When the federal Tax Cuts and Jobs Act was passed into law on Dec. 22, it created some big changes for businesses and individuals. Tax professionals and business owners are still determining how some of the new rules will play out.
“We heard…that it was intended to simplify the tax code, and it did not simplify the tax code at all,” said Mark Kmiecik, shareholder at Davis & Kuelthau. “If it did anything, it left more questions than answers in terms of some of the implications it’s going to have, for example at the state level.”
Rates have gone down for individuals in the highest tax bracket, said Fred Sitzberger, founder and chief executive officer of Brookfield-based Sitzberger & Co. S.C. The seven tax brackets have been changed, with rates coming down overall until 2025, and employers are to implement the new tax withholding tables this month.
“It’s not going to be a big change,” he said. “Probably $50, $75, $100 a paycheck.”
One of the biggest individual changes is a significant increase in the standard deduction, to $12,000 for single taxpayers and $24,000 for married taxpayers filing jointly.
“Probably 85 percent of the population is going to take a standard deduction,” Kmiecik said.
“People who are paying mortgage interest and/or investment interest, if they are no longer itemizing those deductions, if they are using the standard deduction, they no longer receive a tax benefit for those deductions,” said John Petrie, director of investment advisory and principal for wealth management firm Aspiriant in Milwaukee. “By not having that itemized tax deduction, falling back instead on the standard deduction, it makes those loans more expensive.”
Investors who have loans should now be considering whether to put any excess cash toward their loans, or toward their investment strategy, he said.
“If they’re real conservative investors, to me it becomes a no-brainer that they should throw more money at their mortgage,” Petrie said. “Collectively, I think that most people will truly see a tax cut, so the fact that they won’t be itemizing deductions because they’ll be taking standard deductions, I don’t see that as a bad thing.”
The personal exemption has been tossed. But the child credit has increased to $2,000, Sitzberger said. Alimony is no longer a deduction. And the alternative minimum tax is retained for high earners.
State and local income taxes deductions are limited to $10,000 for both single and married filers.
The home equity interest deduction has been eliminated, so the overall indebtedness on a home is limited to $750,000, Sitzberger said.
“Most of my clients have $200, $300, $350,000 loans so it doesn’t really affect a lot of people,” he said. “The rules were written so a vast amount of the working people would not be negatively affected.”
The itemized deduction of up to 50 percent of adjusted gross income on charitable contributions to public charities has increased to 60 percent.
Individuals may choose to reconsider their charitable giving, since it would be less advantageous to donate with a standard deduction, Petrie said. They could double up their giving in one year to meet the threshold for itemizing, and then take the standard deduction the following year.
“A lot of people say, ‘Oh, it’s really going to hurt the charitable contributions,’ but most of my clients, they would contribute the money whether it was deductible or not deductible,” Sitzberger said.
Business owners also have a few new rules to evaluate.
The biggest and most talked about change is the corporate tax rate reduction from 35 percent to 21 percent.
“I think it would allow a business owner, instead of paying this additional tax, to be able to invest in plant and equipment, hire more employees,” Sitzberger said.
At the same time, a much lower one-time repatriation tax of 15.5 percent for liquid assets and 8 percent for illiquid assets is being imposed on overseas earnings, which aims to incentivize companies to bring their cash back to the U.S.
“In the last two weeks or so, you’ve seen corporations raise wages, you’ve seen companies bring money back into the United States…so the initial indications of this are positive,” said Joseph Tierney, president and shareholder at Milwaukee-based Davis & Kuelthau S.C.
With the decrease in the corporate tax rate, some companies that set up as a pass-through entity may consider electing to be taxed as a corporation, Tierney said.
“It’s the question that I’m receiving from clients more frequently based on this new act,” Kmiecik said, particularly for business owners in a tax bracket that is taxed at a higher rate than the 21 percent corporate rate.
The qualified business income deduction provision was meant to address this topic, he said. It provides tax-favored treatment of business income from pass-through entities, allowing a deduction of 20 percent of qualified business income if the taxable income is over a certain threshold.
For some pass-through companies, particularly manufacturers, the new deduction may be advantageous.
“Investors in pass-through entities, S corps, LLCs, etc., these pass-through entities, they may be entitled to a new 20 percent deduction on qualified business income that gets generated by these entities,” Petrie said. “Qualified business income, generally speaking, I think of it in terms of manufacturing income. Income that’s not from professional services.”
“The entire thing is to go ahead and recreate the manufacturing base and create jobs for America,” Sitzberger said.
Also of interest to businesses, the Section 179 expensing deduction has increased from $500,000 to $1 million. The phase-out threshold for Section 179 deductions has increased from $2 million to $2.5 million, and the first year “bonus depreciation deduction” increased from 50 percent to 100 percent.
The corporate alternative minimum tax has been repealed. Deductions for business-related entertainment, such as sporting event tickets, also has been spiked, but businesses will be able to deduct 50 percent of qualified meals.
Deductions for business interest expenses have been limited to 30 percent for adjusted taxable income, except for small businesses with gross receipts of less than $15 million for the past three years.
As planners begin parsing them out, Kmiecik warned there’s no telling whether all of these adjustments will be upheld for the long term.
“The first thing that really struck me is how quickly Congress was able to push through this complex, enormous piece of legislation,” he said. “Republicans were able to do this in seven weeks. What happens if the Democrats in 2021 take office? We need to plan for today, but keep in mind what could happen down the road.”
