Key Considerations Under the New Tax Law

More than ever, it is important for individuals and businesses to enter into detailed tax planning. Due to the complexity of the tax law, the details are often left to the tax advisor, but having a basic understanding of how the new tax reform may affect you or your business will help make your relationship with your tax advisor even more effective. We have outlined a few of the key considerations that are critical to individuals and businesses.

Business Strategies

Many individuals and business are affected by changes in section 179, bonus depreciation, 1031 exchanges, and certain employer provided fringe benefits. In the case of employer provided fringe benefits, even non-profit entities are affected.

Consider whether to become a C Corporation
Beginning in 2018, C Corporations have a new, much lower, federal tax rate of 21% on their taxable income. Deciding whether to convert to a C Corporation is a complex analysis which you should consider with your tax advisor.

Maximize Section 179 and Bonus Depreciation
Section 179 allows a taxpayer to immediately expense the cost of qualifying property—rather than recovering such costs through depreciation deductions. The maximum deduction amount has increased to $1,000,000. In addition, the new tax law extends and modifies bonus depreciation to allow immediate deduction of 100% of eligible new and used property (previously this was 50% and only new property was eligible). There are qualifications and limitations regarding these deductions, so be sure to check with a qualified tax professional.

We are hoping for a correction from Congress due to a drafting error. As it stands, qualified improvement property was intended to be 15-year property and eligible for bonus depreciation, but it is clearly 39-year property as the law is written. While we are hoping for a correction on this, it now appears unlikely because of its revenue impact. We will update you when and if it this correction is made.

We previously discussed the increased benefits of cost segregation studies and the new Opportunity Zones. You can read more about it on our previous post.

Section 1031
Under the new tax laws, 1031 exchanges are only allowable for real estate. Previously, income could be deferred on any type of property used in a business through a 1031 exchange, but beginning in 2018 only real estate is eligible. However, replacement personal property will usually be eligible for 100% bonus depreciation.

What is a 1031? Talk to your Schmidt Westergard tax advisor about how to take advantage of a 1031 exchange. 

Employer Provided Fringe Benefits
Employers are seeing considerable changes in how they can deduct fringe benefits provided to their employees. Beginning in 2018, benefits to employees such as parking, mass transit passes, and van pool expenses are no longer deductible by the employer. These can still be provided to employees as benefits, but will not be deductible by the employer. This is affecting non-profit entities as well.

Additionally there are significant changes regarding meals and entertainment expenses. Read our previous discussion on how the new tax laws affect businesses in the area of meals and entertainment deductions.

Individual Strategies

Section 199A Deduction
Business owners that are taxed as a sole proprietorship or pass-through entity have the ability to take up to a 20% deduction of their qualified business income. However, there are limitations that include the categorization of the business and taxable income thresholds. Joint filers with a taxable income above $315,000 ($157,500 for single filers) begin to see limitations on this 20%.

As an example, a married taxpayer filing a joint return with a Schedule C business or pass-through entity that nets $200,000 of income for the year will benefit from a $40,000 deduction (200,000 times 20%) assuming their total taxable income for the year is less than $315,000.

Planning for and determining how to take advantage of this deduction can be very complex.

Increased Standard Deduction and Charitable Planning
The standard deduction increased to $12,200 for individuals and $24,400 for married couples. Coupled with the new $10,000 limit on the state tax deduction (for income and property taxes) and elimination of miscellaneous itemized deductions, many individual taxpayers (especially those without a mortgage) will likely be utilizing the standard deduction rather than itemizing deductions as they may have in the past. For those now using the standard deduction, no tax benefit is received for charitable contributions. Therefore, if you are making charitable contributions, doubling up on contributions every other year while taking the standard deduction the other years will maximize the tax savings while continuing to meet your charitable giving desires.

For example, assume married taxpayers have maximized the (new) $10,000 deduction for state income tax and/or property taxes paid and they also contribute $12,000 annually to their church. Because their total itemized deductions are only $22,000 for 2019, they will not benefit from itemizing these deductions. Rather they use the $24,400 standard deduction for 2019 (essentially losing any tax benefits of the contributions). However, if they double up on the contributions for a total of $24,000 to their church in 2019, then their total itemized deductions will be $34,000 in 2019. In 2020 they will make no church contributions, but still use a full $24,400 (indexed for inflation) standard deduction. This strategy increases the tax savings of the contributions while maintaining the charitable giving goal.

If you are over age 70 ½ and have an IRA, you should consider making charitable deductions directly from your IRA. This counts toward your required minimum distribution, lowers your AGI, and maximizes the use of your standard deduction.

Before employing this strategy, be sure to talk to your tax advisor.

Review your estimated tax payment requirements
With lower tax rates, increased standard deduction, limitations on tax deductions and the drastic reduction in those who are subject to the alternative minimum tax, and most importantly the 20% 199A deduction, you may have a significant reduction in you estimated tax payment requirements.

Estate and Gift Strategies

If you have previously taken advantage of the estate and gift tax exemption, you will be able to give even more. The estate and gift tax exemption has been increased significantly (to $11.4 million per taxpayer for 2019), providing a great advantage to your estate planning. Additionally, the annual gift tax exclusion has increased to $15,000 for individuals and $30,000 for couples in 2018 and 2019.

There are many additional significant strategies outlined in our tax planning guide. It provides an in-depth analysis of the tax law changes and various strategies.

Contact your Schmidt Westergard tax advisor to determine how these key issues impact you and how to plan for them.

Read more about the Tax Cuts and Jobs Act:
Tax Cuts and Jobs Act: 2018 Federal Tax Law Changes for Pass-Throughs