Tax reform will have extensive impact on the business climate in the near and long term, with companies focused on navigating many changes and nuances, in addition to new risk and compliance challenges.
Brian Newman, tax partner at CohnReznick, and Joy Matak, tax director at CohnReznick, recently sat down with Inside Counsel to discuss the seismic shift of the landscape and specific tax reform developments. He shared changes related to the tax landscape, including the impact on trusts and estates, state and local tax, international tax, the not-for-profit area and changes related to executive compensation.
The reduction of tax rates for corporations and individuals should have a positive impact on the economy for the foreseeable future, according to Newman. With a significantly lower corporate tax rate, businesses will be prone to reinvest in infrastructure, hire more employees and increase their dividends to shareholders. A larger workforce armed with more disposable income means more spending–and for any company selling product, spending is the key ingredient in fueling growth.
“The Tax Cuts and Jobs Act is one of the most significant pieces of tax legislation ever,” he said. “But the potential impact is still mainly a mystery to corporate and individual taxpayers, since there is very little guidance on how many of the new provisions apply to them. It is important that all taxpayers take time now to focus on how each of these provisions may affect them.”
However, any new tax laws also brings new risks, especially relating to compliance. Many companies are uncertain on how they can apply the new tax laws due to the lack of interpretive authority of the new provisions. There may also be a risk of investment decisions being made based on the consequences instead of the merit of the investment itself.
So what are the big changes related to the tax landscape in 2018?
For businesses, some of the big changes impact pass-through businesses like S corporations, LLCs, partnerships and sole proprietors. These entities will receive a 20 percent deduction equal to 20 percent of “qualified business income.”
But, per Newman, there are several limitations and this benefit will be phased out for professional service businesses owned by individuals with taxable income of more than $157,500 (single filers) or $315,000 (joint filers). Effective Jan. 1, the tax rate for C-corporations was reduced to 21 percent from the maximum rate of 35 percent. In addition, the corporate AMT has been repealed. Taxpayers can now, subject to certain limitations, deduct 100 percent of the costs of certain assets acquired to be used in a trade or business.
For 2018, the maximum, which allows an election to deduct certain depreciable assets, is increased from $500,000 to $1 million. On the other hand, “like-kind” exchanges are limited to real property and the deduction for fringe benefits and entertainment expenses has been eliminated or reduced. Finally, the Section 199 deduction is repealed.
“For individual taxpayers, the big changes include revised Individual rates and brackets, with generally lower rates, with the top rate dropping from 39.6 percent to 37 percent,” he explained. “These tax cuts are scheduled to expire after 2025. There is no change to the preferential long-term capital gains tax rate. The standard deduction is increasing to $24,000 from $12,700 for married taxpayers filing jointly, and from $6,350 to $12,000 for single taxpayers. For eligible taxpayers, the child tax credit is increased from $1,000 to $2,000 and a $500 credit is provided for certain non-child dependents.”
The new legislation limits an individual’s itemized deduction for state and local taxes to $10,000 in 2018 which, for many individuals, could increase their federal income tax liability. For other taxpayers, the reduced state and local tax deduction may have limited impact if they were subject to the AMT and were not receiving the benefit of state tax deductions anyway. And mortgage interest deductions for new purchases of first or second homes will be capped at $750,000 in mortgage debt for mortgages incurred after December 15, 2017.
According to Matak, the new limitation of the tax deduction is receiving significant pushback from legislators in several states. There is proposed legislation in high tax states designed to circumvent the $10,000 state and local tax deduction limitation on an individual’s income tax return. Additionally, New York has just announced its intention to sue the federal government due to the limitation on the deductibility of state and local taxes.
She said, “Reform around trust and estate taxation comes as welcome relief for high-net-worth individuals and family businesses. The tax reform law doubles the amount that can be exempted from federal estate tax to around $11 million per taxpayer, which was effective Jan. 1. Opportunities abound to accomplish significant asset protection and business succession goals but planning must be tailored to each taxpayer’s unique facts and circumstances.”
Amanda G. Ciccatelli is a Freelance Journalist for Corporate Counsel and InsideCounsel, where she covers intellectual property, legal technology, patent litigation, cybersecurity, innovation, and more.