Tax Reform FAQs
Are my existing net operating losses at 12/31/17 limited to 80% of my AGI?
Rules for existing NOLs remain the same. There is no taxable income limit to usage of pre-2018 losses. They can be carried back two years and forward 20. The rules have changed for NOLs created after 2017.
Do I need to update my withholding allowance?
No action needs to be taken by employees, as the IRS is issuing guidances to employers on withholding rates based on your existing allowances.
Did the estate tax go away?
The legislation does not eliminate the estate tax. Rather, the tax exemption amount is doubled from $5.6 million to $11.2 million per person (indexed for inflation) for 2018 through 2025.
How does the TCJA affect my home mortgage interest deduction?
The tax reform reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap. The final bill repeals the deduction for interest paid on home equity debt through 12/31/25. Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence. Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.
Do I still have to pay taxes on my alimony income?
You will have to report your alimony income under the old law, unless both parties elect otherwise and follow strict procedures. With respect to new agreements executed after 2018, the law is changed. Alimony income is not taxable to the recipient; alimony is not deductible by the payor.
How do the changes affect the personal exemption and the child tax credit?
The personal exemption has been repealed, and the child tax credit has increased to $2,000, $1,400 of which is refundable. There is also a $500 non-refundable credit for other dependants.
Will I have issues with my 401K?
Though it was considered, the plan makes no changes to retirement savings tax breaks.
Are my municipal bonds already issued still non-taxable?
Yes, the change to make interest income from advance refunding bonds nontaxable only applies to bonds issued after 12/31/2017.
Can I still take casualty losses on a flood or tornado?
The final bill provides a casualty loss deduction only if a loss is attributable to a presidentially-declared disaster.
Do “rental property related property taxes” aggregate under the personal $10,000 State & Local Tax cap or can you still deduct them on Schedule E?
A taxpayer can deduct property taxes paid for a rental property on Schedule E. The $10,000 SALT cap is only for personal state and local income taxes and personal property taxes that are reported on Schedule A.
For the §199A QBI Deduction, is each rental property on Schedule E to be considered separately for applying the limitation?
No, all rental properties on Schedule E are aggregated for the §199A QBI Deduction computation.
Are there any changes regarding the “home sale capital gain exclusion” in the tax reform?
No, the current law has remained unchanged. Under IRC section 121, a taxpayer must own and occupy the property as a principal residence for two of the five years immediately before the sale. The law permits a maximum gain exclusion of $250,000 ($500,000 for married taxpayers).
Will real estate agents and brokers qualify for the 20% pass-through deduction?
If the real estate agent / broker has taxable income of less than $157,500 (for single taxpayers) or $315,000 (for couples filing jointly), then the personal service restriction will not apply and they may generally claim the 20% pass-thru deduction. Above this level of income, the benefit of the 20% deduction is phased out over an income range of $50,000 for singles and an income range of $100,000 for couples. Qualified business income must be derived from passthroughs or self-employment. It does not include wages.
Will recharacterization of ROTH conversions be allowed under the new law?
Recharacterizations of Roth conversions are now prohibited.
Do these changes go into effect when I file my individual tax return in April of 2018?
Almost all changes begin January 1, 2018. These changes will be reflected on your tax returns due April 15, 2019 (October 15, 2019 by extension).
Now that the deduction for investment management fees is gone does it matter if I pay IRA management fees with outside funds vs IRA funds?
With the suspension of the deduction of miscellaneous itemized deductions the payment by the IRA owner of the fees outside of the IRA will not generate an itemized deduction post 2018. Nevertheless, since the payment of such fees are not considered a contribution for purposes of determining the amount that can be contributed to an IRA, it may still be advisable to pay from funds outside the IRA so that the taxpayer will have a larger portfolio within the IRA to grow income tax free.
Can you deduct home equity line of credit ("HELOC") interest as investment interest if you use the borrowings to buy securities?
Yes, the deductibility of investment interest expense is still available if you can satisfy the tracing rules.
Would the home equity line of credit ("HELOC") interest still be deductible if it relates to substantial home improvements?
Yes, as long as it qualifies as acquisition indebtedness and does not exceed the $750,000 limit on face amount of the loan ($1,000,000 limit for loans of acquisition indebtedness acquired on or before December 15, 2017).
Will LT Capital Gains for Kids also follow the Trust preferred LT Capital Gains Rate Schedule?
Yes, the trust and estate rates will apply; including the capital gains rates.
What about a Schedule C where no wages are paid (sole owner provides all services), will it qualify for the Sec. 199A deduction?
In that situation, the taxpayer will only be eligible to receive a potential maximum deduction of 2.5% of qualified property. However, if total taxable income is below $315k (for a joint filer or $157,500 for other filers) the limitation does not apply and the potential maximum deduction would be 20% of their QBI. Also, between $315k - $415k and $157.5k - $207.5k there is a phase-in of the limitation.
When a taxpayer has multiple rental activities on Schedule E, assuming it qualifies as a trade or business, is the 199A deduction computed per property or in total. Specifically, is the 2.5% of basis computed per property?
It's currently not clear whether and how we'll be able to group assets/businesses. Aggregating is one way we would support the real estate rising to the level of a trade or business which would lead us to think that multiple rental real estate properties would be viewed in the aggregate.
Do you think that there will be limitations on what kind of rental activities can be called QBI?
The key issue will be similar to what we faced with section 1411: Does the rental activity rise to the level of a trade or business? For example, rental of a single triple net lease property isn't a trade or business and therefore wouldn't generate QBI. Rental of 10 triple net lease properties, however, might give rise to the level of a trade or business, barring guidance that may state otherwise.
Will I not be able to deduct the business meals & entertainment expenses anymore under the new law?
Under the new law, no deduction is allowed with respect to an activity generally considered to be entertainment. Taxpayers may still generally deduct 50% of the food and beverage expenses associated with operating their trade or business.
When does the 100% bonus depreciation start?
The 100% bonus depreciation under Sec. 168(k) applies to qualified property placed in service after September 27, 2017 through 2022. After 2022, the percentage is scaled down.
Does 30% limitation on deductions of “net interest expense” apply to all businesses with average receipts in excess of $25 million?
No - “Real Property Trade or Business” has the ability to elect out of the “interest limitation”. It includes any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Additionally, a farming business may elet out of this limitation.
Are there any changes to Like-Kind Exchange Rule in the new law?
The final bill retains the current Section 1031 Like Kind Exchange rules only for real property.
Does the parking change (no deduction) apply to employer owned parking lots?
Yes. The FMV of the parking benefit provided to the employee that is not taxed to the employee on account of 132(f) is always disallowed as a deduction even when the employer owns the parking.
Is per diem for out of town meals only 50% deductible?
Yes, that is correct. Out of town meals (as long as they are not lavish) are not entertainment but they are business. Business meals are subject to the 50% limitation.
Doesn't TCJA exclude dues paid to any organization organized for business, entertainment, etc.?
Dues paid for business organizations such as Chamber of Commerce, AICPA, etc. remain 100% deductible. Dues to entertainment organizations would not be deductible at all.
For assets that had a binding contract prior to 9/27/17, but placed in service in 2018, what % of bonus is available?
The present-law phase-down of bonus depreciation is maintained for property acquired before 9/28/2017, and placed in service after 9/27/2017. Under the provision, in the case of property acquired and adjusted basis incurred before September 28, 2017, the bonus depreciation rates are as follows: 50% if PIS in 2017; 40% if PIS in 2018; or 30% if PIS in 2019. Note that the AICPA is planning to ask the IRS/Treasury to provide more guidance around the application of the binding contract rules to the 100% expensing of property acquired and placed in service after Sept. 27, 2017, and what the acquisition date for self-constructed property is for bonus depreciation purposes.
How will self-rentals or rental activities in general be treated as qualified business income?
Rental real estate that rises to the level of a trade or business appears to generate QBI. Two questions that will need to be addressed include: (1) does the self-rental of one property rise to the level of a trade or business and (2) will there be any mandatory grouping to prevent abuse. We suspect rental of a single property is not likely to give rise to a separate trade or business but we need to wait for guidance.
Could you explain how guaranteed payments apply/work with respect to the W-2 limit? Similarly how does "reasonable" S-corp compensation work with respect to the W-2 limit. In other words, will GPs and reasonable S-corp Shareholder wages count towards the W-2 limit or not?
The short answer is that guaranteed payments are NOT considered wages for purposes of the limitations. Wages paid to an S corporation shareholder are, however, considered wages for purposes of the limitation.
What is the "domestic" requirement - can a US based manufacturing exporter still qualify for the Sec. 199A deduction?
QBI is defined in section 199A(c) and general means income effectively connected with the conduct of a trade or business with the US.
With respect to the 50% limit of W-2 wages, do you believe this includes W-2 wages paid to an owner in the case of an S-Corporation (let's assume the owner is the only employee)?
Yes. In fact, that appears to be a potential strategy for partnerships that incur guaranteed payments but no wages. To date, we are not aware of any suggestions that W-2 wages paid to S corporation shareholders will not count for purposes of the wages limitation.
For purposes of the Sec. 199A deduction would income from a management company be considered as from a specified trade or business and therefore potentially not allowable in the QBI calculation?
If the management services relates to investment management we don't think it will qualify. For example, private equity fund management fees likely do not qualify. If the taxpayer is performing property management, e.g., in the real estate context, then it's not clear and we'll likely need additional guidance around the meaning of the term "reputation and skill".
What happened to the Alternative Minimum Tax?
The act repeals the corporate AMT. In the case of individuals, the act increases both the exemption amounts and phase-out amounts for tax years beginning after December 31, 2017.
Will state income taxes change as a result of the TCJA?
Most states bind their tax codes to the federal tax code in one of several ways, for simplicity of the taxpayer and the state itself. Many state tax codes are expected to follow the changes enacted by the TCJA.
Are all of these changes to the tax code permanent?
With some exceptions, most corporate tax changes are permanent, and most individual tax changes will sunset after 2025.
Should a taxpayer should test the QBI and W-2 limit on a business-by-business basis?
Should I convert my S Corp to a C Corp to take advantage of the lower income tax rate?
There are many factors to take into account when considering a conversion, including shareholder compensation and accumulated earnings. It is best to contact your trusted tax advisor for a solution that is sure to be unique to your business's needs.
Disclaimer: This information is presented solely for the purpose of providing information about tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances. These materials are for educational purposes only and are not intended, and should not be relied upon, as accounting or tax advice. The views expressed by the authors are not necessarily those of Huselton, Morgan & Maultsby, PC.