This past Friday, House and Senate negotiators completed the reconciliation of their respective tax bills. While the Tax Cuts and Jobs Act (the “Act”) will not be final until it is formally approved and signed into law, all indications are that there are now sufficient votes for it to pass both chambers this week so that the President can sign it before the Christmas holiday. Assuming the Act is adopted in its current form, most of the provisions will take effect on Jan. 1, 2018. Below are some of the matters to consider before year-end.
Note, however, you should discuss these matters first with your tax advisor before making any decisions or taking any actions because any benefit or detriment of a particular course of action will necessarily depend on your unique tax situation. Taft’s Tax and Private Client practice groups will be providing further insight regarding the Act’s changes in subsequent alerts. In the meantime, members of Taft’s Tax and Private Client practice groups are available to further discuss planning opportunities for this year and beyond. In general, the individual provisions of the Act generally phase out in 2026, while the business provisions are generally permanent.
New restrictions on business deductions, coupled with the decreased corporate tax rate and the effective reduced tax rate for certain qualified business income from pass-through entities and sole proprietorships, create a general strategy for businesses to accelerate deductions and postpone income recognition. Specifically, businesses should consider taking the following actions:
- Delaying the close of any cash transactions or using installment sales to delay the recognition of income until 2018, when the 21% corporate tax rate (which will also apply to personal service corporations) and the new 20% deduction for qualified business income from pass-through entities and sole proprietorships take effect.
- Accelerating capital investments prior to 2023 to take advantage of the temporary allowance of 100% immediate expensing (which will begin to be phased out in 2023).
- Changing the ownership structure of business holdings to take full advantage of the lower corporate tax rate and the lower effective tax rate for certain qualified business income from pass-through and sole proprietorship businesses. (Note, in the case of income from many professional services, excluding engineering and architectural services, the lower effective tax rate for certain qualified business income from pass-through and sole proprietorship businesses is phased out for taxpayers earning over $157,500, filing individually, and $315,000, filing jointly.)
Although the Act lowers the top individual ordinary income rate to 37%, the elimination and capping of certain itemized deductions means individuals should focus on accelerating deductions before Dec. 31, 2017. Specifically, individuals should consider taking the following actions:
- Paying state and local income, property and sales taxes for 2017 by the end of this year (assuming such payment will not subject you to the AMT) because the Act will limit the deduction for state and local taxes to $10,000 per year. (Note, however, the Act specifically forbids claiming a deduction in 2017 for prepaying income taxes that are imposed in a later year.)
- Making charitable donations in 2017 because the doubling of the standard deduction will make itemizing deductions less valuable for many individuals going forward.
- Maximizing expenses that qualify as miscellaneous deductions in 2017 because they cannot be claimed after 2017.
- Beginning any like-kind exchanges of personal property (e.g., planes, boats or vehicles used in business, art, etc.) in 2017 because the Act limits like-kind exchanges to real property not held primarily for sale.
Trusts and Estates
The Act increases the amount that can be transferred free of gift, estate and generating-skipping transfer taxes to $11.2 million for individuals and to $22.4 million for married couples (subject to annual inflation adjustment). Therefore, individuals should consider taking the following actions:
- Delaying making gifts above the annual exclusion amounts until 2018 to take advantage of the increased lifetime exclusion amounts.
- Making substantial gifts in 2018 to descendants, using dynasty trusts and other vehicles that can give your family members enhanced protection from creditors and claims in divorce, while providing financial management and custom terms for your family.
- Having your estate plan reviewed to make sure assets flow as intended among family members, charities and other recipients.
Members of Taft’s Tax and Private Client practice groups are available to discuss any questions you may have.