What CPAs Are Asking About Tax Reform in 2018?
Surgent experts have already issued well more than 10,000 CPE credit hours on tax reform and in doing so, we’ve addressed hundreds of questions on this law from practitioners. Here are answers to five of the top questions CPAs and tax professionals
Question No. 1: Is it true that businesses such as accounting and law firms are ineligible for the 20% deduction?
This is not true in many cases. Professional firms such as law firms and accounting firms are eligible for the 20% deduction as long as the owner's taxable income does not exceed the phase-out limits, which start at $157,500 and $315,000.
Question No. 2: What is Qualified Business Income (QBI)?
Generally QBI is the income from a qualified business that is used to determine the 20% deduction. In other words the deduction is 20% of QBI, which is the net amount of qualified items of income, gain, deduction and loss with respect to any qualified
trade or business of the taxpayer.
Question No. 3: Can Schedule E filers with net rental income take the 20% deduction?
Like a lot of issues surrounding the implementation of this deduction, we await IRS guidance. We think that in order to take this deduction we would have to conclude that the rental activity constituted a "trade or business," but we don't know how
a rental activity would meet that requirement. Stay tuned for more IRS guidance on this as well as other issues related to the 20% deduction.
Question No. 4: Which business entities may a taxpayer use in order to take advantage of the 20% deduction?
A taxpayer may do business as a Schedule C, an S corporation, or partnership/Multi Member LLC and take advantage of this deduction; but each entity has separate rules relating to the deduction itself. The only ineligible entity is the C corporation,
which—because of the favorable 21% marginal tax rate—is not able to take advantage of this deduction.
Question No. 5: Are the taxable income limitations applicable only to professionals, or every trade or business?
They are subject only to what are called specified service trade or businesses, which include some but not all professionals. By having taxable income under these limits, otherwise ineligible firms, medical practices, and the like are eligible for
the 20% deduction.
Summary of Top Changes in the Tax Cuts and Jobs Act
Here’s a list of the major provisions in the law that was signed by President Trump on December 22nd, 2017.
These provisions begin in 2018 unless noted and many of the individual provisions are temporary, with some set to expire as of January 1, 2026.
- There are seven individual tax brackets. The top rate is 37%, kicking in at $500,000 for singles and $600,000 for MFJ.
- The standard deduction is increased to $12,000 for singles and $24,000 for MFJ.
- The child tax credit is increased to $2,000 per child, with $1,400 as a refundable credit – such $1,400 payable to taxpayers even with no tax liability.
- The dreaded individual AMT remains, though ostensibly applying to fewer taxpayers since it applies at higher income levels.
- Schedule A deductions for mortgage interest will be limited to mortgage debt up to $750,000. The current $1M limit will apply to properties purchased before December 15, 2017. Home equity interest is no longer deductible. As a concession
to the real estate industry, the deduction is available for both new mortgages on first and second homes on debt up to $750,000.
- Schedule A deductions for the much debated and popular SALT will be limited to $10,000, including any combination of state and local taxes (or sales taxes) and property taxes. Paying these 2018 taxes now to gain the deduction in 2017
is specifically outlawed.
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- The individual mandate penalty is reduced to $0. Reduced sign-ups of healthy people could potentially lead to soaring premiums.
- Medical expenses exceeding 7.5% of AGI can be deducted in 2017 and 2018.
- Alimony would no longer be deductible by the payor, and the recipient would not include the alimony as income. This change takes effect for divorce and separation agreements executed in 2019.
- $10,000 yearly can be withdrawn from §529 plans per child for private schooling even at the elementary and high school levels.
- The estate tax was not repealed. The exemption doubles to $10M indexed to inflation after 2011 ($10.98M in 2017).
- Individuals are generally able to deduct 20% of qualified business income from pass-through entities. There are limitations. A phaseout starts at $157,500 for singles and $315,000 for MFJ.
- The hallmark of this bill reduces the top corporate tax rate from 35% to 21%.
- The one-time repatriation rate for overseas funds is 8% (15.5% for cash). Income earned abroad will generally not be taxed; only domestic profits would be subject to American taxation.