ACCOUNTING
TAX UPDATE FOR 2018 INCOME TAX RETURN
On Dec. 17, 2017 President Trump signed into law, which is commonly known as the “The Cuts and Jobs Act” (TCJA) that made major changes in the tax rules for individual and business. For individuals, there are new, lower income tax rates, a substantially increased standard deduction, severely limited itemized deductions and no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT), among other changes. For businesses, the corporate tax rate is cut to 21 percent, the corporate AMT is gone, there are new limits on business interest deductions, and significantly liberalized expensing and depreciation rules. And there's a new deduction for non-corporate taxpayers with qualified business income from pass-through entities.
Additional 20 percent deduction for qualified business income
The IRS has issued regulations on the new 20 percent deduction for qualified business income (QBI) created by the TCJA, also known as the pass-through deduction. Here's a summary of the basic rules:
For tax years beginning after Dec. 31, 2017, taxpayers other than corporations may be entitled to a deduction of up to 20 percent of their qualified business income (QBI) from a domestic business operated as a sole proprietorship, or through a partnership, S Corporation, trust or estate. This deduction can be taken in addition to the standard or itemized deductions.
In general, the deduction is equal to the lesser of: (A) 20 percent of QBI plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, or (B) 20 percent of taxable income minus net capital gains.
QBI generally is the net amount of qualified items of income, gain, deduction, and loss, from any qualified trade or business. But QBI doesn't include capital gains and losses, certain dividends and interest income, reasonable compensation paid to the taxpayer by any qualified trade or business for services rendered for that trade or business, and any guaranteed payment to a partner for services to the business. Please consult your tax prepare to determine actual deduction as it will depend upon each taxpayer facts and circumstances.
Bonus depreciation may be claimed for used property
TCJA boosted the first-year bonus depreciation allowance from 50 to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. That means a business can write off the cost of most machinery and equipment in the year it's placed in service. And, for the first time ever, for property acquired and placed in service after Sept. 27, 2017, bonus depreciation may be claimed for used as well as new equipment. The IRS has explained that used equipment and machinery qualifies for the 100 percent bonus first-year depreciation allowance if: the taxpayer (or a predecessor) didn't use the property at any time before the acquisition; the property wasn't acquired from a related party or from a component member of a controlled corporate group; and the taxpayer's basis in the used property isn't figured by reference to the basis of the property in the hands of the seller or transferor.
Foreign Information Reporting and Taxation
U.S. individuals and entities having foreign transactions or interest in foreign entities may be subject to foreign transactions reporting requirements. This may include filing of additional tax returns and forms such as Form 114 (foreign bank account reporting), Form 3520/3520A, Form 5471, Form 5472, Form 8804, Form 8938 etc. Penalty for non-filing or late filing of such forms is $10,000 or more therefore it is important that these forms are filed timely before the respective due dates.
In addition to above filing requirements, IRS has introduced a concept of repatriation tax for the individuals who own interest in a foreign entity. Newly enacted section 965 imposes a repatriation tax on certain previously untaxed earnings of specified foreign corporations (SFCs) of U.S. shareholders by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an 8 percent rate. The repatriation tax generally may be paid in installments over an eight-year period.
Hiring Your Children
If you have children under the age of 18, you can hire them to work for you and then deduct the wages you pay them from your own taxable income. Furthermore, if you operate a sole proprietorship, you can employ your children without having to pay any Social Security or Medicare taxes on their wages. But make sure you pay them an amount that is reasonable and based on the work they are performing
Child and family credit
The act increases the child tax credit to $2,000 per qualifying child; $1,400 of this amount is refundable. The act also adds a $500 nonrefundable credit for qualifying dependents other than children. More importantly, the act increases the phase out for the child tax credit to $400,000 from $110,000 for married taxpayers filing a joint return and to $200,000 from $75,000 for other taxpayers.
“kiddie tax”
The tax on unearned income of children is completely overhauled by the act. Parents’ income and the unearned income of siblings no longer factor into the equation. Instead, earned income of a child is taxed according to an unmarried taxpayer’s rates. Taxable income attributable to net unearned income is taxed according to the unfavorable tax rates applicable to trusts and estates.
Sanjay Gupta, CPA, FCA, who has 27 years of experience in accounting and taxes, is based in Plantation. He can be reached at [email protected] or visit www.sanjayguptacpa.com