President Trump signed the Tax Cuts and Jobs Act (TCJA) into law on December 22, 2017. The Act introduced sweeping changes to the U.S. tax landscape on a scale not witnessed in over 30 years, effectively dividing the tax regime into pre and post TCJA eras.
As expected, the opinions about the Act and its significance were colored by perceptions of Trump’s presidency. However, there is no gainsaying that businesses and individuals need to prepare for the changes and make modifications where necessary. This article itemizes the changes precipitated by the Act, both on individual and business levels.
Changes Effected by the TCJA
For ease of understanding, this section will be divided into two. The first segment will tackle the changes that affect individuals, then those affecting businesses and corporations.
Individuals
1. Increase in Standard Deductions
The new policy increased the standard deductions available for different categories of individuals. For couples filing jointly, this was raised from $12,700 to $24,000; individuals filing singly saw a raise from $6,350 to $12,000 and heads of households’ filings likewise went from $9,350 to $18,000. As highlighted elsewhere in this work, these changes are expected to expire in 2025, and the process reverted to the former stipulations.
2. Lowered Rates for Personal Income Taxes
The Act retained the 7 categorizations of individual income tax brackets. However, it introduced lower rates for the different brackets, although the 10% and 35% rates remained the same.
3. Family Credits
The new Act also impacted the threshold of family credits and the deductions allowed. The Act raised the child tax credit to $2,000. For non-child dependents, the tax credit is pegged at $500. To be eligible for the child credit, you have to provide the child’s SSN and must be under 17. However, joint filers are ineligible if their Adjusted Gross Income (AGI) is $400, 000 or more.
4. Deductions
Some provisions in the Act either create new deductions for tax purposes or retain the old ones. In some cases, it scraps the previous provisions entirely. For instance, alimony deductions have been eliminated. However, this is only for payments under agreements made after 2018. Similarly, moving deductions are also not allowed for tax purposes except for members of the military.
Corporations
1. Reduction of Corporate Tax Rate
The TCJA lowered the tax rate to about 21% beginning from December 31, 2017. It is crucial here for businesses to pay attention to whether they use the fiscal year calculations or calendar year calculations. There are slight variations in TCJA eligibility under each category.
2. Elimination of Alternative Minimum Tax
The new Act repealed the provision in the old law allowing for alternative minimum tax at the rate of 20%.
3. Depreciations
Qualified business properties acquired between September 27, 2017, and January 1, 2023, are eligible for an increased bonus depreciation package increasing from 50 percent to 100 percent.
The definition of property that comes under this depreciation package has been expanded to include properties acquired post-September 2017 if some conditions are met. These conditions include that the taxpayer did not use the property before acquisition and did not acquire the property from a relative.
4. Time Limitation for Recovery of Real Property
Basically, the recovery period for the recovery systems remained the same. 39 years for nonresidential real property and 27.5 years for residential rental property. However, for the alternative depreciation system, the recovery period was reduced from 40 to 30 years.
5. Deductions and Exclusions
For business-related deductions, certain important reductions are available or have been retrenched. The TCJA placed a mandatory limit on business interest expense with the provision not applying to businesses with earnings of $25 million or below in the preceding 3 tax years.
Also, deductions are no longer permitted for activities that are considered mere entertainment. Taxpayers can get up to 50% tax deduction for food served to customers and clients, as long as the meals are served in the course of discharging duties and are not considered extravagant. Furthermore, employees are permitted to exclude employee awards from tax calculations as long as the awards are tangible personal property.
6. Provisions Impacting S Corporations
The first change here is that nonresidents are now permitted to be S-Corp shareholders. Also, non-residents are eligible to benefit from small business trusts. Similarly, S-Corps can transition to C-Corps under certain conditions. This will enable them to take advantage of the tax benefits that come with such transitions.
How Does The New Tax Law Affect Individuals And Businesses?
From the changes discussed above, it is possible to deduce the effects of these changes on citizens and companies. However, the degree of the new policy’s effects varies between individuals and corporations.
The wholesale and retail industries seem to benefit more than other sectors in the economy. With many multinational retail companies paying pittances in taxes, it’s hard to argue otherwise.
The economy is bearing the brunt of this new tax policy. Since the Act’s enactment, deficits rose and the GDP strolled downhill. The expected investment boom that the tax cuts were supposed to foster has not materialized since the Act was signed into law and reduced tax-generated revenue isn’t helping the Free World either.
Furthermore, it is clear that the new policy potentially has a major impact on the profits of corporations. In fact, operation earnings are expected to rise by about 10%. Unfortunately, however, implementation of this law is expected to further increase the Federal deficit to the neighborhood of $1 trillion.
How can individuals and businesses adapt to the changing tax policy?
Despite the rave about the new policies, there are favorable and not-so-favorable provisions in it. However, to take advantage of the benefits and step away from the repercussions, businesses and individuals need to take crucial steps to be tax-compliant.
For Individuals:
1. Bundling Deductions
Individual taxpayers can put together deductions from several years into one year to exceed the $12, 000 or $24, 000 thresholds. For instance, a taxpayer can bundle deductible expenses for three years into one year, exceed the limit, and become eligible for a tax reduction.
2. Review Plans with an Expert
Taxpayers should go through their plans with an expert in order to be abreast with all that they need to know. The changes, deductions, allowances, and exclusions can be a little too much for the layman.
For Corporations:
1. Consider Changing from S-Corp to C-Corp
S Corps can switch to C Corps to take advantage of the tax cuts that C Corps benefit. However, the business has to meet the criteria needed to make the transition.
2. Buy Equipment and Write Off Depreciation
The new policy gives room for corporations to write off the depreciation of equipment purchases upfront instead of spreading out the depreciation over the years. Keep in mind too that even used equipment is eligible for this benefit.
3. Take Advantage of the Cash Method of Accounting
Another strategy not just to be compliant with the law but also to take advantage of its benefits is to use the cash method of accounting. In the manufacturing business, the recommended practice is to use the accrual system of accounting. However, under the new tax policy, businesses can use cash-based accounting and enjoy the perks of it, including being able to deduct inventory from tax payable at the point of purchase instead of later on.
4. Implement Paid Leave
The TCJA provides incentives for corporations to pay employees who are on leave. Thus, the company in question could earn credit for paid employee family medical expenses. This is an excellent way of reducing the overall tax payable by the firm while being compliant with the law at the same time.
Conclusion
The new Tax Cut and Jobs Act is the primary piece of legislation everyone interested or involved in tax should pay attention to at the moment. The broad changes with benefit disparities keep everyone, especially businesses on their toes, waiting for the expected gains to materialize.
However, analysts still believe that the gains will move from trickles to huge gushes in no time. In any case, CFOs and heads of tax departments of firms can take good steps to stay tax compliant and enjoy its benefits.
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Additional Resources
Questions to Ask about Tax Change under a Biden Presidency
