New year - new tax laws.
It’s a new year and we have a new tax law. Tax Cuts and Jobs Act. How does it affect you? Well, first off this law does not affect you until you file your 2018 income tax return.
Some of the personal changes are:
1. Increases the standard deduction. Single $12,000, MFJ $24,000, HOH $18,000
2. Eliminates personal exemption.
3. Caps using state withholding, sales tax, and property taxes at $10,000 combined as an itemized deduction.
4. It repeals the Obamacare tax for those without health insurance in 2019.
5. Increases the child tax credit from $1,000 to $2,000.
6. Changes the tax brackets to 10, 12, 22, 24, 32, 35, 37
Some of the business changes are:
1. Lowers the corporate tax rate to 21% starting 2018 – Was 35%
2. Establishes a 20% deduction of qualified business income from certain pass through businesses i.e.: s-corps, LLC’s.
3. Increases the Sec 179 deduction of capital equipment from $500,000 to $1M starting in 2018.
4. 100% bonus depreciation deduction starting in 2018 for 5 years through 2022.
5. Eliminates net loss carry backs and limits net loss carry forward to 80% of taxable income.
The personal tax changes expire in year 2025 and revert back to what was in 2017. The business changes are permanent. While much of the big changes are directed towards corporate America, some people believe that we are giving away too much. The new tax law impact is supposed to spur economic growth through business investment in equipment, people, and expansion.
According to the Tax Foundation’s Taxes and Growth Model, the Tax Cuts and Jobs Act would increase the long-run size of the U.S. economy by 1.7 percent. The larger economy would result in 1.5 percent higher wages and a 4.8 percent larger capital stock. The plan would also result in 339,000 additional full-time equivalent jobs.
The larger economy and higher wages are due chiefly to the significantly lower cost of capital under the proposal, which reduces the corporate income tax rate and accelerates expensing of capital investment for short-lived assets. The long run GDP growth is projected to grow 2.6% due in part to the reduced corporate income tax rate.
The lost government revenue would be made up with the expansion of income and payroll tax base. It would also be made up from the increase in taxable income from corporate America. This is according to the Tax Foundation’s Taxes and Growth Model.
A very basic example of a C- Corp with taxable income in current tax system of $500,000 and had $1.25 Million of capital equipment purchases.
Sec 179: $500,000
Bonus: $1.25M - $500,000= $750,000 X .40= $300,000
Depreciation Allowed: $800,000
Tax $500,000 X .35= $ 175,000
Now with the new tax law:
Sec 179: $1M
Bonus: $1.25M - $1M = $250,000 X 100% = $250,000
Depreciation Allowed: $1.25M
Tax (($500,000+$800,000) - $1.25M = $50,000 X .21 = $10,500
This is a very basic example but shows the difference in the tax under the old law and the new law.
Now is the time to plan for the new tax law changes. If you would like more information on the changes, you can contact the SBDC office at 716-338-1024 or visit the IRS web site.