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Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act was signed by President Trump on December 22, 2017. The Act makes sweeping changes to the U.S. tax code and impacts virtually every taxpayer. Individuals are more impacted by the provisions of the act than any other class of taxpayer. With the reduction in effective tax rates, the elimination of some deductions, exclusions and credits coupled with the enhancement of other deductions and credits, individual taxpayers are going to have to navigate a different maze in making decisions to maximize their tax benefits and minimize their tax liability. For businesses, tax benefits include a reduction in the corporate tax rate, increase in the bonus depreciation allowance, an enhancement to the Code Sec. 179 expense and repeal of the alternative minimum tax. Owners of partnerships, S corporations and sole proprietorships are allowed a temporary deduction as a percentage of qualified income of pass-through entities, subject to a number of limitations and qualifications. On the other hand, numerous business tax preferences are eliminated.

Click a topic below to see a more in-depth look at changes made by the Tax Cuts and Jobs Act:

Alternative Minimum Tax for Individuals

TCJA temporarily increases the alternative minimum tax (AMT) exemption amounts for individuals for tax years 2018 through 2026. The AMT system was originally enacted to ensure that all taxpayers, particularly higher-income taxpayers, pay at least a minimum amount of federal income tax. The AMT generally imposes a minimum tax on taxpayers who have substantially lowered their regular tax liability by taking advantage of tax-favored and preference items, including deductions, exemptions and credits. A taxpayer's AMT for a tax year is the excess of the tentative minimum tax over the regular tax liability. To calculate the tentative minimum tax, the taxpayer must first determine alternative minimum taxable income (AMTI) and then subtract the AMTI exemption amount. The AMTI is taxable income recomputed by taking into account adjustments and preferences. The amount of alternative minimum taxable income up to the exemption amount is excluded from minimum taxation. The exemption amount is phased out at certain AMTI levels. The difference between the AMTI and the exemption amount is then multiplied by the appropriate AMT rate, and the product of this computation is the tentative minimum tax.

Exemption amount and phaseout thresholds for individuals temporarily increased
Beginning in 2018, the AMT exemption amounts are:

  • $109,400 for married individuals filing jointly or surviving spouses
  • $70,300 for single or head of household filers
  • $54,700 for married individuals filing separately

The threshold amounts for phaseout or reduction of the AMT exemption amount are also temporarily increased after 2017. The phaseout threshold is $1 million for married individuals filing jointly or surviving spouses, and 50 percent of this amount for all other individuals. Thus, the phaseout threshold is $500,000 for an individual filing as single, head of household or married filing separately.

For tax years after 2018, the temporary increases in the AMT exemption amounts and phaseout thresholds are adjusted annually for inflation.

The exemption amount continues to phase out 25 percent for each $1 that AMTI exceeds certain threshold amounts. Thus, the AMT exemption amount is completely phased out for an individual for 2018 when AMTI reaches $1,437,600 for married individuals filing jointly or a surviving spouse; $781,200 for filing as single or head of household and $718,800 for married filing separately.

The AMT exemption amount and phaseout threshold for an estate or trust are not impacted by any of the temporary increases in the exemption amount and phaseout threshold for an individual. For 2018, the AMT exemption amount for an estate or trust is $24,600 (but $0 for portion of an electing small business trust) and the phaseout threshold is $82,050 for 2018.

Bonus Depreciation

The 2017 Tax Cuts and Jobs Act contains important changes to the bonus depreciation rules under the Modified Accelerated Cost Recovery System (MACRS). Nearly all of these changes are taxpayer friendly and none more so than the increase in the bonus depreciation rate from 50 percent to 100 percent, effective for property acquired after September 27, 2017.

This 100 percent rate will phase down after 2022. You may elect the 50 percent rate for property acquired after September 27, 2017, and placed in service in your 2017 tax year, if for planning purposes it is desirable to defer depreciation deductions into future years.

The date that you acquire property for purposes of the 100 percent rate is usually the date that you pay or accrue the cost but special rules apply if you construct property or property is constructed for you.

Another noteworthy change allows you to claim bonus depreciation on most used property.

Please note that interior improvements to nonresidential real property, such as a commercial retail space, no longer qualify for bonus depreciation after 2017 and are depreciated over 39 years. It is possible that Congress will enact a “technical correction” to allow bonus depreciation and a 15-year recovery period. Our office will keep you informed on any developments.

Finally, the following additional developments should be noted:

  • The corporate election to forgo bonus depreciation and claim unused alternative minimum tax credits is repealed in conjunction with the repeal of the corporate alternative minimum tax. However, under another provision, corporations are allowed to claim all unused AMT credits in 2018 through 2022.
  • Relief from the adverse impact of bonus depreciation on the long-term contract method of accounting is extended.
  • Certain taxpayers that use “floor plan financing” with respect to inventory may not claim bonus depreciation.
  • Bonus depreciation is now allowed for television, film and live theatrical productions.

Cash Method of Accounting and Simpler Inventory Rules Available to More Small Businesses

Tax reform legislation has expanded the availability of the cash method of accounting to small businesses.

Before 2018, most corporations and partnerships with a corporate partner were required to use the accrual method unless they had average annual gross receipts of $5 million or less. TCJA increased the gross receipts threshold to $25 million, opening up the cash method to many more businesses.

In addition, any business where the production, purchase or sale of merchandise is an income-producing factor had to apply complex inventory rules and use the accrual method unless it had average annual gross receipts of $1 million or less ($10 million or less for taxpayers engaged in certain trades or businesses). The TCJA increased the gross receipts threshold to $25 million for businesses with inventories, allowing more businesses to use the cash method and apply simpler inventory rules for tax purposes.

Changes to Income Tax Charitable Deduction

TCJA changed some of the requirements that allow you to take an income tax charitable deduction, beginning in 2018.

Income Limits
If you itemize deductions on your income tax return, a charitable deduction is allowed up to a certain percentage of your adjusted gross income. For cash gifts, this percentage limit has increased to 60 percent (up from 50 percent).

The TCJA also increased the standard deduction considerably and limited or eliminated many itemized deductions. As a result, it may be to your benefit to take the standard deduction, even if you have itemized deductions in the past. It is important to keep track of your expenses and charitable donations so that we have the information needed to compare and choose the option with more tax benefit.

College Athletic Events
Donations to colleges and universities may qualify for the charitable deduction. However, if you receive the right to purchase tickets or seating at an athletic event in exchange for the donation, it does not qualify. You may be able to take a deduction for amounts that are not tied to the right to purchase tickets.

Keeping Records
Each and every donation you make over $250, regardless if it is in cash or property, must be substantiated. Generally, a bank record or a written acknowledgement from the charity indicating its name, the date of the donation and the amount of the donation, is sufficient. You must keep these records for each donation to ensure the charitable deduction is allowed.

Contributions and Rollovers to ABLE Accounts

TCJA makes modifications to ABLE accounts created by the Achieving a Better Life Experience Act of 2014. These changes, effective in 2018 through the year 2025,

  • allow rollovers from 529 accounts into ABLE accounts, up to an amount equal to the annual gift tax exclusion;
  • increase the annual contribution limit by the lesser of any earned income of the designated beneficiary or the poverty line for a one-person household; and
  • make contributions to ABLE accounts eligible for the saver’s credit.

ABLE accounts are designed to encourage individuals and families to provide private funding to assist disabled individuals in maintaining a healthy, independent and quality lifestyle through a tax-favored savings account program. This program, modeled along the lines of qualified tuition programs under Code Sec. 529, has been available since 2015.

Eligible individual
An individual eligible to be the designated beneficiary of an ABLE account must be disabled or blind, and the onset of the disability or blindness must have occurred before the individual attained age 26. The individual must either be entitled to benefits based on blindness or disability under Title II of the Social Security Act; or the person must certify under penalties of perjury that the individual (or the individual's agent under a power of attorney or a parent or legal guardian of the individual) has the signed physician's diagnosis, and that the signed diagnosis is retained and provided to the ABLE program or the IRS upon request.

Any person may make nondeductible contributions to an ABLE account for the benefit of an eligible individual. However, the aggregate annual contribution amount from all sources cannot exceed the annual gift tax exclusion amount ($15,000 for 2018).

An ABLE account’s designated beneficiary may contribute an additional amount equal to the lesser of the amount of any earned income or the federal poverty line (of the prior year) for a one-person household ($12,060 for 2017). The increased contribution amount, based on earned income, is only available to eligible individuals who do not participate in a retirement plan. Contributions made by eligible individuals to their own ABLE account may qualify for the saver’s credit.

Contributions may also be received as rollovers from 529 plans, provided that the ABLE account is owned by the designated beneficiary of that 529 account or a member of such designated beneficiary's family. Such rolled-over amounts count towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year.

Excess contributions. The designated beneficiary (or a person acting on their behalf) must maintain adequate records for ensuring that the annual contribution limit is not exceeded. A 6-percent excise tax applies to excess contributions to ABLE accounts. An excess contribution subject to tax does not include timely-made corrective distributions which must be made on or before the day (including extensions of time) for filing the individual's return for that tax year.

Distributions from an ABLE account are not included in gross income unless they exceed the amount of qualified disability expenses incurred during the tax year. Qualified disability expenses include, but are not limited to:

  • education
  • housing
  • transportation
  • employment training and support
  • assistive technology and personal support services
  • health
  • prevention and wellness
  • financial management and administrative services
  • legal fees
  • expenses for oversight and monitoring
  • funeral and burial expenses

Amounts in an ABLE account can be rolled over for the purpose of either changing the designated beneficiary or the ABLE program. To escape tax, the amount must be paid into another ABLE account in a qualified ABLE program not later than the 60th day after the date of payment or distribution. The ABLE account accepting the payment must be established for the designated beneficiary or an eligible individual who is a family member of the designated beneficiary. However, there is no such thing as an inherited ABLE account. The assets, if any are left over from paying qualified disability expenses, will generally be transferred to the state.

Individuals with disabilities face significant barriers to living independently and finding and holding employment. Although the federal government provides certain safety-net programs, these benefits can either be lost once the disabled individual establishes a minimum level of savings and income, or are inadequate due to the increased costs of health care and support systems to allow them to be employed and live independently. An ABLE account may be of special interest to you.

Corporate Tax Rates Reduced

TCJA calls for a 21-percent corporate tax rate beginning in 2018. The maximum corporate tax rate currently tops out at 35 percent. In addition, the 80-percent and 70-percent dividends-received deductions under current law are reduced to 65 percent and 50 percent, respectively. TCJA also repeals the alternative minimum tax on corporations.

Under prior law, corporations determined their annual income tax liability by applying a graduated rate of tax to their taxable income. The corporate income tax rates consisted of four brackets. The top corporate tax rate was 35 percent on taxable income in excess of $10 million. If a corporation had a net capital gain for any tax year, the corporation paid an alternative tax if it was less than the tax computed in the regular manner. Under the alternative tax, the portion of the corporation's taxable income that was net capital gain was subject to a maximum tax rate of 35 percent. The alternative tax rate was applied to the lesser of a corporation's net capital gain or its taxable income.

21-Percent Corporate Income Tax Rate
For tax years beginning after December 31, 2017, the graduated corporate rate structure is eliminated and corporate taxable income is taxed at a 21-percent flat rate. The new rate is permanent.

Presently, the United States has one of the highest statutory corporate tax rates among developed countries. Although the prior maximum corporate tax rate was 35 percent, many corporations paid an effective tax rate that was considerably less.

Alternative Minimum Tax (AMT) for Corporations
The AMT for corporations is repealed beginning after 2017. Any unused minimum tax credit of a corporation may be used to offset regular tax liability for any tax year. In addition, a portion of unused minimum tax credit is refundable in 2018 through 2021. The refundable portion is 50 percent (100 percent in 2021) of any excess minimum tax for the year over any credit allowable against regular tax for that year.

Repeal of the AMT allows some corporations to use certain tax benefits to effectively pay significantly below the new 21-percent rate.

Reduction of Dividends-Received Deduction
The 70-percent dividends-received deduction has been reduced to 50 percent, and the 80-percent dividends-received deduction is reduced to 65 percent.

Under prior law, a corporation was generally allowed a deduction for dividends received from other taxable domestic corporations. The amount of the deduction was generally equal to 70 percent of the dividend received. Dividends subject to the 70-percent dividends-received deduction were taxed at a maximum rate of 10.5 percent (30 percent of the 35-percent top corporate tax rate).

TCJA reduces the dividends-received deduction to reflect the new lower corporate tax rate of 21 percent. Dividends subject to the new 50-percent dividends-received deduction will be taxed at a maximum rate of 10.5 percent (50 percent of the 21-percent new corporate tax rate). Dividends subject to the new 65-percent dividends-received deduction will be taxed at a maximum rate of 7.35 percent (35 percent of the 21-percent new corporate tax rate).

Deduction for Educator Expenses Remains Intact

Despite proposed amendments in the House and Senate versions of the federal Tax Cuts and Jobs Act, the educator expense deduction was retained by the final version enacted on December 22, 2017.

Eligible educators may claim an above-the-line deduction in computing adjusted gross income (AGI) for certain unreimbursed expenses, like books, supplies, computer equipment and supplementary materials. The limitation, as adjusted, is $250 for 2018.

Deferral of Advance Payments and Other Income Recognition Rules for Accrual Basis Taxpayers

The proper time for accrual basis taxpayers to include amounts in income has changed under TCJA.

  • Under one rule, accrual basis taxpayers generally must include amounts in income for tax purposes no later than when the amounts are included for financial accounting purposes.
  • Under a second rule, accrual basis taxpayers can elect to defer including certain advance payments in income until the tax year after the tax year in which the payments were received.

These income recognition rules generally apply to tax years beginning after December 31, 2017.

Depreciating Additions and Improvements to Commercial Property

TCJA contains important depreciation changes that affect the way improvements to the interior of a business building are depreciated. These changes apply to property placed in service after 2017.

Recovery Periods
Before 2018, improvements to the interior of commercial property by a lessor or lessee were depreciable over 15 years and also qualified for 50 percent bonus depreciation. Similarly, a 15-year depreciation period applied to interior improvements to a building used in a retail trade or business. In the case of a restaurant building, the 15-year depreciation period applied to both interior and exterior improvements.

Unfortunately, due to a Congressional drafting error, the 15-year depreciation period for these types of improvements no longer applies. Instead, such improvements are depreciated over a 39-year recovery period if placed in service after 2017 and bonus depreciation for interior improvements does not apply.

A technical correction could be enacted which retroactively provides a 15-year recovery period to internal improvements to any type of commercial building (nonresidential real property). If this technical correction is enacted, a 100 percent bonus depreciation allowance may be claimed on interior improvements. We will keep you apprised of developments in this area. Whether or not a technical correction is enacted, restaurant buildings acquired after 2017, as well as exterior improvements to restaurant buildings made after 2017, are depreciated over 39 years.

Depreciation and Sec. 179 Expensing

TCJA modifies provisions related to depreciation and expensing of fixed assets.

Listed Property
TCJA increases the depreciation limitations under section 280F that apply to listed property. For passenger automobiles placed in service after December 31, 2017, and for which the additional first-year depreciation deduction is not claimed, the maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is placed in service; $16,000 for the second year; $9,600 for the third year; and $5,760 for the fourth and later years in the recovery period. The limitations are indexed for inflation for passenger automobiles placed in service after 2018.

In addition, TCJA removes computer or peripheral equipment from the definition of listed property. Such property is therefore not subject to the substantiation requirements that apply to other listed property.

Real Property
The separate definitions of qualified leasehold improvement, qualified restaurant and qualified retail improvement property are eliminated. Qualified improvement property is treated as a new class of MACRS property with a recovery period of 15 years, effective for property placed in service after December 31, 2017. The definition of qualified improvement property for purposes of the new 15-year recovery period is the same as the definition applied for bonus depreciation purposes. Specifically, qualified improvement property is defined as any improvement to an interior portion of a building which is nonresidential real property if the improvement is placed in service after the date the building was first placed in service by any taxpayer.

TCJA also requires a real property trade or business electing out of the limitation on the deduction for interest to use ADS to depreciate any of its nonresidential real property, residential rental property and qualified improvement property.

Code Sec. 179 Expensing
TCJA increases the maximum amount a taxpayer may expense under Code Sec. 179 to $1 million, and the phase-out threshold amount to $2.5 million for tax years after 2017. These amounts are indexed for inflation for tax years beginning after 2018.

For tax years beginning after 2017, the definition of qualified real property under Code Sec. 179 is expanded to include:

  • certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging; and
  • any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service: roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems.

The incentives for investing in business property are significant and must be coordinated. For example, Code Sec. 179 expensing is claimed prior to the additional depreciation allowance. In general, taxpayers should expense under Code Sec. 179, assets with the longest recovery (depreciation) period in order to accelerate the recovery of their costs. Planning for your capital and equipment acquisitions and retirements is essential.

Depreciation of Farm Property and Farming NOLs

TCJA contains a number of changes to the way in which farming property is depreciated under MACRS. In addition, the rules for claiming net operating losses are changed.

Beginning in 2018, the depreciation period for most types of new farm machinery and equipment is reduced from seven to five years. Farmers are allowed, for the first time, to use the 200 percent declining balance method to depreciate most farming property. Previously, the less favorable 150 percent declining balance method applied.

Business Interest Expense Deduction
The new law also limits business interest expense deductions to 30 percent of taxable income. However, this rule only applies if your average gross receipts in the prior 3 years are $25 million or less. A farming business may elect out of this interest deduction limitation but in doing so loses the benefit of accelerated depreciation deductions. All farm property (including farm property placed in service in prior years) with a regular depreciation period of 10 years or greater will need to be depreciated under the “ADS” system using the “straight-line method” (the least favorable method) over longer recovery periods than usually apply. Whether or not to make the election will largely depend upon comparing the tax costs of losing the benefit of accelerated depreciation and delaying the deduction of disallowed interest.

Net Operating Losses
Finally, NOL farming losses that arise in tax years beginning in 2018 and later may only offset taxable income in two carryback years. The carryback period for earlier farming NOLs was five years. On the plus side, the carryforward period for new NOLs is now unlimited. Previously, the carryforward period was set at twenty years. However, new NOLS will only be able to offset 80 percent of taxable income in a carryforward year. The old rules (five-year carryback, twenty-year carryforward and 100 percent taxable income offset) will continue to apply to NOLs from prior tax years. Therefore, it will be necessary to maintain good records that distinguish between NOLs subject to the old rules and NOLs subject to the new rules.

NOLs arising in a 2017/2018 fiscal-year are not subject to the 80 percent taxable income limitation. Therefore, it may be preferable for such fiscal-year taxpayers to accelerate expenses, such as bonus depreciation, in order to maximize the 2017/2018 NOL.

Discharge of Student Loan Debt

TCJA offers tax savings for student loan borrowers whose student loans are forgiven due to a disability. This change applies to student loans discharged in 2018 through 2025. Under prior law, the discharged debt was generally treated as taxable income. The TCJA expanded the income exclusion applicable to the forgiveness of student loan debt to include discharges due to the student's death or total and permanent disability.

There are several types of student loans eligible for this exclusion.

In the case of total and permanent disability, debt forgiveness can impact whether the student or former student qualifies for public or private assistance. Eligibility for benefits under a Federal-means tested program or similar state program may be impacted by income from a discharge of indebtedness. Excluding such income for an individual who becomes totally and permanently disabled may help in qualifying for assistance. Additionally, this may free up income for necessary living expenses, savings or contributing to a qualified tax-advantaged account, such as an ABLE account.

Distributions from Qualified Tuition Programs

Beginning in 2018, you can save more for a child’s education as a result of changes to qualified tuition programs (529 plans). You can use a 529 plan to pay up to $10,000 per year, per child, for K-12 tuition.

The 2017 Tax Cuts and Jobs Act modified the rules for 529 plans to help parents and other family members save more for a child’s education. Though contributions to 529 plans are not deductible, there is no income limit for contributors. 529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualifies as a higher education expense.

The definition of a qualified distribution has been expanded, beginning in 2018. Plan participants may now withdraw up to $10,000 for tuition incurred during the tax year in connection with the enrollment or attendance of the designated beneficiary at a public, private or religious elementary or secondary school. This change applies on a per-student basis, rather than a per-account basis. Distributions over $10,000 are treated as taxable distributions under the general rules of section 529.

Employer Credit for Paid Family and Medical Leave

TCJA provides a new tax credit to employers who provide at least two weeks of paid family and medical leave at 50 percent of wages to qualified employees in tax years 2018 and 2019.

You must have a written policy in effect that satisfies a few requirements to claim the credit. In order to qualify in 2018, the policy needs to be in effect by December 31, 2018.

The credit is based on a minimum of 12.5 percent (maximum of 25 percent) of qualified wages paid while an employee is on leave. Additionally, the qualified employee’s wages are subject to limitations and there are length of service requirements.

Enhanced Child Tax Credit

The enhanced child tax credit has been highlighted as one of the provisions of TCJA designed to lower overall tax liability for middle-class families. The child tax credit is temporarily increased from $1,000 to $2,000 per qualifying child for tax years 2018 through 2025. As much as $1,400 of that amount is refundable. The child tax credit is also expanded to provide for a new $500 nonrefundable credit for qualifying dependents other than qualifying children. In addition, more families will be able to take advantage of the credit due to an increase in the adjusted gross income phaseout thresholds.

Although the deduction for personal and dependency exemptions is temporarily repealed for tax years 2018 through 2025, the definition of a dependent is still applicable for the child tax credit and other tax benefits. A qualifying child for purposes of claiming the $2,000 child tax credit is the same as that for claiming a dependency exemption, except that the child must not have attained the age of 17 by the end of the year and must be a U.S. citizen, national, or resident.

A taxpayer must include on his or her return a qualifying child’s Social Security number (SSN) to receive either the refundable or nonrefundable portion of the credit with respect to that child. An SSN issued by the Social Security Administration (SSA) to the qualifying child is valid for purpose of the refundable portion only if the child is a U.S. citizen or the SSN authorizes the individual to work in the United States. In addition, the SSN must be issued to the qualifying child on or before the due date of the taxpayer’s return.

The $2,000 child tax credit per qualifying child phases out once the taxpayer's modified adjusted gross income (MAGI) exceeds $400,000 if married filing jointly, or $200,000 for all others. The new phaseout threshold is more than double the old phaseout threshold and will allow more taxpayers to benefit from the child tax credit. The credit is reduced by $50 for $1,000 (or fraction thereof) that a taxpayer’s modified adjusted gross income (MAGI) exceeds the threshold amount. The threshold amounts are not indexed for inflation.

For each dependent who is not a qualifying child for purposes of the child tax credit, TCJA provides a new nonrefundable credit of $500, if the dependent is a qualifying relative (and not a qualifying child) for purposes of claiming a dependency exemption; or a qualifying child over the age of 16. In addition, a taxpayer who cannot claim the child tax credit because a qualifying child does not have an SSN may nonetheless qualify for the nonrefundable $500 credit for the child. To claim the $500 credit, the taxpayer must include the dependent’s SSN, taxpayer identification number (TIN), or adoption taxpayer identification number (ATIN) on his or her return.

A taxpayer must file either Form 1040 or Form 1040A to claim the child tax credit. The child tax credit cannot be claimed by a taxpayer filing Form 1040-EZ.

Entertainment Expense Deductions

Many businesses consider the occasional wining and dining of customers and clients just to stay in touch with them to be a necessary cost of doing business. The same goes for taking business associates or even employees out to lunch once in a while after an especially tough assignment has been completed successfully. It's easy to think of these entertainment costs as deductible business expenses. However, due to a recent change in the tax law, many of those expenses may not be deductible.

Entertainment Expense Deduction Limited
As a general rule, your company can deduct 50 percent of the cost of meals as a business expense if specific conditions are met. However, Congress has eliminated the 50 percent deduction for most entertainment expenses. Even if a meal or entertainment expense qualifies as a business expense, none of the cost is deductible unless strict and detailed substantiation and recordkeeping requirements are met.

Under transitional guidance provided by the IRS, 50 percent of food and beverage expenses associated with operating a trade or business continue to be deductible after 2017 if the following requirements are met:

  • the expense must be ordinary and necessary and paid in carrying on a trade or business;
  • the expense may not be lavish or extravagant;
  • the taxpayer or an employee must be present when the food or beverages are furnished;
  • food and beverages must be provided to a current or potential business customer, client, consultant or similar business contact; and
  • if food is provided during or at an entertainment event the separate invoice requirement applies.

Estate Tax Exclusion Doubled

TCJA doubled the amount of property that is excluded from taxation for purposes of federal estate and gift taxes.

For the estates of decedents dying and for gifts made in 2018 through 2025, this amount increased from $5 million to $10 million, before adjustment for inflation. The inflation adjustment brings the amount for 2018 up to $11.18 million per person and $22.36 million for a married couple using “portability.” Assuming the proper election has been made, portability allows the estate of a surviving spouse to take advantage of any unused exclusion amount left at the death of his or her predeceased spouse.

Because the exemption from the generation-skipping transfer (GST) tax is computed by reference to the exclusion amount used for estate and gift tax purposes, the GST exemption amount for GSTs occurring in 2018 is also $11.18 million. However, portability does not apply for purposes of the GST tax.

Due to budgetary concerns, Congress made these changes temporary. Consequently, the doubling of the estate and gift tax exclusion and GST exemption amount expires for decedents dying and for gifts and GSTs made after December 31, 2025. This means that the next several years present a tremendous opportunity for persons such as you to make large gifts. These gifts could be outright or they could be in trust. They could be coupled with strategies that leverage the amount of your lifetime exclusion or that invest in a business for your children, or purchase life insurance structured so that the death benefit will not be included in your estate.

Excess Business Losses Limited for Noncorporate Taxpayers

Under TCJA, excess business losses of noncorporate taxpayers are not allowed for tax years beginning after December 31, 2017, and before January 1, 2026. Any excess business loss that is disallowed is treated as part of the taxpayer’s net operating loss (NOL) carryover to the following tax year.

Noncorporate taxpayers must apply this rule for excess business losses after applying the passive activity loss rules. For partnerships and S corporations, the limit on excess business losses is applied at the partner or shareholder level.

Comment: For losses arising in tax years beginning after December 31, 2017, an NOL may generally only reduce 80 percent of taxable income in a carryback or carryforward tax year.

An “excess business loss” is the excess, if any, of:

  • the taxpayer’s aggregate deductions for the tax year from the taxpayer’s trades or businesses, determined without regard to whether or not such deductions are disallowed for such tax year under the excess business loss limitation; over
  • the sum of
    • the taxpayer’s aggregate gross income or gain for the tax year from such trades or businesses, plus
    • $250,000, adjusted for inflation (200 percent of the $250,000 amount in the case of a joint return).

The $250,000 amount is adjusted for inflation for tax years beginning after December 31, 2018.

Example: For 2018, Ned Brown has $1,000,000 of gross income and $1,400,000 of deductions from a retail business that is not a passive activity. His excess business loss is $150,000 ($1,400,000 − ($1,000,000 + $250,000)). Brown must treat his excess business loss of $150,000 as an NOL carryover to 2019.

The result of this provision is that an individual taxpayer is limited to offsetting a maximum of $250,000 of business loss against other income for the tax year. In the example, if Ned Brown reported wages of $400,000 (and no other income) in 2018, his adjusted gross income would be $150,000. Under present law, all of the $400,000 of losses can be used to offset wage income to arrive at adjusted gross income of $0.

Excessive Employee Compensation

TCJA changed the definition of covered employees, compensation and publicly held companies for purposes of the $1 million deduction limitation on the compensation for certain highly paid employees.

Changes Impact Executive Compensation Programs
Beginning in 2018, companies cannot deduct compensation in excess of $1 million for the:

  • CEO,
  • CFO,
  • top three other most highly compensated employees, and
  • any employee who, beginning in 2017, was previously considered a covered employee.

Performance-based compensation and commissions are now included in the $1 million deduction limitation. Finally, publicly held companies now include all entities required to file under Section 15(d) of the Exchange Act.

Certain Contracts Grandfathered
Luckily, Congress included a transitional rule, which grandfathers in contracts in effect on or before November 2, 2017, that have not had any material modifications since that date. These agreements should still abide by the strict rules for performance-based compensation. However, for new agreements going forward, it appears that companies will no longer need to abide by those requirements.

Excise Tax on Net Investment Income of Private Colleges and Universities

Private foundations (other than exempt operating foundations) are generally subject to a two-percent excise tax on their net investment income. However, private colleges and universities are considered 501(c)(3) educational organizations and are public charities rather than private foundations. Under present law, they are therefore not subject to the private foundation excise tax on net investment income.

In tax years beginning after 2017, TCJA imposes an excise tax of 1.4% on the net investment income of certain private colleges and universities. For this purpose, net investment income is the same as defined for purposes of the excise tax applicable to private foundations.

An “applicable educational institution” subject to this excise tax is defined as an educational institution that

  • has at least 500 students during the preceding tax year, of which more than 50 percent are located in the United States;
  • is a private educational institution and not a state college or university; and
  • has assets with an aggregate fair market value of at least $500,000 per student (not including assets used directly in carrying out the institution’s exempt purpose) as measured at the end of the preceding tax year.

For these purposes, the number of students of an institution is based on the daily average number of full-time students attending the institution, with part-time students being taken into account on a full-time student equivalent basis.

The assets and net investment income of any related organization are treated as assets and net investment income of the applicable educational institution.

Expanded Medical Expense Deduction

For tax years 2017 and 2018, you may be able to deduct medical expenses in excess of 7.5 percent of your adjusted gross income. TCJA reduced the threshold, which had been 10 percent for most taxpayers. Therefore, you may be able to deduct more of your 2017 and 2018 medical expenses, or may even have a medical expense deduction for 2017 or 2018, if the same amount of expenses would not have qualified for a deduction in 2016 when the threshold was 10 percent for taxpayers under age 65.

Year Threshold Amounts
Pre-2017 10% or 7.5% if taxpayer or spouse is 65 or older
2017 and 2018 7.5% for all taxpayers
After 2018 10% for all taxpayers

Impact of Other TCJA Provisions
Other TCJA provisions may affect your deduction for medical expenses. For example, if your income exceeds a certain amount, you normally must reduce the amount of your itemized deductions. However, the phaseout for itemized deductions is temporarily repealed for tax years beginning after 2017 and before 2026. Thus, you may be able to deduct the full amount of medical expenses that exceed the 7.5 percent threshold (in 2017 and 2018). On the other hand, you may benefit from not itemizing and taking the increased standard deduction starting in 2018 ($24,000 for married filing jointly and surviving spouse, $18,000 for head of household, and $12,000 for others), even with the reduced medical expense threshold.

Future Impact
If you need or are considering any medical treatments, there may be a tax impact to you based on whether you:

  • incur the medical expense in 2018, or
  • incur the medical expense in 2019, when the threshold goes back up to 10 percent.

Of course, your physician's advice on timing medical treatment should always take precedence over any tax considerations.

Foreign Tax Credit for Domestic Corporations

Domestic corporations may claim the foreign tax credit for foreign income taxes paid or accrued to a foreign country or possession. Changes under TCJA may impact either the availability or calculation of the foreign tax credit.

TCJA Impacts Foreign Tax Credit
Many of these changes are a result of new provisions, including the new participation dividends received deduction (DRD). The DRD under Code Sec. 245A was added by TCJA and it applies to dividends received after 2017. The new deduction allows domestic corporations that own 10 percent or more of a foreign corporation to deduct 100 percent of the dividends received from the corporation, instead of receiving a deemed-paid credit.

Gambling Losses

TCJA changed federal income tax treatment of gambling loss deductions.

Gambling Losses Deductible to Extent of Winnings
Gambling winnings, whether legal or illegal, are includable in gross income. For nonprofessional gamblers, wagering losses are itemized deductions, meaning they can only claim the loss if they forego the standard deduction. Professional gamblers, who pursue wagering as a full-time activity and not as a hobby, may treat their gambling losses as trade or business expenses. However, loss deductions for both professional and nonprofessional gamblers are limited to the amount of gambling gains, and excess losses and expenses cannot be carried over to other tax years.

Gambling-Related Expenses
TCJA expanded allowable gambling losses to include other expenses incurred in connection with the conduct of that individual’s gambling activities. For example, expenses incurred in traveling to and from a casino fall within the scope of the gambling loss limitation.

Keeping Records
Gambling losses must be established by adequate evidence. The easiest way to do this is to keep a diary of expenses. The diary should include:

  • the date and type of each specific wager or wagering activity;
  • the name of the gambling establishment;
  • the address and location of the gambling establishment;
  • the names of other persons (if any) that were present with the taxpayer at the gambling establishment; and
  • the amounts won and lost.

There are also specific guidelines for documenting specific types of wagering transactions.

Home Mortgage Interest Deduction

Tax law provides several incentives for home ownership, including a deduction for mortgage interest (if you claim itemized deductions). TCJA placed new restrictions on the home mortgage interest deduction, described below.

Lower Dollar Limit
Home mortgage interest is generally deductible if it is paid or accrued on acquisition debt or home equity debt secured by any qualified residence (i.e., the taxpayer’s principal or second residence). The deduction for acquisition debt was limited to interest paid on the first $1 million of debt and the first $100,000 on home equity loans.

Under TCJA, you may treat no more than $750,000 as acquisition debt for tax years beginning in 2018. The reduced dollar amount does not apply to any debt incurred before December 16, 2017. Thus, the higher dollar limits continue to apply to interest paid on such debt. In addition, there are transition rules if you refinanced an existing acquisition debt or entered into a binding written contract before December 15, 2017, to close on the purchase of a home before January 1, 2018.

Cap on Home Mortgage Interest Deduction – Acquisition Debt
Filing Status 2017 Tax Year Tax Years Beginning in 2018 - 2025
Single; Married filing jointly $1,000,000 $750,000
Married filing separately $500,000 $375,000

Home Equity
TCJA also suspends the deduction for interest on home equity. Beginning in 2018, you may not claim a deduction for interest paid on any home equity unless the debt is used to buy, build or substantially improve the home securing the loan. In other words, interest paid on a home equity debt used to pay other personal expenses (e.g., credit card, car loan, etc.) is no longer deductible during 2018 through 2025.

Deduction for Interest on Home Equity Debt
Filing Status 2017 Tax Year Tax Years Beginning in 2018 - 2025
Single; Married filing jointly $100,000 Deduction suspended, unless the debt is used to buy, build or substantially improve the home securing the loan
Married filing separately $50,000

Impact on Life Insurance Companies

TCJA made the following key changes specifically applicable to life insurance companies:

Insurance tax reserves
For tax years beginning after 2017, life insurance reserves for any contract are determined as the greater of the net surrender value of such contract, or 92.81 percent of the amount determined using the tax reserve method otherwise applicable. In addition, the 10-year spread for changes in a life insurance company’s basis for determining reserves is eliminated. Instead, income or loss resulting from the change is taken into account as an adjustment attributable to a change in the method of accounting.

Net operating losses
The operations loss deduction for life insurance companies is repealed for losses arising in tax years beginning after 2017. Instead, life insurance companies are allowed a net operating loss (NOL) deduction and are subject to the same NOL limitations applicable to other noninsurance companies.

Capitalization of certain policy acquisition expenses
TCJA modified the rules requiring insurance companies to capitalize and amortize a portion of policy acquisition expenses on certain specified insurance contracts, effective generally for net premiums for tax years beginning after 2017. The amortization period for these expenses is extended from 120 months to 180 months, and the percentage of expenses subject to the capitalization rule is increased

Small life insurance company deduction
The small life insurance company deduction is repealed for tax years beginning after 2017.

Dividends-received deduction proration rules
For purposes of the life insurance company proration rules for the dividends-received deduction, the company’s share is 70 percent and the policyholder’s share is 30 percent.

Policyholder surplus accounts
The special rules for distributions to shareholders from pre-1984 policyholder surplus accounts are repealed for tax years beginning after 2017. A 21-percent tax is imposed on a life insurance company’s remaining balance in the account as of December 31, 2017, which is required to be paid ratably over the next eight years beginning with the 2018 tax year.

Reporting of life insurance transactions
New reporting requirements apply for acquisitions of life insurance contacts in reportable policy sales occurring after 2017, and for the payment of reportable death benefits after 2017.

Impact on Partnerships

TCJA made significant changes to the federal taxation of partners and partnerships.

Carried interest
Capital gain passed through to fund managers via a partnership profits interest (carried interest) in exchange for investment management services must meet an extended three-year holding period to qualify for long-term capital gain treatment.

Technical termination rules
The rule providing for technical termination of partnerships is repealed for partnership tax years beginning after December 31, 2017.

Substantial built-in loss
The Code Sec. 743 definition of a “substantial built-in loss” is modified so that a substantial built-in loss also exists if the transferee partner would be allocated a net loss in excess of $250,000 upon a hypothetical disposition at fair market value by the partnership of all partnership assets immediately after the transfer of the partnership interest.

Loss limitation rules
The basis limitation on partner losses applies to a partner’s distributive share of charitable contributions and foreign taxes.

New Withholding Requirements
If a foreign partner sells or exchanges its interest in the partnership, there are new rules on how the gain or loss on the transaction must be treated for federal tax purposes. Additionally, the party that is the transferee in the transaction might now be required to withhold tax on any gain realized on the sale or exchange. In some cases, there are exceptions to the withholding requirement, and the IRS has temporarily suspended withholding for certain types of partnerships.

Impact on Property and Casualty Insurance Companies

TCJA made following key changes specifically applicable to property and casualty (P&C) insurance companies.

Loss reserve discounting
For tax years beginning after 2017, P&C insurance companies’ loss reserves are discounted using an annual rate based on the corporate bond yield curve. Also, the periods for determining loss payment patterns are extended for certain lines of business, and the election allowing taxpayers to use their own historical loss payment pattern rather than the industry-wide loss payment pattern is repealed.

Net operating losses
Net operating losses (NOLs) of P&C insurance companies continue to be available to offset 100 percent of taxable income and can be carried back two years and forward 20 years.

The proration percentage for tax-exempt interest and the dividends-received deduction is changed from 15 percent to 25 percent beginning with the 2018 tax year.

Special estimated tax payments
The election under Code Sec. 847 that permitted nonlife insurance companies not to discount unpaid losses but instead to make special estimated tax payments is repealed for tax years beginning after 2017.

Individual Health Insurance Mandate Repealed

Congress has passed legislation that effectively repeals the individual mandate after 2018 by doing away with the penalty associated with individuals failing to maintain health insurance.

Under the Affordable Care Act, individuals are required to buy health insurance through their employer, the government or on their own, or pay a penalty. The penalty remains in effect for 2017 and 2018. If an individual does not maintain insurance in 2017 or 2018, they must pay a penalty in the amount of $695 per adult or 2.5% of household income in excess of their tax filing threshold, whichever is greater.

The employer mandate has not been repealed by this legislation. Certain employers must continue to offer their employees affordable health insurance or pay a penalty.

Kiddie Tax

The Tax Code imposes a "kiddie tax" on the unearned or investment income of children who are under 19 (under 24 if a student). Beginning after 2017, legislation has simplified the calculation of the kiddie tax on a child’s unearned income above a certain amount ($2,100 for 2018) by applying the tax rates applicable to trusts and estates.

Before 2018, if a child had unearned income above the threshold amount ($2,100 for 2017), the kiddie tax could be applied at the parents’ tax rate which was usually much higher than the child’s tax rate. The kiddie tax was created to lessen the effectiveness of intra-family transfers of income-producing property. Without the kiddie tax, families could shift income produced from income-producing property from the parents' high marginal tax rate to the child's generally lower tax bracket, thereby reducing a family's overall income tax liability.

The kiddie tax applies when at least one of the child's parents is alive at the close of the tax year, the child is not married and the child falls in one of the following three categories:

  • the child has not attained the age of 18 by the close of the tax year;
  • the child has not attained the age of 19 by the close of the tax year, and the child's earned income is less than one-half of the child's support for the year; or
  • the child is a student who has not attained the age of 24 by the close of the tax year, and the child's earned income is less than one-half of the child's support for the year.

Length-of-Service Award Amount Increased

For tax years beginning after December 31, 2017, TCJA increases the aggregate amount of length of service awards that may accrue for a bona fide volunteer with respect to any year of service from $3,000 to $6,000 and adjusts that amount in $500 increments to reflect changes in cost of living after 2018. Qualified services for this purpose are firefighting and prevention services, emergency medical services and ambulance services.

If the plan is a defined benefit plan, the limit applies to the actuarial present value of the aggregate amount of length of service awards using reasonable actuarial assumptions and methods.

Limitation on Itemized Deductions of State and Local Taxes by Individuals

The TCJA limits annual itemized deductions for all nonbusiness state and local taxes (SALT), including property taxes, to $10,000 ($5,000 for married taxpayers filing separately). Sales taxes may be included as an alternative to claiming state and local income taxes. For a large number of taxpayers, total itemized deductions will no longer exceed the standard deduction.

Charitable Contributions Made to Avoid SALT Deduction Limit
Some state programs provide a credit against state and local tax liability for making charitable contributions to a state or local entity as an attempt to get around the SALT limitation.

The IRS rules, however, limit any charitable contribution deduction in this scenario. The receipt of a state or local tax credit for a charitable contribution is receipt of a valuable benefit. Under existing federal tax principles, the receipt of a benefit in exchange for a charitable contribution reduces any deduction by the amount of the benefit received.

The taxpayer’s charitable contribution is not reduced dollar-for-dollar for any state and local tax credit. Instead, the proposed rules provide a de minimis exception that allows you to disregard up to 15% of the contribution to the charitable organization.

Miscellaneous Itemized Deductions Suspended

TCJA has suspended the ability of taxpayers to take a deduction for certain expenses classified as “miscellaneous itemized deductions” for tax years beginning in 2018 through 2025.

Examples of such expenses generally deducted as unreimbursed employee business expenses are:

  • Lodging
  • Meals and entertainment
  • Required medical exams
  • Subscriptions to professional journals
  • Union or professional dues
  • Job hunting expenses
  • Business use of a home
  • Depreciation on a home computer

Additional expense items considered as miscellaneous itemized deductions include:

  • Investment fees
  • Separately paid custodian fees for an IRA
  • Tax preparation fees

However, there may be options available to restructure your tax situation in order to preserve the deductibility of these expenses. In addition, it may even be possible for us to work with your employer so that you can be reimbursed for certain expenses without your overall financial results being adversely affected.

Net Operating Loss (NOL) Rules Modified

TCJA altered the treatment of net operating losses (NOLs) in two significant ways.

NOL Income Limitation
First, taxpayers can only utilize an NOL for up to 80 percent of their taxable income in any given year rather than offsetting all taxable income. Taxpayers are limited to the lesser of the total available NOL or 80 percent of the taxable income in the specific tax year. The taxable income limitation is effective only for NOLs that occur in tax years beginning after 2017. However, it does not apply to non-life insurance companies.

NOL Carryforward and Carryback
Second, the two-year carryback period and the 20-year carryforward period are generally eliminated for NOLs arising in tax years ending after 2017. Taxpayers are not allowed to carry back NOLs, except for non-life insurance companies and farming businesses that can generally carry back an NOL two years. Any excess NOLs may be carried forward indefinitely until they are completely used up. Non-life insurance companies, however, retain the 20-year carryforward period.

New Limits on Business Interest Deduction

TCJA caps the business deduction for net interest expenses. Starting in 2018, the deduction is limited to:

  • Business interest income for the tax year
  • 30 percent of adjusted taxable income for the year, including any increases in adjusted taxable income as a result of a distributive share in a partnership or S corporation (discussed below), but not below zero
  • Floor plan financing interest of the taxpayer for the tax year

In effect, the new law limits the deduction to 30 percent of adjusted taxable income. Adjusted taxable income is not the same as taxable income, but rather is determined by a special formula defined in the new law.

Exceptions to the limitation
There are, however, exceptions to this limitation:

  • The limitation does not apply for small businesses with average gross receipts of $25 million or less
  • Floor plan financing used by automobile dealers is permitted to the full extent of business interest income and floor plan financing interest
  • Certain real property or farming businesses may elect to be excluded from the limitation

New Rules for Electing Small Business Trusts

An electing small business trust (ESBT) can be valuable because the trust can hold A corporation stock and spread the income among family members and other beneficiaries.

Charitable Contribution Deduction
Many ESBTs make charitable donations, and an allocable portion of the S corporation’s charitable contribution deduction is also passed through to the ESBT. However, the ESBT was governed by trust rules that generally limited its deduction to amounts of gross income that were paid for a charitable purpose under the terms of the governing instrument. Excess deductions could not be carried over.

These rules have changed for tax years beginning after December 31, 2017. The portion of an ESBT that holds S corporation stock is now treated like an individual with respect to the deduction for charitable donations. Thus, the ESBT’s charitable contribution deduction is limited to 60 percent of its adjusted gross income, and disallowed deductions can be carried over for five years.

Nonresident Alien Beneficiaries
Previously, a nonresident alien beneficiary could inadvertently terminate the S corporation election. Beginning on January 1, 2018, nonresident alien beneficiaries are no longer treated as ineligible S corporation shareholders.

Pass-Through Income Deduction

Noncorporate taxpayers may deduct up to 20 percent of domestic qualified business income from a partnership, S corporation or sole proprietorship (Code Sec. 199A deduction). A similar deduction is allowed for specified agricultural or horticultural cooperatives. A limitation based on wages paid, or on wages paid plus a capital element, is phased in for taxpayers with taxable income above a threshold amount. The deduction is not allowed for certain service trades or businesses, but this disallowance is phased in for lower income taxpayers. The deduction applies to tax years from 2018 through 2025.

Caution. TCJA provides rules that would prevent pass-through owners—particularly service providers such as accountants, doctors, lawyers etc.—from converting their compensation income taxed at higher rates into profits taxed at the lower rate.

For individual taxpayers, the Code Sec. 199A deduction is not allowed in determining adjusted gross income. Further, it is not an itemized deduction, but it is available to individuals who itemize deductions and to those who claim the standard deduction. However, the deduction amount cannot be more than the taxpayer’s taxable income (reduced by net capital gain) for the tax year.

The Code Sec. 199A deduction is similar to the domestic production activities deduction under Code Sec. 199, in that both allow taxpayers to deduct a portion of their “taxable income” if it is less than a portion of their relevant business income. Also, neither deduction can be claimed if the taxpayer has no relevant business income. It is anticipated that the IRS will provide a new worksheet or form for calculating the Code Sec. 199A deduction, similar to Form 8903, Domestic Production Activities Deduction.

Patents, Inventions and Models Excluded from Capital Assets

Owners of patents, inventions, models and similar property should be aware of a change in the way that property is characterized.

These types of intellectual property are now excluded from the definition of “capital asset” if they are owned by:

  • the person who created them, or
  • a person whose basis in the property is carried over from the creator’s basis—for instance, a person who received the property as a gift or inheritance from the creator.

For these owners, any gain or loss on the disposition of the property is ordinary, rather than capital. This can be beneficial if the disposition results in a loss. However, the tax rate on any gain will probably be higher than if the property were a capital asset.

For other owners, the old rules still apply—that is, the intellectual property is probably a capital asset unless it falls into another category of excluded property. For instance, if the owner bought the property in a bona fide sale, gain on a subsequent disposition will probably be taxed at the lower rates for capital gain. However, the deduction for any loss may be limited.

Qualified Equity Grants Offered as a New Income Deferral Option

Under the TCJA, employees who are granted stock options are able to elect to defer recognition of income for up to five years. The election is not available to certain executives, highly compensated officers and “one-percent owners” of the corporation. The corporation must maintain a written plan under which at least 80 percent of all employees providing services to the corporation are granted stock options with the same rights and privileges. Further guidance is expected.

Repeal of the Deduction and Inclusion of Alimony Payments

A divorce impacts a family in many ways. If you have an existing divorce instrument or are contemplating a divorce, do not overlook the tax consequences that may affect the financial well-being of your family.

TCJA repealed the deduction of alimony payments by the payor spouse and the inclusion of alimony in the income of the payee spouse. These changes are effective for divorces executed after December 31, 2018, or existing divorce instruments that are modified after that date unless the parties specify that the new rules apply.

The loss of the deduction for the payor spouse will likely increase that spouse’s income tax liability, while decreasing the payee spouse’s income. As a result, the payor spouse will likely negotiate for lower alimony payments and both spouses will possibly have reduced income to support their family.

Repeal of the Domestic Production Activities Deduction

TCJA has repealed the domestic production activities deduction (DPAD) for tax years beginning after 2017.

The DPAD was often called the “manufacturing deduction,” but it could apply to a broad range of activities, including software, film and TV production, utilities, construction, even architecture and engineering. Since it was equal to nine percent of income from qualified activities, it could reduce the federal income tax on that income by more than three percent. The DPAD could also reduce state income taxes in many locations.

Pass-through entities that previously benefited from the DPAD will now want to determine if they are eligible to claim the Code Sec. 199A deduction.

Research Expenditure Deduction

TCJA makes important changes to the way in which research and experimental expenditures are handled.

Under prior law, these expenditures are currently deductible. However, after 2021, they must be capitalized and recovered ratably over five years through amortization deductions. Moreover, if you or your company are conducting research in a foreign country, the amortization period is extended to 15 years. Additionally, if a project is disposed, retired or abandoned, the capitalized costs must continue to be amortized. No deductible loss may be claimed, as under prior law.

Finally, the new law will treat all software development costs as research and experimental expenditures that are subject to five-year amortization. Under prior law, software development costs could be deducted in the year paid or incurred even if they were not considered research expenditures.

Recharacterization of Roth IRA Contributions

An individual who has made contributions to a Roth or traditional IRA may subsequently decide that a contribution to an IRA of the other type is more advantageous. If certain requirements are met, a contribution can be characterized and treated as having been originally made to a different type of IRA. Recharacterizing an IRA contribution requires transferring amounts previously contributed to a traditional or Roth IRA (plus any resulting net income or minus any resulting net loss) to another IRA of the opposite type and electing to have the amounts treated as having been transferred to the second IRA at the time they actually were contributed to the first IRA.

A recharacterization election effectively reverses the contribution from one type of IRA to another (e.g., Roth to traditional, or traditional to Roth). The contribution being recharacterized is treated as having been originally contributed to the second IRA on the same date and for the same tax year as that in which the contribution was made to the first IRA. Because the owner never has use of the IRA assets, the recharacterization does not count towards the once-per-year limit on IRA-to-IRA rollovers.

TCJA repeals the special rule permitting recharacterization of Roth conversions for tax years beginning after December 31, 2017. Therefore, for example, a conversion contribution establishing a Roth IRA during a tax year can no longer be recharacterized as a contribution to a traditional IRA (thereby unwinding the conversion).

TCJA does not preclude an individual from making a contribution to a traditional IRA and converting the traditional IRA to a Roth IRA. Rather, the provision would preclude the individual from later unwinding the conversion through a recharacterization.

Rollover of Plan Loan Offset Amounts

Plan loan offset amounts occur when, under the terms governing a plan loan, the accrued benefit of the participant or beneficiary is reduced to repay the loan, including the enforcement of the plan's security interest in the accrued benefit. These amounts are treated as actual distributions, not deemed distributions, so that a plan may be prohibited from making the offset. As an actual distribution, a plan loan offset is eligible for rollover if it otherwise qualifies.

TCJA increases the period during which a qualified plan loan offset amount may be contributed to an eligible retirement plan as a rollover contribution from 60 days after the date of the offset to the due date (including extensions) for filing the Federal income tax return for the tax year in which the plan loan offset occurs, that is, the tax year in which the amount is treated as distributed from the plan. This extended time is effective for plan loan offset amounts treated as distributed in tax years beginning after December 31, 2017.

Under TCJA, a qualified plan loan offset amount is a plan loan offset amount that is treated as distributed from a qualified retirement plan, a section 403(b) plan or a governmental section 457(b) plan, solely by reason of the termination of the plan or the failure to meet the repayment terms of the loan because of the employee’s severance from employment.

Small Business Exemptions from Inventory Accounting and UNICAP Rules

TCJA exempts “small” taxpayers from keeping inventories for tax purposes and applying the uniform capitalization rules for determining the capitalized cost of inventory or property that is constructed or otherwise produced by or for a taxpayer’s own use.

In general, if your average annual gross receipts are $25 million or less you will qualify for these exemptions.

Accounting Method Change Must Be Filed
The exemptions are effective beginning with the 2018 tax year. However, an accounting method change must be filed with your 2018 tax return in order to take advantage of the simplified rules. The good news is that the accounting method change will likely result in a significant current deduction for 2018 (a “Code Sec. 481(a) adjustment”) attributable to certain expenses that were previously capitalized into inventory or property produced for your use in tax years that began before 2018

We expect the IRS to issue details regarding the manner of making the accounting method change soon.

Also note that if you began constructing property that is eligible for bonus depreciation before September 28, 2017, and are now exempt from the UNICAP rules because of this law change, you must generally place the property in service by December 31, 2019, in order to qualify for bonus depreciation. Previously, the placed-in-service deadline for property with a long production period was December 31, 2020.

Specialized Small Business Investment Company (SSBIC) Rollover Election Repealed

Investments in small businesses can yield many tax benefits. One of those benefits has been eliminated, but several others are still available.

Individuals and C corporations have been able to defer capital gain on the sale of publicly traded securities by investing in a specialized small business investment company (SSBIC). SSBICs were eliminated in 1996, but SSBICs that were licensed at that time still qualified for the rollover.

This election has been eliminated. Capital gain on the sale of publicly traded securities after December 31, 2017, can no longer be deferred by investing in an SSBIC. However, tax laws still favor several other types of small business investment companies, as well as direct investments in qualified small businesses.

Suspension of Moving Expense and Bicycle Commuting Reimbursements

TCJA temporarily suspended two fringe benefits. Generally, employees are permitted to exclude up to $20 per month in qualified bicycle commuting reimbursements. Likewise, reimbursements for qualified moving expenses are excluded from employees’ gross income.

Both of these benefits are suspended for the years 2018 through 2025. Further guidance is expected.

Transition Tax for U.S. Shareholders of Foreign Corporations

As a U.S. shareholder in a foreign corporation you are potentially liable for the transition tax, added by TCJA under Code Sec. 965.

Mandatory One-Time Tax on Accumulated Offshore Earnings
The transition tax is a mandatory one-time tax on the untaxed post-1986 foreign earnings of certain foreign corporations of U.S. shareholders. The tax is determined by reference to the foreign corporation’s post-1986 foreign earnings for its last tax year, beginning before January 1, 2018.

Due Dates. Accordingly, for calendar year foreign corporations with tax years ending on December 31, 2017, the tax was due and payable with the taxpayer’s 2017 return. This is because the foreign corporation’s tax year ends during a fiscal taxpayer’s 2017 tax year or with a calendar year taxpayer’s 2017 tax year. For fiscal year foreign corporations, the last tax year beginning before January 1, 2018 (e.g., December 1, 2017) will end during or with a taxpayer’s 2018 tax year and the return is due with the 2018 return.

Stock in Foreign Corporations. The tax can apply based on your direct or indirect ownership of stock in a foreign corporation or your ownership in a pass-through entity that owns stock in the foreign corporation.

Unrelated Business Taxable Income

The unrelated business income tax (UBIT) generally applies to income derived from a trade or business regularly carried on by an exempt organization that is not substantially related to the performance of the organization’s tax-exempt functions. TCJA requires that for an organization with more than one unrelated trade or business, the unrelated business taxable income (UBTI) is first computed separately with respect to each trade or business and without regard to the specific deduction generally allowed under section 512(b)(12). A net operating loss deduction is allowed only with respect to a trade or business from which the loss arose.

The result of the provision is that a deduction from one trade or business for a tax year may not be used to offset income from a different unrelated trade or business for the same tax year. The provision generally does not, however, prevent an organization from using a deduction from one tax year to offset income from the same unrelated trade or business activity in another tax year, where appropriate.

Transition rule. The provision is effective for tax years beginning after December 31, 2017. Under a special transition rule, net operating losses arising in a tax year beginning before January 1, 2018, that are carried forward to a tax year beginning on or after such date, are not subject to this rule.

Unrelated Business Taxable Income Increased by Certain Fringe Benefit Expenses
TCJA increased the unrelated business taxable income (UBTI) of exempt organizations by the nondeductible amount of certain fringe benefit expenses paid or incurred after December 31, 2017. Specifically, UBTI will be increased by nondeductible amounts paid for certain qualified transportation fringe benefits, parking facility fringe benefits, and on-premises athletic facility fringe benefits. Further guidance is expected.

Vehicle Depreciation

TCJA contains several provisions that will affect depreciation on vehicles used in a trade or business.

The entire cost of a vehicle with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds may now be deducted in a single year as a result in the increase in the bonus depreciation rate from 50 percent to 100 percent. The vehicle, however, needs to be acquired and placed in service after September 27, 2017.

Depreciation claimed on vehicles with a GVWR of 6,000 pounds or less remain subject to annual depreciation caps. These caps are substantially increased by the new law if the vehicle is placed in service in 2018 or later. For example, the first-year cap is $18,000 if bonus depreciation is claimed. The cap is $11,060 if the same vehicle is placed in service in 2017, even if the 100 percent bonus applies because it was acquired after September 27, 2017.

On a related noted, the like-kind exchange rules only apply to exchanges of real property after 2017. This means that you will now recognize taxable gain if you trade-in the vehicle and the trade-in allowance exceeds the cost of the vehicle as reduced by prior depreciation allowances. However, if your basis exceeds the trade-in allowance you will recognize a loss.

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