On December 22, President Trump signed H.R. 1, the Tax Cuts & Jobs Act into law. The intention of this bill was to eliminate some of the complexities in the tax code and provide tax relief to individuals and businesses alike. You can debate whether the law met these intended outcomes, but the answer will likely depend on your individual circumstances.
I’ve been a Certified Public Accountant in the State of Minnesota since 1992 and I’ve worked as a senior financial leader for most of my career following two years as an auditor for a Big Eight firm (there were eight big firms way back in the olden days!). Currently I work as an independent CFO helping businesses with their strategy regarding their finance function. The Tax Cuts & Jobs Act has been a topic of discussion for just about a year, with anticipation building over the past six months. The first continuing education session I attended was last June where a tax professional from BDO’s Washington D.C. office shared early differences between the versions being touted by the United States House of Representatives, the United States Senate, and the President of the United States. Some of the tenets of those early bills remained in the final version while others seemed to evolve as politics came into play.
I was a junior in college when the last major tax reform was enacted. The Tax Reform Act of 1986 came into being as an attempt to lower tax rates and close loopholes. At the time, the Treasury Department report advocated for the reform.
“A tax that places significantly different burdens on taxpayers in similar economic circumstances is not fair. For example. If two similar families have the same income, they should ordinarily pay roughly the same amount of income tax, regardless of the sources or uses of that income.”
That seems to make sense until such time that politicians and lobbyists get involved! What they need is for accountants to drive the reform so it really makes sense! We know that won’t happen but a guy needs to dream…
I’ve listened to many reports and attended several education sessions on the Tax Cuts & Jobs Act and my primary takeaway is that it’s too early to state definitively how to determine all the ways it will impact me or my clients. The details are still being vetted and reviewed so the tax professionals I’ve consulted have recommended that we all slow down and let the details unfold. I’m inclined to take their advice but thought I’d highlight the five things that caught my attention on behalf of my clients.
- When will this take effect? Most provisions for the new law go into effect for tax years beginning after December 31, 2017. For individuals and companies on a calendar tax year, this law would take effect January 1, 2018.
- Tax rates have been reduced for individuals. The maximum federal rate for individuals is reduced from 39.6% to 37.0%. The standard deduction for single/married taxpayers changes from $6,500/$13,000 under the old law to $12,000/$24,000 under the new law. Personal exemptions are eliminated under the Tax Cuts & Jobs Act and individual deductions are limited to $5,000/$10,000 for single/married persons with other restrictions.
- Lower the corporate tax rate for corporations from 35% to 21%. According to the December 20, 2017 PwC ‘Tax Insights’, the United States has the highest corporate tax rate among advanced economies. This reduction is intended to stimulate the economy by providing tax relief to businesses. The new law provides for rate reductions for C-Corporations as well as pass-through entities, although the rate for pass-through entities is slightly different with clauses that attempt to make the effective tax rate the same as for C-Corps. Further, some pass-through entities were excluded from the rate reduction, specifically ‘specified service trade or business’ or the trade or business of performing services as an employee. What this means to me is that most service businesses (including accountants and lawyers) will not enjoy the lower corporate rates. The exception to this is for engineers and architects; the skeptical person would submit that they have better lobbyists.
- Business meals and entertainment are no longer deductible. In 2017, qualified business meals and entertainment were 50% deductible to a business. Going forward, business meals and entertainment will no longer be deductible for tax purposes. This may have a major effect on meals, entertainment and sports tickets purchased by corporations. Part of the theory seems to be that the lower tax rates will allow the companies to purchase these items from the tax savings but eliminate the deduction.
- Section 179 property dollar limitation increases from $500,000 to $1,000,000 annually. Long-term, tangible personal property purchased for use in a business (at least 51% business use) is now eligible for a $1,000,000 annual deduction. Types of qualifying assets include computers/software, business machinery & equipment (including some vehicles) and office furniture.
There are many more changes to both personal and business taxes that are too numerous to note in this post. This is an historic time for tax changes, something that I definitely didn’t appreciate in 1986 as I didn’t have the experience to know it might be over 30 years before the next major reform might occur. In closing, I’d reiterate that the details are becoming more evident every day and tax preparers are anxiously awaiting the release of their updated software so they can model how this will impact their individual and corporate clients. Take some time to learn more about how the Tax Cuts & Jobs Act will affect you and your business. Don’t make any decisions before you know what it really means. I’ve spoken with business owners who have already suggested they’ll convert from an S-Corp to a C-Corp based on what they know of the new law. My recommendation is to wait to see how all the provisions lay out before making strategic decisions on this law.
Walter Jungbauer Sr. CPA is the owner of Jungbauer Consulting, Inc., which provides fractional and part-time senior financial leaders (CFOs & Controllers) to businesses with revenues from $1M-$100M. Jungbauer teaches the Capstone Course in the Masters in Accountancy program at Saint Mary’s University of Minnesota where he is an adjunct faculty member.