Tax Alert: Significant Federal Tax Changes
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On December 20, Congress passed, and President Trump later signed, the Tax Cuts and Jobs Act (“Act”). The Act includes numerous tax changes, which will impact the taxes owed by most Americans. While we can’t address each change in this article, we did want to highlight some significant changes that we believe will impact many taxpayers.
Effective Date: January 1, 2018
Most tax law changes from the Act take effect on January 1, 2018 and remain effective through the end of 2025. We’ll note the exceptions to this general rule.
Business Tax Changes
Corporate Rate Reduced. The Act changes the corporate tax rate to a flat 21% rate.
Dividends Received Reduction Reduced. The Act reduces the previously 80% dividends received deduction to 65%. The previously 70% dividends received deduction is reduced to 50%.
AMT Repealed. The Act repeals the corporate alternative minimum tax.
Increased Sec. 179 Expensing. The Act increases the maximum amount a taxpayer may expense under Sec. 179 to $1 million. The phase-out threshold amount is also increased to $2.5 million. For tax years beginning after 2018, these amounts (in addition to the $25,000 sport utility vehicle limitation) are indexed for inflation.
Temporary Expensing Of Qualifying Business Assets. A 100% first-year deduction for cost of qualified property is allowed for property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. In later years, this immediate deduction phases down (80% for 2023, 60% for 2024, 40% for 2025 and 20% for 2026).
Shortened Depreciation for Farming Equipment and Machinery. The depreciation period for most machinery and equipment used in a farming business, the original use of which begins with the taxpayer, is shortened from seven to five years.
Deduction For Pass-Through Businesses. Owners of pass-through businesses, including sole proprietorships, partnerships, limited liability companies (LLCs) and S corporations, may be allowed to deduct up to 20% of the income from their business from their taxable income. There are complex limitations on this deduction that could reduce the impact of this deduction for some business owners. In addition, the deduction is further limited for the owners of specified service businesses, including businesses in the fields of health, law, accounting, actuarial science, and certain consulting.