The 2017 Tax Cuts and Jobs Act: Implications for Individuals and Business Owners

By John Love

After what seemed like months of endless campaign promises, media coverage, legislative false starts, and congressional hand-wringing, Congress finally passed the 2017 Tax Cuts and Jobs Act in December to much political fanfare.   The nation’s most sweeping tax reform act since 1986, which was signed into law by President Trump on December 22nd, will have significant financial implications for both individuals and businesses — particularly pass-through entities such as partnerships, S-corporations, and limited liability companies (LLCs).

Geared towards cutting tax rates, simplifying tax filing, and stimulating economic growth, the Act will affect just about every US taxpayer in some way.  Let’s take a look at some of the Act’s fundamental provisions and how they could affect the various targeted constituencies, beginning in the 2018 tax year (note that the Act would not affect tax filings for 2017 or years prior).

Businesses and Corporations

  • Attorneys and CPAs have historically recommended the use of pass-through entities such as LLC’s, partnerships, and S-corporations to enable businesses and their owners to avoid paying federal income tax at the entity level. Such pass-through taxation enables the taxable income that would be assessed to the business to flow down to the owners’ respective individual returns.  In what I believe to be the most significant tax cut applicable to small business owners, the Act provides that most types of partnerships, S-corporations, and LLC’s can deduct 20% of most types of income; as such, only 80% of the income from the pass-through will be taxable to the owner. However, there are certain limitations to the deduction, such as (i) income caps on the amount of the deduction and (ii) a phase-out of the deduction based on the individual taxpayer’s income level for certain “service businesses” such as law, healthcare, accounting, consulting, and financial services.
  • In another significant tax cut, the Act slashes the federal corporate tax rate from 35% to 21%.
  • The Act also repeals the corporate alternative minimum tax (or AMT as it is commonly known), a vehicle for closing loopholes to require minimum taxation amounts on corporate entities. Given the repeal of the AMT and a much lower corporate tax rate, corporations—already optimized for fundraising and personal liability protection for shareholders—just got a lot more attractive from a tax perspective.
  • Many companies formerly domiciled in the US have set up offshore offices to keep their profits safe from taxation back home. The Act implements a “territorial” model of taxation, versus the previous “worldwide” model. With a territorial model, you only have tax liability for profits you make within that jurisdiction. With the advent of the new tax law here, US companies will owe our government taxes only on income earned through domestic operations, and they will also have a window to repatriate assets for a clean slate at much lower tax rates (15.5% on cash, 8% on non-cash assets such as equipment) on existing revenues held overseas under the old model.

For our executive and entrepreneur clients at the Forrest Firm, you’re likely to see significant changes – and potentially big savings – for your individual filings.

  • While most of the media coverage and political chitchat centered around consolidating the current seven individual tax brackets to three, the Act maintained the seven-bracket structure, but most with reduced rates. The new rates vary from a floor of 10% (which is unchanged) to a top rate of 37% (down from 39.6%). While several of the brackets remain unchanged, most brackets feature a rate reduction of 1% to 4%.
  • The provision that will likely affect the most individual filers is that Act’s doubling of the existing standard deduction from $6,350 to $12,000 ($12,700 to $24,000 for married filers). This measure will streamline tax returns for many individuals, who will now be incentivized to take the standard deduction versus itemizing.
  • Another change on the same level as the doubling of the standard deduction is the doubling of the child tax credit from its current $1,000 to $2,000. Along with this development, married couples earning up to $400,000 annually will be able to use the child tax credit—a huge increase from the former income cap of $110,000.
  • The Act maintains the mortgage interest deduction (which was on the table for elimination) on both primary and second residences, albeit with a cap on mortgage debt up to $750,000 (down from $1 million). The law eliminates interest deductions on home equity loans, which incentivized over-borrowing during the housing boom of the late 90s-early 00s.
  • The Act eliminates the personal exemption ($4,050 in 2017) in an apparent trade-off for the increased standard deduction. However, the law does create a temporary credit of $500 for non-child dependents to help those who are caring for their parents (a phenomenon related to the aging Baby Boomers) or adult children with disabilities.
  • One of the more hotly-debated provisions of the Act is its cap on the state and local tax (SALT) deduction. The Act permits taxpayers to deduct up to $10,000 in state and local taxes; under the previous law, the SALT deduction was unlimited.
  • The Act removes the tax penalty for failure to buy health insurance (the individual mandate), a key provision of the prior administration’s Affordable Care Act.
  • While the final version of the Act maintained the individual AMT, the blow was softened somewhat by raising income thresholds for applicability from $84,500 to $109,400 for married couples ($70,300 for individuals, up from $54,300).
  • In what should be of particular interest to estate planning clients, the Act exempts nearly every individual except for the wealthiest from federal estate tax by doubling the estate tax exemption from its current level of $5.49 million to $11.98 million. As a result, only a small fraction of decedent’s estates will be subject to federal estate tax.

As an attorney and CPA, I enjoy providing both legal and tax advice to clients regarding entity formation, corporate transactions, purchase and sales of businesses, and much more. To get started with a consultation on matters of concern to you, reach out to me at the Forrest Firm today.