Beyond Section 199A: Other TCJA Tax Changes
The Tax Cuts and Jobs Act (TCJA) has been at the forefront of tax news for what seems like a lifetime already, and it will continue to be for the remainder of 2019 as we formally implement the Act’s changes during the upcoming filing season.
While the Section 199A deduction has overshadowed many of the other various federal tax changes — as it should, it’s a pretty big deal — let’s not forget about additionally important business and individual provisions that will affect just about everyone.
The following changes are in effect for tax years beginning after Dec. 31, 2017.
- Corporations. Flow-through entities were not the only businesses greatly affected by the TCJA. In an effort to be more competitive and keep profits in the United States, the corporate tax rate was permanently reduced from a maximum progressive rate of 38 percent to a flat rate of 21percent. In addition to this significant tax rate reduction, the corporate alternative minimum tax was also eliminated.
- Section 179 expensing and bonus depreciation. Businesses will now be able to expense up to $1 million (increased from the 2017 amount of $510,000) for qualifying property placed in service during the year, as long as the total property placed in service during the year does not exceed $2.5 million. “Qualifying property” eligible for immediate expensing was also expanded to include certain improvements, as long as the improvements are not structural in nature and do not enlarge the building. In addition, the bonus depreciation rules now allow businesses to take a 100-percent first-year deduction (up from 50 percent) on qualified new and used property that was acquired after Sept. 27, 2017, and placed in service by Dec. 31, 2022.
- Interest expense. Under amended Code Section 163(j), the deduction for business interest incurred will now be limited for tax years beginning after 2017 for all taxpayers, except for those with average gross receipts of $25 million or less (average of three-tax-year period ending with the prior tax year); real estate or farming businesses that elect to exempt themselves; and certain regulated entities. The deduction will be limited to the sum of:
- Business interest income for the taxable year;
- 30 percent of the taxpayer’s adjusted taxable income for the tax year; and
- The taxpayer’s floor plan financing interest paid by vehicle dealers for the tax year.
For calculation purposes, adjusted taxable income is taxable income before any net operating loss, Section 199A deduction, depreciation, amortization or depletion. If businesses are in a real property trade, they can file an irrevocable election to elect out of the limitation; however, if they elect out, they are required to use the alternative depreciation system (ADS) to depreciate real property.
- Net operating losses. Prior to the TCJA, net operating losses (NOL) were generally able to be carried back up to two tax years and forward up to 20 tax years to offset taxable income. For NOLs arising in tax years beginning after Dec. 31, 2017, the TCJA now limits the NOL deduction to 80 percent of taxable income, eliminates the two-year carryback period and allows for an indefinite carryforward.
- Miscellaneous provisions. Other notable modifications under the TCJA include the following:
- The Section 199 Domestic Production Activities Deduction has been eliminated.
- The Orphan Drug Credit has been lowered to 25 percent from 50 percent of a company’s costs related to clinical trials for developing rare-disease treatments.
- Small taxpayers are excepted from the uniform capitalization rules (UNICAP).
- There is a now a limitation on tax-free exchanges of real property not held primarily for sale.
- There is a transition from a worldwide tax system to a territorial system with base erosion rules.
There are numerous tax changes for individual taxpayers. Most of them are set to expire on Dec. 31, 2025.
- Tax brackets. Although the seven-bracket structure has been retained, there has been a shift as the income bracket ranges were modified. Most individual income tax rates have been lowered, including the top marginal rate from 39.6 percent to 37 percent. Table 1 shows a comparison of the married filing jointly tax brackets.
- Standard deduction and exemptions. The standard deduction has been almost doubled, which was one of the major selling points for the TCJA in simplifying the tax law. Due to the increase, more taxpayers will likely take the standard deduction rather than itemizing their deductions. However, the personal exemption has been eliminated, which makes the perceived tax benefit of the increased standard deduction deceptively higher than it should be. In an effort to soften the blow of the elimination of exemptions, the child tax credit was expanded from $1,000 to $2,000 (of which a portion is refundable), and the phaseout was increased to be more inclusive.
- Itemized deductions. A number of deductions have been eliminated or limited, the most noteworthy being the $10,000 cap on all state and local income taxes. Other changes to itemized deductions include: the elimination of the 3-percent Pease limitation; reduction of the mortgage interest limitation; elimination of deductions subject to the 2-percent limitation; and an increase to the charitable contribution adjusted gross income (AGI) limitation from 50 percent to 60 percent.
- Alternative minimum tax (AMT). Although individual AMT was not eliminated like its corporate counterpart, the exemption and phaseouts have been increased in an effort to align with the original intentions of the supplemental tax first enacted in 1982. With the increased exemption and phaseout amounts, the AMT will be less likely to hit at lower income levels. For example, for taxpayers who are married filing jointly, the exemption increased from $86,200 to $109,400, and the phaseout threshold increased from $164,100 to $1 million.
This article appeared in the March/April 2019 issue of New Jersey CPA magazine. Read the full issue.