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TAX LAW Changes That Affect 2017

Did you know that the “Bipartisan Budget Act of 2018” signed on February 9, 2018 and the Tax Cuts and Jobs Act signed on December 22, 2017 have provisions that affect 2017 taxes?

CONGRESS passes “Bipartisan Budget Act of 2018” on February 9, 2018

This 2018 law affects some provisions of Tax Law for 2017
Early this morning, February 9, 2018: The US Congress passed and President Trump signed the “Bipartisan Budget Act of 2018” (BBA). This has some impact on individuals and businesses for 2017 in its 652 pages. Primarily, this act extended some deductions that had expired on December 31, 2016, but now will expire December 31, 2017.

So why would Congress use a 2018 law to change 2017 tax law, when less than two months earlier Congress passed a massive overhaul of the tax code? Simply put, it deals with the way Congress is passing the law to get around a 60 vote in the Senate. Now, we turn to some of the changes enacted in 2018 that affect 2017.

Some of the changes now back in the law through December 31, 2017 are:
  1. Mortgage insurance premiums
  2. Above-the-line deduction for qualified tuition and education expenses
  3. Exclusion from income of discharge of qualified principal residence indebtedness
  4. Nonbusiness energy property credit
  5. Energy efficient new homes credit
If you paid mortgage insurance premiums, they are now deductible for 2017. Most mortgage companies did not report this since it was not the law, but now it is. So you may likely see a revised mortgage statement 1098 for the 2017 tax year. If you paid mortgage insurance premiums, you should gather the information. Tax software including the IRS computers is not set up to accept this just yet, so you can see some changes coming during the filing season that are already in progress.

This BBA also calls on the IRS to create a new tax form for seniors (presumably those over age 65). We will see what transpires throughout this year as to what that form will look like.

This February 2018 Bipartisan Budget Act of 2018 comes on the heels of the December 2017 “Tax Cuts and Jobs Act” (TCJA) passed on December 22, 2017. The TCJA does impact some deductions for 2017, but mainly affects 2018 (more on that later). Here are some of the 2017 deduction changes:
  • 100% Bonus Depreciation for purchases after September 27, 2017
  • Medical Expense Deduction limit lowered to 7.5% of adjusted gross income (instead of the 10%)
  • Loan refinances after 12/15/17

TAX Overhaul

Tax Cuts and Jobs Act signed December 22, 2017

The new tax law has sweeping effects for 2018 and some for 2017 that were discussed above. Here are some highlights of the changes for 2018:
  • 21% Corporate tax rate. Lowers corporate tax rate to a flat 21%; no tiers, so corporations with income below $100,000 will see a tax increase while those above that level will see a decrease in tax.
  • 20% Qualified Business Income Deduction (different from rate reduction). This was enacted to help small businesses that are pass-through entities (S-corps, LLCs) come close to the new lowered corporate rate.
  • Personal rates are lowering
  • Standard Itemized Deduction almost doubles
  • Child Tax credit doubles
  • Personal exemptions are now no longer

S-Corporations and LLCs have an opportunity to have up to a 20% qualified business income deduction. The calculation is not a simple 20% of net income unless the owner’s taxable income is below $157,500 for single taxpayers and $315,000 for married filing joint taxpayers.

If you are over those thresholds, you then have some limits on the 20% deduction. You will need to look at total payroll paid, as this could be a limiting factor. In addition, another limiting factor that could come into play deals with a calculation dealing with a percentage of assets in the business (this limit will be for very few small businesses, so it’s not discussed here). Also, this deduction is limited to positive taxable income. In other words, you will not create a loss with this 20% deduction and any excess not deducted this year is not carried forward into the next year; you lose the unused deduction. When a business has a tax loss in a year, it carries forward to the next year and will have an effect of reducing the 20% deduction in the next year.

Small businesses in certain lines of business will not receive a 20% deduction for qualified business income deduction once their taxable income is above $207,500 for individuals or $415,000 for married filing separate returns. Those industries are: Health, Law, Accounting, Consulting, Performing Arts, Actuarial Services, Athletics, Financial Services, and Brokerage Services.

Ralph Willett has been a CPA for over 30 years. He started his career with a big international accounting firm. He then was CFO of several companies, one of which manufactured a product you would recognize: the “Little Giant Ladder System”. Ralph helped that company grow by over 1,000% by selling the product on TV. He is involved in the community and is President Elect of the Entrepreneurial CPAs here in Phoenix. He also serves on the Board of the Gilbert Chamber of Commerce and is on the Gilbert Chamber Public Policy Committee.

Visit www.willettcpa.com to learn more or contact Ralph directly at (480) 699-2308.