American small business owners and entrepreneurs across the country received a financial present this holiday season when Congress passed the new tax reform package. The “Tax Cuts and Job Act of 2017” is the most significant and radical change in tax law since the 1980s and is sure to impact you and your business in the coming year. Here are our top five most important elements of the Tax Cuts and Job Act of 2017 that you should know more about:
1.Rate Changes – For corporations and individuals
The Tax Cut Act remains true to its name and cuts the corporate tax rate. Corporate tax gets simplified to a flat 21 percent rate. This is a big change from the multi-bracket structure with a 35 percent top rate!
Individual rates are also reduced with the new law. Although we keep seven brackets, the Tax Cut Act has reduced rates with the highest bracket now at 37 percent – an almost 3 percent drop.
2.Deductions and Exemptions Have Reformed
– Standard Deduction Increased
The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. To help cover the cost, personal exemptions and most additional standard deductions are suspended.
– Personal Exemptions Removed
Previously, you could claim a $4,050 personal exemption for yourself, your spouse and each of your dependents. But the under new tax bill, the personal exemption is not available for anyone.
– State and Local Tax Deductions Cappped
State and local tax deductions are limited to $10,000 total for all property, income and sales tax. Where you live and your state tax structure will determine the impact of this change on your taxes.
– Alternative Minimum Tax (ATM) Exemption Raised
The alternative minimum tax, a parallel tax system that ensures people who receive a lot of tax breaks still pay some federal income taxes, remains in place, but the exemption changes to $70,300 for single filers and $109,400 for joint filers and the phaseout threshold to $1 million. The changes mean the AMT will affect far fewer people than before.
3. Reduction of Pass-through Income
Pass-through entities usually are smaller corporations that are created to reduce the effects of double taxation. Because sole proprietorships and partnerships also pay taxes on their profits at an individual level, pass-throughs do not pay income taxes at the corporate level. Instead, the income made by the owners shows up on their individual 1040 form and taxes are collected at the individual owners’ rate.
Most owners of pass-through entities such as S corporations, partnerships and sole proprietorships will see their income tax lowered with a new 20 percent income reduction calculation. In general, the Act increases the amount of income allowed to be claimed as pass-through from 17.4 to 20 percent. There are many variable to the reductions depending on your business structure. Talk to your tax advisor for the specific ways this reduction will impact you business.
4. Estate and Gift Tax Exemption Doubled
This is a major win for the small business owner! Estate Tax, which applies to the transfer of property to decedents, either as a gift or through a will or trust, has been doubled. The basic amount of the exemption for individuals has increased from 5M to 10M.
Several business credits are maintained but modified, including the orphan drug credit, the rehabilitation credit, the employer credit for paid family or medical leave and the research and experimentation credit.
Thomas Jones is the lead tax partner at McConnell & Jones. With more than 40 years of experience in investment and financial management, Mr. Jones is responsible for providing the firm’s clientele with access to a complete range of personal and confidential financial services including tax planning, retirement and estate planning services. Additionally, Mr. Jones works directly with entrepreneurs and small business owners to provide financial solutions that promote long-term business success. Contact us for more information on these and other important elements of the new Tax Act to help prepare for the upcoming filing season.