As the filing deadline for 2018 taxes is rapidly approaching, here is a quick recap of some of the major changes that have gone into effect this year that you should keep in mind as you prepare.
Swapping the personal exemption for a higher standard deduction
With the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), personal taxes have taken a step toward simplification with the elimination of the personal exemption. In its place, the standard deduction for all filers has just about doubled. This change does deliver most people a small improvement in the form of a somewhat larger overall deduction than they previously realized under the old personal exemption + standard deduction model. For example, a single filer would have been able to take a standard deduction of $6,500 plus a personal exemption of $4,150 for a total of $10,650. Now, while there is no personal exemption, the standard deduction for 2018 is $12,000. The table below shows the changes in the standard deductions.
|Tax Filing Status||Previous Standard Deduction||New Standard Deduction|
|Married filing Jointly||$13,000||$24,000|
|Married filing Separately||$6,500||$12,000|
|Head of household||$9,550||$18,000|
DATA SOURCE: IRS AND TAX CUTS AND JOBS ACT.
Elimination of Unreimbursed Employee Business Expenses
Among the many changes to itemized deductions, one area that may be significant for many filers is the elimination of the ability to claim unreimbursed employee business expenses. Prior to the passage of the TCJA, expenses incurred by an employee for the benefit of employers could be deducted under specific rules. Items such as continuing education costs for work related purposes (such as an MBA) or vehicle expenses for travel used in the furtherance of business, could be deducted by individuals. This is no longer the case. This also includes expenses for tools and supplies, depreciation for equipment such as laptops used for work, and the home office deduction. Please note that a deduction may still be available for state and local tax purposes. Be sure to check with your accountant to see if you are still eligible.
Flat tax for C-Corps
The corporate tax rate is now a flat 21%, and is in place permanently. This change simplifies and lowers the tax burden for the vast majority of C corporations that previously were covered by a graduated rate structure of 15, 25, 34 and 35%. While the previous structure did have a lower bottom tax bracket, very few C corporations qualified for that bracket as it had a maximum income of $50,000.
Deduction for pass-throughs and sole proprietorships
For pass-through entities such as S corporations and Partnerships as well as sole proprietorships, taxes are assessed based on the owner’s personal income level and not the corporate tax rate. The TCJA provided tax relief for many of these businesses as well, but the details are significantly more complicated than the simple flat tax for C corporations. Individuals with income from these types of businesses can deduct up to 20 percent of that business income, but only within specific rules.
These final rules were not published until mid-January 2019 when the IRS released a 247-page document detailing what organizations and income would be eligible for the tax break. Both the amount of money you earn and the type of business you operate factor into how much you can deduct. For example, filers who are married and filing jointly, make less than $315,000, and who operate a non-service business will likely qualify for the full deduction. As earnings increase, the qualifying deduction becomes some percentage of income, but not the full 20%.
Individuals who operate specified service businesses and have income in excess of $315,000 for a married couple filing jointly or $157,500 for all other taxpayers, are not eligible for the deduction. The question of what constitutes a specified service trade or business requires a detailed review, but some of the fields covered include health, law, consulting and the performing arts. To determine what this means for you, consult with a tax professional for clarification on how your business will be classified.
Certain business assets are eligible for 100% bonus depreciation if they were acquired and placed in service after September 27, 2017. Examples include:
- Equipment or furniture
- Certain vehicles
- Off-the-shelf computer software
If you have acquired assets that fall into any of the above categories, this article provides more details on this depreciation rule, including max values that can be claimed.
Other assets such as certain improvements to non-residential real property, fire protection systems, security alarms, HVAC, and roofs may be eligible for expense under Section 179.
Net operating loss changes
For businesses with a net operating loss, these can no longer be carried backto offset previous years’ tax liabilities. They are also no longer able to be a 100% offset and are instead limited to an 80% offset in any given year. While the carryback provision is no longer in place for any losses generated after December 31, 2017, there is no longer a 20-year carryforward limit and instead, losses can be carried and spread indefinitely into the future.
Important deadlines to remember
- S corporations and Partnerships filing deadline: March 15.
- 2018 individual tax returns and calendar year C corporations: April 15.
- Quarterly estimated tax deadlines
- April 15, 2019
- June 17, 2019
- September 16, 2019
- January 15, 2020
With so many changes to the tax code for 2018, partnering with a professional CPA firm is the best way to ensure that you correctly file to realize the maximum benefit for you and your company. Contact Gift CPAs to schedule your appointment today.