it easier for fruit-or-nut-bearing trees and vines to qualify for bonus depreciation continue to apply.

Alternative Minimum Tax

Property eligible for bonus depreciation continues to be exempt from the unfavorable depreciation adjustments that apply under the AMT. However, the corporate AMT has been repealed; accordingly the election that corporations could make to give up bonus and other accelerated depreciation for bonus-depreciation-eligible property in exchange for a refund of otherwise-deferred AMT credits was eliminated.

Call us to talk about the above changes and other changes made by the TCJA that may affect planning for your business and personal affairs.

Changes to the Alternative Minimum Tax (AMT) take effect beginning in 2018, under the Tax Cuts and Jobs Act (TCJA).

Before the Tax Cuts and Jobs Act, a second tax system called the alternative minimum tax (AMT) applied to both corporate and non-corporate taxpayers. The AMT was designed to reduce a taxpayer's ability to avoid taxes by using certain deductions and other tax benefit items. The taxpayer's tax liability for the year was equal to the sum of (i) the regular tax liability, plus (ii) the AMT liability for the year.

A corporation's tentative minimum tax equalled 20% of the corporation's "alternative minimum taxable income" (AMTI) in excess of a $40,000 exemption amount, minus the corporation's AMT foreign tax credit. AMTI was figured by subtracting various AMT adjustments and adding back AMT preferences. The $40,000 exemption amount gradually phased out at a rate of 25% of AMTI above $150,000. "Small" corporations-those whose average annual gross receipts for the prior three years didn't exceed $7.5 million ($5 million for startups)-were exempt from the AMT. A taxpayer's net operating loss (NOL) deduction, generally, couldn't reduce a taxpayer's AMTI by more than 90% of the AMTI (determined without regard to the NOL deduction). Very complex rules applied to the deductibility of minimum tax credits (MTCs). All-in-all, the AMT was a very complicated system that added greatly to corporate tax compliance chores.

Corporate AMT Repeal

The Tax Cuts and Jobs Act repealed the AMT on corporations. Conforming changes also simplified dozens of other tax code sections that were related to the corporate AMT. The TCJA also allows corporations to offset regular tax liability by any minimum tax credit they may have for any tax year. And, a corporation's MTC is refundable for any tax year beginning after 2017 and before 2022 in an amount equal to 50% (100% for tax years beginning in 2021) of the excess MTC for the tax year, over the amount of the credit allowable for the year against regular tax liability. Thus, the full amount of the corporation's MTC will be allowed in tax years beginning before 2022.

Temporary Easing of Individual AMT

The TCJA doesn't repeal the AMT for individuals, but it does increase its exemption amounts for tax years 2018 through 2025, making it less likely to hit at lower income levels. Before the TCJA, individual AMT exemptions for 2018 (as adjusted for inflation) would have been $86,200 for marrieds filing jointly and surviving spouses; $55,400 for other unmarried individuals; $43,100 for marrieds filing separately. Those exemption amounts would have been reduced by 25% of the amount by which the individual's AMTI exceeded:

  1. . . . $164,100 for marrieds filing jointly and surviving spouses (completely phased out at $508,900);
  1. . . . $123,100 for unmarried individuals (completely phased out at $344,700); and
  1. . . . $82,050 for marrieds filing separately (completely phased out at $254,450, with an additional add-back to discourage separate filing by marrieds)

Exemption Increases and Higher Phaseouts

The TCJA increases the individual AMT exemption amounts for tax years 2018 through 2025 to $109,400 for marrieds filing jointly and surviving spouses; $70,300 for single filers; and $54,700 for marrieds filing separately. These increased exemption amounts are reduced (not below zero) by 25% of the amount of the taxpayer's alternative taxable income above $1 million for joint returns and surviving spouses, and $500,000 for other taxpayers except estates and trusts. All of these amounts will be indexed for inflation after 2018 under a new measure of inflation that will result in smaller increases than under the method previously used.

For trusts and estates, the base figure AMT exemption of $22,500, and phase-out threshold of $75,000, remain unchanged.

If you were subject to the individual AMT in the past, you may be able to reduce your wage withholding or pay reduced amounts of estimated taxes going forward due to the exemption increases and higher phaseout levels.

Please call us if you wish to discuss how they or any of the many other new tax rules in the TCJA might affect your particular situation, and the planning steps you might consider in response to them.

Listed below are changes to the individual and corporate income tax rates that take effect beginning in 2018 under the major piece of tax legislation called the Tax Cuts and Jobs Act (TCJA).

Rate Changes for Individuals

Individuals are subject to income tax on "ordinary income," such as compensation, and most retirement and interest income, at increasing rates that apply to different ranges of income depending on their filing status (single; married filing jointly, including surviving spouse; married filing separately; and head of household). Currently those rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

New Rates

Beginning with the 2018 tax year and continuing through 2025, there will still be seven tax brackets for individuals, but their percentage rates will change to: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The following tables show the dollar ranges of these new brackets.

TCJA Drops Corporate Income Tax Rate to 21% and Modifies Individual Rate Brackets

TCJA Drops Corporate Income Tax Rate to 21% and Modifies Individual Rate Brackets

TCJA Drops Corporate Income Tax Rate to 21% and Modifies Individual Rate Brackets

TCJA Drops Corporate Income Tax Rate to 21% and Modifies Individual Rate Brackets

Bottom Line

While these changes will lower rates at many income levels, determining the overall impact on any particular individual or family will depend on a variety of other changes made by the Tax Cuts and Jobs Act, including increases in the standard deduction, loss of personal and dependency exemptions, a dollar limit on itemized deductions for state and local taxes, and changes to the child tax credit and the taxation of a child's unearned income, known as the Kiddie Tax.

Capital Gain Rates

Three tax brackets currently apply to net capital gains, including certain kinds of dividends, of individuals and other non-corporate taxpayers: 0% for net capital gain that would be taxed at the 10% or 15% rate if it were ordinary income; 15% for gain that would be taxed above 15% and below 39.6% if it were ordinary income, or 20% for gain that would be taxed at the 39.6% ordinary income rate.

The TCJA, generally, keeps the existing rates and breakpoints on net capital gains and qualified dividends. For 2018, the 15% breakpoint is: $77,200 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $51,700 for heads of household, and $38,600 for other unmarried individuals. The 20% breakpoint is $479,000 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $452,400 for heads of household, and $425,800 for any other individual (other than an estate or trust).

Important: These new tax rates will not affect your tax on the return you will soon file for 2017, however they will almost immediately affect the amount of your wage withholding and the amount, if any, of estimated tax that you may need to pay.

A related change is that the future annual indexing of the rate brackets (and many other tax amounts) for inflation, which helps to prevent "bracket creep" and the erosion of the value of a variety of deductions and credits due solely to inflation, will be done in a way that understates inflation more than the current method does. While it won't be very recognizable immediately, over the years this will push some additional income into higher brackets and reduce the value of many tax breaks.

Corporate Income Tax Rate Drop

C corporations currently are subject to graduated tax rates of 15% for taxable income up to $50,000, 25% (over $50,000 to $75,000), 34% (over $75,000 to $10,000,000), and 35% (over $10,000,000). Personal service corporations pay tax on their entire taxable income at the rate of 35%. (The benefit of lower rate brackets was phased out at higher income levels.)

Beginning with the 2018 tax year, the TCJA makes the corporate tax rate a flat 21%. It also eliminates the corporate alternative minimum tax.

Please call us if you wish to discuss how they or any of the many other changes in the TCJA could affect your particular tax situation, and the possible planning steps you might consider in response to them.

RBSK Payroll
RBSK Payroll Partners