Now that the Tax Cuts and Jobs Act (tax reform) is active legislation, you are likely to see its impact on your tax return this year. To help, we’ve compiled this list of facts about tax reform to review and discuss with your tax professional.
Are the TCJA provisions permanent?
No, the tax law is effective for tax years 2018 through 2025. The act may be extended prior to expiration, but we will have to wait and see if lawmakers take that action.
What impact do the new tax laws have on individual tax rates?
In general, many individuals and businesses should see a lower effective tax rate under the TCJA, depending on their unique financial circumstances. The top individual tax rate under tax reform is 37 percent. The individual AMT remains, but with increased exemption amounts and increased phase-out levels. The maximum AMT rate dropped from 39.6 percent to 28 percent under tax reform.
What impact do the new tax laws have on business taxes?
Under tax reform, corporations have a flat tax rate of 21 percent. For pass-through entities, there is a potential 20 percent tax deduction. This is applicable to partnerships, S-corporations, and sole proprietorships whose owners have income less than $157,500 ($315,000 for married filing jointly and your business is not considered a non-qualified business). Non-qualified businesses include those in the fields of health, law, accounting, actuarial science, performing arts, consulting, and athletics.
Also of note, this pass-through deduction is not based on the definition of “business income” most of us are used to. Instead, it uses "qualified business income" (QBI) to calculate any deduction to which you may be entitled. There is also an income-based limitation on the amount of the deduction.
Does the new pass-through tax deduction apply to estates and trusts?
Yes. The new pass-through tax deduction applies to taxpayers other than
C-corporations; thus, the deduction is available to estates and trusts.
Does the new pass-through tax deduction apply to real estate businesses?
If you are the owner of a qualified real estate-related business, you may also qualify for the pass-through deduction. However, the deduction is subject to a limit of 2.5 percent of the cost of your allocable share of depreciable real and personal property (this doesn’t include inventory or land). The cost of these assets may be included during the useful life of each asset or 10 years — whichever is longer.
Another important point: To qualify for the 20 percent QBI deduction on rental real estate businesses, the property must be directly owned by an individual or eligible pass-through entity and each real estate enterprise must also receive at least 250 hours of total documented “rental services” activity to qualify for the deduction.
Is there still a tax penalty for skipping health insurance coverage?
For 2018, the tax penalty for not carrying health insurance still applies. These fines were originally were imposed under the Affordable Care Act’s individual mandate. If you are a self-employed business owner, there is no longer a tax penalty for not having health insurance beginning with your 2019 return. The elimination of the $695 per person or 2.5 percent of income levy will reduce your tax bill.
Can I still claim expenses for business-related meals?
If you are used to writing off dinners and other meal expenses for your business at 100 percent of the cost, you will no longer be able to do that on this year’s return (with the exception of office parties, which are still fully deductible).
The TCJA expands the 50 percent limitation of meal expenses that is applied to individual taxpayer’s business-related meals to employers. This means that expenses associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringe benefits and for meals provided at the convenience of the employer can only be deducted at 50% of their cost. In addition, these amounts incurred and paid after Dec. 31, 2025, will not be deductible at any rate.
Are business entertaining expenses still eligible for tax deductions?
Under the TCJA, you can no longer deduct 50 percent of the cost of entertainment directly related to, or associated with, the active conduct of a business. Unfortunately, this means that if you treat clients or employees to tickets to any type of entertainment be it a show, sporting event, concert or the like, you will be paying for it out-of-pocket with no deduction on your tax return.
Can I still deduct mortgage interest?
Under the TCJA, the mortgage interest deduction is reduced to the first $750,000 of debt related to acquiring, constructing or substantially improving your primary home or a designated secondary residence that a mortgage loan is secured by. Previously, if you itemized deductions on your return, you could deduct mortgage interest on the first $1 million of debt. In addition, for the next $100,000 in principal you could deduct any other mortgage debt, such as a home equity loan, used for other purposes (even those unrelated to actually improving your home).
Although tax reform reduces the mortgage interest deduction substantially, there is good news for those freelancers who had loans that began before December 15, 2017. In this case, you are effectively grandfathered into the previous law, meaning that you can still deduct interest on the first $1 million of the mortgage debt. If you decide to refinance the loan that you first contracted on or before December 15, 2017, you are still entitled to deduct up to $1 million in mortgage interest, but only on the remaining debt of the original loan.
The TCJA is the most significant tax reform that our country has seen in decades. If you haven’t already, now is the time to check in with a tax professional to ensure that you know which tax reform provisions apply to you — before the due date for your business or individual tax return arrives.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com — which also features a new blog, how-to articles, and a comprehensive freelance tax guide.
Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available Jan. 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.