The Tax Cuts and Jobs Act (TCJA) has officially been passed and signed into law. While the TCJA was touted as a simplification of the tax code, it inherently contains many complexities.
To start, the conference report itself is 1,097 pages long. The report lists the changes that were passed related to the tax law, but it doesn't give much detail surrounding those changes. It is likely that clarification will be provided throughout 2018 and in future years. But ... understandably ... people want to know how it will affect them and their businesses sooner rather than later.
The Basics for Individuals
Rates are going down across the board for individuals, and standard deduction amounts are increasing. The deduction for miscellaneous expenses (including unreimbursed business expenses, professional fees, and investment fees) is going away. Likewise, the deduction for personal exemptions will not be available after 2017. Beginning in 2018, the deduction for sales tax will be included in the total deduction for sales and local taxes and property taxes, but it is capped at $10,000 per year.
The Basics for Businesses
Business tax rates were reduced. The federal tax rate for C-corporations was reduced to 21 percent (previously 35 percent for personal service corporations) beginning Jan. 1, 2018. But before you rush out to incorporate, keep in mind that this rate applies to income retained in the corporation. C-corps are not pass-through entities so if you take cash from the C-corp in the form of salary (deductible to the corporation, taxable to the individual), you negate the benefit of the low corporate bracket. Of course, another way to take cash from your corporation is in the form of dividends (not deductible to the corporation), which allow you to take advantage of the 21 percent rate at the corporate level. But when you combine that with the capital gains rate that you will pay on the dividends personally, you are back to a combined rate of as much as 41 percent (combined corporate and individual).
Much discussion has centered around the impact of tax reform on pass-through entities. Whereas the House proposal called for a flat tax rate for pass-through business income, the final bill provides for a 20 percent deduction of "combined qualified business income" - a complicated calculation. The most important takeaway is the fact that, for the most part, the deduction will not apply to specified service income (i.e., personal service income from a medical practice).
With the bill newly passed, there are more questions than answers at this point. Unfortunately, in the midst of all of the news about the tax law, there is also plenty of misinformation circulating. More clarification will come about as the dust settles. But the best advice for 2018 is to proceed with caution - and contact your tax advisor before you make any changes.
Lucy Carter, CPA, is a member (owner) in KraftCPAs PLLC and practice leader of the firm's healthcare industry team. Contact her via email at firstname.lastname@example.org. For more information, visit www.kraftcpas.com/healthcare.htm.