Summary of the NEW TAX BILL for Individuals and Small Business Owners

Happy New Year!  It is amazing, but Congress was actually able to pass a tax bill at year-end.  I know, I know, everyone has heard about how they missed their chance to have “real” reform.  How it’s a benefit to the ultra-rich.  How corporations make out like bandits and the little guy doesn’t.  But, in my opinion, that is really not the case.

According to CPA, Mark Kohler, over 80% of Americans will see a tax reduction.  What I try to do is take all media reports with a grain of salt and actually talk to accountants, tax attorneys and read independent analyses of the code.

While there obviously could have been a better and more substantial bill put forth, there are some key points of this bill for individuals and small business owners to consider.  To see how it affects you, one of the best calculators out there is via The New York Times at http://snip.ly/yb71a.

I summarized the latest podcast from CPA, Mark Kohler and small business attorney, Mat Sorensen.  I think they provided a concise analysis in a 40-minute podcast. If you would like to listen, you can access it here,

Most importantly though is that most of these expire in 5 years, so we will be doing this all over again!  

Individual Summary

  • The number of brackets stays the same but most brackets will drop 2-3%.
  • The Standard deduction is being doubled..$24k for married and $12k for single filers
  • The increase in the standard deduction is designed to have fewer people itemize.
    • Most Americans who itemize have household incomes north of $100k.  That is 27.7% of Americans according to Statista.
  • State and local tax deductions now limited to $10k.  Affects those in high tax states more than others.  (Florida residents couldn’t care less)
  • According to Kohler, this could result in roughly 30 million Americans no longer itemizing!
  • There is a doubling of the Child Tax credit (not deduction) to $2k per child.
    • In addition, the phase-out was raised even higher so that the overwhelming majority of people with kids will receive this credit.
  • The Estate tax limit is now so high ($11 million individual or $22 million) that very few people are affected.
  • Obamacare penalty for not buying insurance has been repealed in 2019, not 2018.
  • Mortgage Interest Deduction is alive and well for those with under a $750k loan.
    • Any HELOC loan is only deductible if it was done for improvement.  No more deducting that HELOC interest for a trip to the Bahamas….or a new boat.
  • Moving expense deduction is gone unless in military
  • Electric vehicle deduction is gone
  • 529 Plan assets can now be used for k-12 expenses up to $10k per year.  This is a clear benefit for Americans who prefer their children attend private schools.

Small Business Summary

This section is for S corp, LLC, Sole Proprietors, etc.

  • The most important part is the 20% deduction on pass-through business income to help small businesses in a similar fashion to the C Corp tax rate reduction. This was added because often in small businesses with multiple owners, they often have different income levels.
    • Take a look at your payroll matrix for potential savings on FICA taxes and getting the new 20% deduction
    • For a personal service business (realtor, financial advisor, actor, athlete, CPA, etc.)- this deduction phases out at $315k married filing jointly and $157,500 if you are single.
    • 90% of small biz owners are going to see this benefit. (*Look for guidance from IRS on categorizing income if you are personal service)
  • IRS should be more aggressive on payroll allocations going forward….be taxed as an S corp and make sure to take payroll.  In general, according to Kohler, don’t be an LLC or sole proprietorship.
  • Businesses that have $1m plus businesses that have good payroll and are not personal services are going to be the biggest winners.
  • Entertainment business deduction is gone.  No write-offs on golf, spa, show, skybox, a play, baseball game, etc. anymore.
    • However, a “gift” of entertainment, such as tickets to a play, game, etc. has been shown in the past to qualify because the “gifter” is not receiving the benefit.
  • Much more valuable depreciation schedules now.  This is to incentivize companies to spend money on productivity-enhancing technology.
  • Providing food at the workplace, bagels, donuts, coffee, cafeteria services is now 50% write-off not 100%.  Stock up now.
  • A C corp is taxed at 21% but still distributes profits to the owner at their personal rate.  You are double taxed in this scenario.  Most often remaining taxed as an S corp makes the most sense.

I hope you found this summary helpful.  As you know, I am not a tax advisor.  It is important that you discuss these changes with your CPA or tax professional.  None of these statements are meant to be personal advice or recommendations.  If you are looking to change tax advisors or think now is the time to get one feel free to reach out here.

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