The goals of the new tax law were simplification, fairness and a move towards a flatter tax system. American businesses are looking to be more competitive overseas and wanted the reduced tax rates. The final tally on the overall cost of the bill includes collections from increased taxes spurred on by this future economic growth.
There is a lot of give and take in these various new laws. Many of the provisions will benefit organizations that are buying new assets or hiring new people. However, as you will see from some of the specifics, this new law is anything but simple.
Lower Income Tax Rates
Corporations will see a new flat 21 percent rate, which means it may be time to review your business’s entity.
Individuals will also see lower individual income tax rates, according to the table below.
2017 Tax Year
Married Filing Joint
|10 %||Up to $18,650||Up to $9,325|
|15%||$18,650 to $75,900||$9,325 to $37,950|
|25%||$75,900 to $153,100||$37,950 to $91,900|
|28%||$153,100 to $233,350||$91,900 to $191,650|
|33%||$233,350 to $416,700||$191,650 to $416,700|
|35%||$416,700 to $470,700||$416,700 to $418,400|
|39.6%||Over $470,700||Over $418,400|
2018 Tax Year
Married Filing Joint
|10 %||Up to $19,050||Up To $9,525|
|12%||$19,050 to $77,400||$9,525 to $38,700|
|22%||$77,400 to $165,000||$38,700 to $82,500|
|24%||$165,000 to $315,000||$82,500 to $157,500|
|32%||$315,000 to $400,000||$157,500 to $200,000|
|35%||$400,000 to $600,000||$200,000 to $500,000|
|37%||Over $600,000||Over $500,000|
Increase in Depreciation Deductions
Section 179 first year allowable depreciation amount increased to $1,000,000, with the phase out limitation now starting at $2,500,000 of purchases.
Bonus depreciation is now allowed on both new and used equipment. The allowable schedule is now:
- 100 percent for property placed in service after 9/27/17 and before 1/1/2022
- 80 percent for property placed in service after 12/31/2021 and before 1/1/2024
- 60 percent for property placed in service after 12/31/2023 and before 1/1/2025
- 40 percent for property placed in service after 12/31/2024 and before 1/1/2026
- 20 percent for property placed in service after 12/31/2025 and before 1/1/2027
Farm equipment is now depreciated over five years and not subject to the 150 percent declining balance method.
New Pass-Through Income Deduction
One of the most beneficial provisions is a new 20 percent deduction of the qualified business income reported by sole proprietors filing a Schedule F, C, E or Form 4835, and owners of pass-through entities such as partnerships, LLCs and S corporations.
The rules aren’t simple, however, and will require a careful analysis depending on your individual tax return income level and the number and type of your business lines. This new deduction is set to expire on 12/31/2025. Also, service industries fall under special rules, and the deduction is phased out at the married filing joint level of $315,000. The qualified business income must be connected to the conduct of a trade or business within the United States. The income excludes income that is capital gain, dividends or interest. It also excludes reasonable compensation and partnership guaranteed payments.
So, how does this work? Married taxpayers with taxable income under $315,000 and single taxpayers with income under $157,500 will be able to take a deduction of the lesser of 20 percent of their qualified business income or their taxable income less any capital gains.
Individuals with income over these levels will have additional tests to meet. The deduction is then limited to 50 percent of the wages paid or 25 percent of wages plus 2.5 percent of the unadjusted basis of the farm assets, excluding land. Here are some ways retirement plan contributions can help you take advantage of the new pass-through income tax deduction.
An unintended consequence of rushing the legislative process was a provision that currently allows the 20 percent deduction to be taken on the full amount of proceeds received on sales to co-ops rather than just the net co-op payments. The original intent was to replace the disallowance of the DPAD deduction, but lawmakers are looking at how they can reduce this unintended result that is currently very favorable to farmers.
Let’s look at some examples:
Basic Facts of the Examples
|Unadjusted Basis of Assets||$1 million||$7 million||$1 million|
|Adjusted Taxable Income||$160,000||$400,000||$475,000|
|How to Figure the Deduction – the Lesser of:|
|1) 20% Deduction||$40,000||$100,000||$100,000|
|2) Greater of:|
|50% of wages or||$37,500||$0|
|25% of wages + 2.5% of unadjusted basis of assets||$193,750||$25,000|
Increased Estate Exemption and Gift Amounts
The amount an individual can own at their passing before a federal estate tax is due is increased to $11.2 million per individual for taxpayers dying in 2018 – 2025. This also increases the amount an individual can gift over their lifetime. Remember that Oregon has a much lower threshold of $1 million.
Standard Deductions, Personal Exemptions, Child Credits and Itemized Deductions
In an effort to simplify filing, the new law increases the standard deduction so that many taxpayers will no longer itemize their deductions. The new standard deduction is $24,000 for couples and $12,000 for individuals. There is a new $10,000 limit on the combination of real estate taxes and state income taxes. Though the House version took away medical deductions, the final bill included them, with an increased deduction limited to amounts over 7.5 percent of adjusted gross income. Most miscellaneous itemized deductions are eliminated. However, the overall limit on your itemized deductions when your income reached certain income levels has been eliminated. Finally, the new law did take away the personal exemption amounts. For farmers with young families, the child credit is doubled to $2,000, with $1,400 of that amount being refundable.
Let’s look at one more example of what these changes will mean for a couple:
|Farm Schedule Income||$250,000||$250,000|
|20% Pass-Through Deduction||$0||-$50,000|
|Less SE Tax Adjustment||-$11,234||-$11,309|
|Itemized or Standard Deduction:|
|State Income Tax||-$20,000|
|Home Real Estate Tax||-$5,000|
|or Standard Deduction||-$24,000|
|Personal Exemptions – 2||-$8,100||-$0|
|Federal Income Tax (Including SE Tax)||$66,014||$50,728|
|Top Federal Income Tax Rate||28%||22%|
We recommend you do tax planning during 2018 to see how these new laws will change your own personal situation. These changes need to be considered in relationship to your overall business structure and long-term plans for your farm. We will look at your choice of entity, rent payments, guaranteed payments and salary and stockholder distributions in order to maximize these benefits for you. You might also want to think about taking advantage of the higher depreciation limits if you need new equipment. As several of these provisions are interrelated, we need to carefully consider your overall picture. As you can see, there are potential benefits, but the new laws are anything but simple.
Meet the Author
Joanne Humphrey, CPA, PFS
Joanne has over 30 years of experience providing business advisory and tax services for business owners with special expertise in dental and medical practices. This includes complex tax preparation and planning, trust and estate planning, retirement planning and financial planning for small and large practices. Joanne specializes in analysis of retirement plan design, ensuring maximum retirement contributions and benefits. She has…
- Wealth management
- Personal Financial Specialist
- Certified Public Accountant
- Tax compliance and strategic tax planning
- Preparation, analysis, and review retirement plan returns and investment reports