Update on the Tax Cuts and Jobs Act - Businesses Expected to See Tremendous Growth
Updated: Apr 1, 2021
Republicans in Congress released their final version of the Tax Cuts and Jobs Act (bill) last Friday. The more than 500 page bill cannot be changed from this point forward. Tax reform is nearing completion, pending a formal vote, just as we are at our most vulnerable state: Christmas shopping season.
One thing is for certain, I fall victim every year to spending too much around the holidays. Some people rely on their much awaited tax refunds to pay off credit card debt, or simply spend without knowing how much they might owe come tax season. Now is the time to get prepared for tax reform and put that extra cash back in your pocket. If you haven't read my last article titled, "What every entrepreneur needs to know about the GOP Tax Bill" check it out for additional value - this one serves as an update.
It's important to note that no part of this tax reform will apply to the 2017 tax year. There are, however, important aspects of the bill that will provide early birds an advantage, and other aspects that can be acted on before year-end. For this reason, it is vital for business owners and entrepreneurs to stay on top of any developments and learn how tax reform will affect them and their businesses.
Currently, taxpayers are allowed to deduct up to $1,000 for each child under the age of 17. An additional $600 was originally agreed upon by the House and Senate for the child tax credit, but, this has since risen $400 bringing the maximum credit to $2,000 per child. Families with non-child dependents will also be allowed a $500 deduction for each child. This is great news, especially given that the top income tax bracket will be lowered to 37% from 39.6%. More credits, more money!
Not so fast.
A tax break may look appealing until you peel back the surface... The new legislation is looking to simplify individual tax returns by encouraging people to take the standard deduction rather than itemizing. In doing so, they have nearly doubled the standard deduction amount to $24,000 for joint filers. The bill also calls for the elimination of personal exemptions. Currently, we all can claim a $4,050 exemption for ourselves, our spouse, and for each of our dependents.
Consider this example: a family of five who claims the standard deduction this year would able to deduct $32,950 ($12,700 joint standard deduction, and $20,250 in personal exemptions) from their income, but next year, may only deduct a total of $24,000 without having that exemption amount.
Crazy, right?! Well, this leads me to my next point.
Why not itemize your deductions to recoup some of your lost exemption amount? That may be easier said than done.
In the latest version of the bill, the SALT (State and Local Tax) deduction will be capped at $10,000. Not only capped, but taxpayers will have to choose among sales, income, and property taxes for the deduction, instead of being able to deduct all local taxes. This was on the verge of being eliminated completely, but managed to fight its way back into the final version of the bill. One option, that some tax payers in high-tax states have, is to pre-pay their SALT (if they normally have more than $10,000 in SALT) to claim the full deduction this year before the limit is set.
The home mortgage interest deduction is also being capped for homes valued over $750,000 (currently $1MM). Homes already under mortgage contracts are grandfathered in, so if you are on the fence about buying an expensive house, you may want to consider expediting that close before year-end to be able to claim the home mortgage interest deduction for years to come.
Lastly, for all you hustlers out there, I've got great news. The requirement to have health insurance will be eliminated (in 2019)! This means no more tax penalties for not having coverage.
Another piece of the tax reform bill is aimed at lowering the tax burden for owners of flow-through entities. Currently, owners report their share of a company's profit (whether distributed or not) on their personal tax returns and are required to pay at their personal income tax rates, which can be as high as 39.6%. The final version of the bill reduces the top effective marginal tax rate for flow-through entities to a maximum of 29.6%, allowing for a 20% tax deduction that applies to the first $315,000 of joint income earned by all business owners.
The deduction for unreimbursed business expenses is going away. Not a huge deal when you may only spend a few hundred bucks and not get reimbursed, but, for professional athletes, they might think a little differently. See, they spend tens (or in some cases, hundreds) of thousands of dollars every year paying agency fees and fines to their respective leagues. While these are considered unreimbursed business expenses, they will no longer be allowed to deduct them from their income. Maybe we will see a increase in good ol' fashioned sportsmanship. That can't hurt, right?
Say goodbye to those suite tickets to a ballgame or front row seats to see T-Swift with your clients. The final bill removes the 50% deduction for entertainment expenses. So, instead of trying to showboat to clients, you'll be more likely to catch a minor league baseball game or a free concert moving forward. The 50% deduction for meals is still intact though. Great news since a favorite corporate pastime is always trying to figure out what to eat for lunch. Corporate tax rates are being permanently reduced from 35% all the way down to 21%.
Woah. The bill also axes the Corporate AMT (Alternative Minimum Tax). AMT for individuals was called to be eliminated as well, but the House and Senate agreed on reducing the number of filers who would be hit by this tax by raising the income limits.
The bill also allows businesses to immediately write off the full cost of depreciable property, excluding certain structures purchased after September 27, 2017 and before January 1, 2023. This part of legislation will dramatically help the real estate sector as they will not be required to depreciate the property over time and will be allowed to deduct the full expense in the year of purchase.
Finally, saved the best for last - the deduction for student loan interest is here to stay.
So, the corporate tax cuts are permanent, yet, almost every single individual tax cut under this bill is set to expire by 2025. Is 7 years long enough to fix the national debt, spur the economy, and create more jobs? I guess we will have to wait and see. Here's to making money, and KEEPING that money!
Check back in for more updates or email me with any questions. firstname.lastname@example.org
If you're interested to see the full version of the bill click here: Tax Cuts and Jobs Act