2017 Federal & Individual Tax Reform Summary
You may have heard that both the House and Senate recently approved the final compromise tax reform bill. While most of the corporate changes included in this bill are permanent, many of the individual tax changes will expire by 12/31/2025 absent new legislation (see our Federal and Individual bulletins for more specific phase out date information).
Provided here is a summary of some of the key elements of the legislation:
- The highest rate applicable to C corporations is reduced from 35% to 21% effective for 2018. This obviously suggests to the extent possible, any legitimate method of accelerating deductions into 2017 or deferring income into 2018 should be considered.
- The U.S. will convert its corporate tax regime from a system that taxes companies on their worldwide income to what is commonly referred to as a territorial based system where companies are only taxed on their US sourced income. This regime is more commonly used throughout the developed world by our competitor economies, and is intended to make the US more competitive in the worldwide economy. There are significant transition issues and many related provisions in the law. 10% or greater owners of foreign entities will need to plan for the transition during 2018.
- Full expensing of new and used qualifying property placed in service after September 27, 2017 for a period of 5 years followed by a phase down will be adopted in lieu of the current 50% bonus depreciation on new property additions.
- The maximum individual rate will be reduced to 37% from 39.6% (exclusive of certain surcharge rates still in effect) effective for 2018, but expiring at the end of 2025. State and local tax deductions will be capped at $10,000 in 2018 forward (this includes real and personal property taxes and state/local income taxes). Taxpayers who are not in AMT may benefit by fully paying 2017 state (e.g. Oregon income tax) and local taxes by December 31, 2017. The new law includes a provision intended to prohibit obtaining a benefit from prepaying 2018 taxes in 2017.
- Qualifying business income of up to 20% can be excluded from taxable income beginning in 2018. There are complex limitations relating to this provision for pass-through income from S corporations and partnerships/LLCs, such limitations being based on W-2 wages and assets employed by the business (which also present significant planning opportunities). Service businesses are severely limited in the ability to use this exclusion, though joint filers with less than $315,000 in taxable income may be eligible for the exclusion despite these limitations. This provision was in part intended to reduce the rate difference between C corporations and pass-through businesses, but it doesn’t eliminate the difference, and so reconsideration of entity type will need to take place.
- The estate and gift tax lifetime exemption will be nearly doubled to $11 million per individual, but will return to roughly current levels after 2025.
- Section 1031 like kind exchanges will be limited to real property not primarily held for sale, generally for exchanges completed after December 31, 2017, with certain transition rules.
The new law certainly does not simplify taxation for most businesses and individuals with significant income/net worth, but we’re are here to help you understand it and to optimize the outcome for you, your family and your business.
Please contact your Perkins tax advisor to assist you with any questions or concerns.
Author: Chris Loughran, Shareholder, Director of Tax