2018 Tax Update
HIGHLIGHTS OF THE TAX CUTS AND JOBS ACT
New income tax rates & brackets - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, seven tax rates apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The Tax Cuts and Jobs Act also provides four tax rates for estates and trusts: 10%, 24%, 35%, and 37%.
Standard deduction increased - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers.
Personal exemptions suspended - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for personal exemptions is effectively suspended because the statutory exemption amount is reduced to zero.
Kiddie tax modified - For tax years beginning after Dec. 31, 2017, the tax on certain children with unearned income (the "kiddie tax") is imposed as follows: the child's taxable income attributable to earned income is taxed under the rates for single individuals, and the child's taxable income attributable to net unearned income is taxed according to the brackets applicable to trusts and estates.
Capital gains provisions conformed - The Act generally retains present-law 0%, 15%, and 20% tax rates on net capital gains and qualified dividends. For 2018, the 15% breakpoint is $77,200 for joint returns and surviving spouses, $51,700 for heads of household, $38,600 for single taxpayers, $38,600 for married taxpayers filing separately, and $2,600 for trusts and estates. The 20% breakpoint is $479,000 for joint returns and surviving spouses, $452,400 for heads of household, $425,800 for single files, $239,500 for married taxpayers filing separately, and $12,700 for estates and trusts.
Carried interests-new holding period requirement - For tax years beginning after Dec. 31, 2017, the Act effectively imposes a 3-year holding period requirement in order for certain partnership interests received in connection with the performance of services ("carried interests") to be taxed as long-term capital gain. If the 3-year holding period is not met with respect to an applicable partnership interest held by the taxpayer, the taxpayer's gain will be treated as short-term gain taxed at ordinary income rates.
New limitations on "excess business loss" - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act provides that the excess farm loss limitation doesn't apply. Instead, a noncorporate taxpayer's "excess business loss" for a tax year is disallowed, and the disallowed loss is carried forward and treated as part of the taxpayer's net operating loss (NOL) carryforward in later tax years. This limitation applies after the application of the passive loss rules.
Deduction for personal casualty & theft losses suspended - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the personal casualty and theft loss deduction is suspended, except for personal casualty losses incurred in a federally-declared disaster. Special rules apply where a taxpayer has personal casualty gains.
Gambling loss limitation modified - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the limitation on wagering losses under Code Sec. 165(d) is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings.
Child tax credit increased; partial credit for non-child dependents - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000. The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers) (not indexed for inflation). The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation, up to the base $2,000 base credit amount. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500. No credit will be allowed to a taxpayer with respect to any qualifying child unless the taxpayer provides the child's SSN. In addition, a $500 nonrefundable credit is provided for certain non-child dependents.
State and local tax (SALT) deduction limited - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, except as described below, state, local, and foreign property taxes, and state and local sales taxes, are deductible only when paid or accrued in carrying on a trade or business or an activity described in Code Sec. 212 (generally, for the production of income). State and local income, war profits, and excess profits are not allowable as a deduction.
However, a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for married taxpayers filing separately) for the aggregate of (i) state and local property taxes not paid or accrued in carrying on a trade or business or activity described in Code Sec. 212 ; and (ii) state and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year. Foreign real property taxes may not be deducted.
An amount paid in a tax year beginning before Jan. 1, 2018, for a state or local income tax imposed for a tax year beginning after Dec. 31, 2017, is treated as paid on the last day of the tax year for which such tax is so imposed, for purposes of applying the above limits. In other words, a taxpayer who, in 2017, pays an income tax that is imposed for a tax year after 2017, can't claim an itemized deduction in 2017 for that prepaid income tax.
Mortgage interest deduction limited - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for home mortgage interest is limited to interest on up to $750,000 ($375,000 for married taxpayers filing separately) of acquisition indebtedness and the deduction for interest on home equity indebtedness is suspended. The new lower limit doesn't apply to acquisition indebtedness incurred before Dec. 15, 2017. A taxpayer who entered into a binding written contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases the residence before Apr. 1, 2018, is considered to incur acquisition indebtedness before Dec. 15, 2017.
The pre-Act acquisition indebtedness limitations continue to apply to taxpayers who refinance existing qualified residence indebtedness that was incurred before Dec. 15, 2017, provided the resulting indebtedness doesn't exceed the amount of the refinanced indebtedness.
Medical expense deduction threshold temporarily reduced - For tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, the threshold on medical expense deductions is reduced to 7.5% of adjusted gross income (AGI) for all taxpayers. In addition, the 10%-of-AGI threshold that applied under pre-Act law for alternative minimum tax (AMT) purposes doesn't apply to tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019.
Individual charitable contribution deduction limitation increased - For contributions made in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the 50% limitation under (Code Sec. 170(b)) for an individual's cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to five years, subject to the later year's ceiling.
No deduction for amounts paid for college athletic seating rights - For contributions made in tax years beginning after Dec. 31, 2017, no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event.
Alimony deduction by payor/inclusion by payee suspended - For any divorce or separation agreement executed after Dec. 31, 2018 (or executed on or before Dec. 31, 2018 but modified later if the modification expressly provides that the Act rules apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse.
Miscellaneous itemized deductions suspended - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for miscellaneous itemized deductions that are subject to the 2%-of-AGI floor is suspended.
Overall limitation ("Pease" limitation) on overall itemized deductions suspended - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the "Pease limitation" on overall itemized deductions (also referred to as the "3% rule) is suspended.
Qualified bicycle commuting exclusion suspended - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the exclusion from gross income and wages for qualified bicycle commuting reimbursements is suspended.
Exclusion for moving expense reimbursements suspended - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the exclusion for qualified moving expense reimbursements is suspended, except for members of the Armed Forces on active duty (and their spouses and dependents) who move pursuant to a military order and incident to a permanent change of station.
Moving expenses deduction suspended - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for moving expenses is suspended, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station.
Repeal of ACA individual mandate - Under pre-Act law, the Affordable Care Act (also called the ACA or Obamacare) required individuals who were not covered by a health plan that provided at least minimum essential coverage to pay a "shared responsibility payment" (also referred to as a penalty) with their federal tax return, for any month the individual did not have minimum essential coverage. This provision is commonly known as the "Individual Mandate." The Act permanently repeals the Individual Mandate by providing that for months beginning after Dec. 31, 2018, the amount of the individual shared responsibility payment is reduced to zero.
Individual AMT retained, with higher AMT exemption amounts - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act increases the amount of an individuals alternative minimum taxable income (AMTI) that is exempt from AMT-the "AMT exemption" amounts-as follows:
...For joint returns and surviving spouses, $109,400;
...For single taxpayers, $70,300;
...For marrieds filing separately, $54,700.
The above AMT exemption amounts are reduced (not below zero) to an amount equal to 25% of the amount by which the individual's AMTI exceeds a phase-out amount, increased as follows:
...For joint returns and surviving spouses, $1 million.
...For all other taxpayers (other than estates and trusts), $500,000.
For trusts and estates, the base figure of $22,500 and phase-out amount of $75,000 remain unchanged. All of these amounts will be adjusted for inflation after 2018 under the new C-CPI-U inflation measure (see above).
ABLE account changes - For tax years beginning after Dec. 22, 2017 and before Jan. 1, 2026, the ABLE account contribution limitation for contributions made by the designated beneficiary is increased, and other changes are in effect as described below. After the overall limitation on contributions is reached (i.e., the annual gift tax exemption amount; for 2018, $15,000), an ABLE account's designated beneficiary can contribute an additional amount, up to the lesser of (a) the federal poverty line for a one-person household; or (b) the individual's compensation for the tax year.
The Act allows the designated beneficiary of an ABLE account to claim the saver's credit under Code Sec. 25B for contributions made to his or her ABLE account.
Coordination with QTPs. For distributions after Dec. 22, 2017, amounts from qualified tuition programs (QTPs, also known as 529 accounts) may be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of his or her family. The rolled-over amounts are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.
Student loan discharged on death or disability - For discharges of indebtedness after Dec. 31, 2017 and before Jan. 1, 2026, certain student loans that are discharged on account of death or total and permanent disability of the student are excluded from gross income.
Certain self-created property not treated as capital asset - For dispositions after Dec. 31, 2017, patents, inventions, models or designs (whether or not patented), and secret formulas or processes, which are held either by the taxpayer who created the property or by a taxpayer with a substituted or transferred basis from the taxpayer who created the property (or for whom the property was created), are specifically excluded from the definition of a "capital asset”.
Estate and gift tax retained, with increased exemption amount - For estates of decedents dying and gifts made after Dec. 31, 2017 and before Jan. 1, 2026, the Act doubles the base estate and gift tax exemption amount from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple).
Business Tax Changes
Dividends-received deduction percentages reduced - For tax years beginning after Dec. 31, 2017, the 70% dividends-received deduction is reduced to 50% and the 80% dividends-received deduction for 20% or more owned corporations is reduced to 65%.
Increased Code Section 179 expensing - For property placed in service in tax years beginning after Dec. 31, 2017, the maximum amount a taxpayer may expense under Code Sec. 179 is increased to $1 million, and the phase-out threshold amount is increased to $2.5 million. For tax years beginning after 2018, these amounts (as well as the $25,000 sport utility vehicle limitation) are indexed for inflation.
Qualified real property. The definition of Code Sec. 179 property is expanded to include certain personal property even though it is used predominantly to furnish lodging or in connection with furnishing lodging. The definition of qualified real property eligible for Code Sec. 179 expensing is also expanded to include the following improvements to nonresidential real property after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems. Also any other building improvements to nonresidential real property that aren't elevators or escalators, building enlargements or attributable to internal structural framework are Code Sec. 179 property.
Temporary 100% cost recovery of qualifying business assets - A 100% first-year deduction for the adjusted basis is allowed for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (after Sept. 27, 2017 and before Jan. 1, 2024 for certain aircraft and property with longer production periods). Thus, the phase-down of the 50% allowance to zero that occurs for property placed in service during 2018, 2019 and 2020 (2019, 2020 and 2021 for certain aircraft and property with a long production period) is repealed. The additional first-year depreciation deduction is allowed for new and used property. The Act refers to the new 100% depreciation deduction in the placed-in-service year as "100% expensing," but the tax break should not be confused with expensing under Code Sec. 179 , which is subject to entirely separate rules (see above).
In later years, the first-year bonus depreciation deduction phases down, as follows:
80% for property placed in service after Dec. 31, 2022 and before Jan. 1, 2024.
60% for property placed in service after Dec. 31, 2023 and before Jan. 1, 2025.
40% for property placed in service after Dec. 31, 2024 and before Jan. 1, 2026.
20% for property placed in service after Dec. 31, 2025 and before Jan. 1, 2027.
For certain property with longer production periods, the beginning and end dates in the list above are increased by one year. For example, bonus first-year depreciation is 80% for long-production-period property placed in service after Dec. 31, 2023 and before Jan. 1, 2025. First-year bonus depreciation sunsets after 2026.
For productions placed in service after Sept. 27, 2017, qualified property eligible for a 100% first-year depreciation allowance includes qualified film, television and live theatrical productions. A production is considered placed in service at the time of initial release, broadcast, or live staged performance.
For trees and vines bearing fruit or nuts and certain other specified plants planted or grafted after Sept. 27, 2017, and before Jan. 1, 2027, the 100% first-year deduction is also available subject to phase out rules similar to those above.
Luxury automobile depreciation limits increased - For passenger automobiles placed in service after Dec. 31, 2017 for which the additional first-year depreciation deduction under Code Sec. 168(k) is not claimed, the maximum amount of allowable depreciation is increased to: $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period. For passenger automobiles placed in service after 2018, these dollar limits are indexed for inflation. For passengers autos eligible for bonus first-year depreciation, the additional first-year depreciation allowance remains at $8,000.
Changes to farming cost recovery - For property placed in service after Dec. 31, 2017, the cost recovery period is shortened from seven to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which commences with the taxpayer.
In addition, taxpayers can use the 200% declining balance method--the 150% declining balance depreciation method is no longer required--for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property) is repealed. The 150% declining balance method continues to apply to any 15-year or 20-year property used in the farming business to which the straight-line method does not apply and to property for which the taxpayer elects the use of the 150% declining balance method.
For tax years beginning after Dec. 31, 2017, an electing farming business-i.e., a farming business electing out of the limitation on the deduction for interest-must use ADS to depreciate any property with a recovery period of 10 years or more (e.g., a single purpose agricultural or horticultural structures, trees or vines bearing fruit or nuts, farm buildings, and certain land improvements).
Recovery period for certain real property improvements is shortened - For property placed in service after Dec. 31, 2017, the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated, and a general 15-year recovery period and straight-line depreciation are provided for qualified improvement property.
Costs of replanting citrus plants lost due to casualty - For replanting costs paid or incurred after the enactment date, but no later than a date which is ten years after the date of enactment, for citrus plants lost or damaged due to casualty, the costs may also be deducted by a person other than the taxpayer if (1) the taxpayer has an equity interest of not less than 50% in the replanted citrus plants at all times during the tax year in which the replanting costs are paid or incurred and such other person holds any part of the remaining equity interest, or (2) such other person acquires all of the taxpayer's equity interest in the land on which the lost or damaged citrus plants were located at the time of such loss or damage, and the replanting is on such land.
Limits on deduction of business interest - For tax years beginning after Dec. 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business's adjusted taxable income. The business interest limitation generally applies at the taxpayer level. However, for partnerships and S corporations, the limitation applies at the entity level.
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2022, adjusted taxable income is computed without regard to deductions allowable for depreciation, amortization, or depletion and without the former Code Sec. 199 domestic production activities deduction (which is repealed effective Dec. 31, 2017).
Under a small business exception, the business interest limitation doesn't apply to taxpayers (other than tax shelters) for a tax year if the taxpayer's average annual gross receipts for the three-tax year period ending with the prior tax year don't exceed $25 million. The business interest limitation also doesn't apply to certain regulated public utilities and electric cooperatives. Real property trades or businesses can elect out of the limitation if they use ADS to depreciate applicable real property used in a trade or business. Farming businesses can also elect out if they use ADS to depreciate certain property used in the farming business. There is also an exception for interest on floor plan financing (i.e., indebtedness used to finance the acquisition of motor vehicles, boats or farm machinery for sale or lease, and secured by such inventory).
Modification of net operating loss (NOL) deduction - For NOLs arising in tax years ending after Dec. 31, 2017, the two-year carryback and the special carryback provisions are repealed, but a two-year carryback applies for certain losses incurred in the trade or business of farming. NOLs generally can be carried forward indefinitely.
For losses arising in tax years beginning after Dec. 31, 2017, the NOL deduction is generally limited to 80% of taxable income (determined without regard to the NOL deduction). Carryovers to other years are adjusted to take account of this limitation.
Domestic production activities deduction repealed - For tax years beginning after Dec. 31, 2017, the Code Sec. 199 domestic production activities deduction (DPAD) is repealed.
Like-kind exchange treatment limited - Generally effective for transfers after Dec. 31, 2017, the rule allowing the deferral of gain on like-kind exchanges is modified to allow for like-kind exchanges only with respect to real property that is not held primarily for sale. However, under a transition rule, the pre-Act like-kind exchange rules apply to exchanges of personal property if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before Dec. 31, 2017.
Employer's deduction for fringe benefit expenses limited - For amounts paid or incurred after Dec. 31, 2017, deductions for entertainment expenses are disallowed, eliminating the subjective determination of whether such expenses are sufficiently business related; the current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or otherwise on the premises of the employer; and deductions for employee transportation fringe benefits (e.g., parking and mass transit) are denied, but the exclusion from income for such benefits received by an employee is retained. In addition, no deduction is allowed for transportation expenses that are the equivalent of commuting for employees (e.g., between the employee's home and the workplace), except as provided for the safety of the employee.
For tax years beginning after Dec. 31, 2025, the Act will disallow an employer's deduction for expenses associated with meals provided for the convenience of the employer on the employer's business premises, or provided on or near the employer's business premises through an employer-operated facility that meets certain requirements.
No deduction for amounts paid for sexual harassment subject to nondisclosure agreement - For amounts paid or incurred after Dec. 22, 2017, no deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement.
Employee achievement awards - For amounts paid or incurred after Dec. 31, 2017, "tangible personal property" that can be excludible employee achievement awards doesn't include cash or cash equivalents; gifts cards, coupons, or certificates; vacations, meals or lodging; or certain other non-tangible personal property.
Limitation on excessive employee compensation - For tax years beginning after Dec. 31, 2017, the exceptions to the $1 million deduction limitation for commissions and performance-based compensation are repealed.
Deduction for local lobbying expenses eliminated - For amounts paid or incurred after Dec. 21, 2017, the deduction for lobbying expenses with respect to legislation before local government bodies (including Indian tribal governments) is eliminated.
Rehabilitation credit limited - For amounts paid or incurred after Dec. 31, 2017, the 10% credit for qualified rehabilitation expenditures with respect to a pre-'36 building is repealed. A 20% credit is provided for qualified rehabilitation expenditures with respect to a certified historic structure, which can be claimed ratably over a five-year period beginning in the tax year in which a qualified rehabilitated structure is placed in service. Transition rules apply.
New credit for employer-paid family and medical leave - For wages paid in tax years beginning after Dec. 31, 2017, but not beginning after Dec. 31, 2019, businesses can claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which the employees are on Family and Medical Leave (FMLA) if the rate of payment is 50% of the wages normally paid to the employees. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the payment rate exceeds 50%. All qualifying full-time employees have to be given at least two weeks of annual paid family and medical leave (all less-than-full-time qualifying employees have to be given a commensurate amount of leave on a pro rata basis).
Accounting method changes
Tax year of inclusion - Generally for tax years beginning after Dec. 31, 2017, a taxpayer is required to recognize income no later than the tax year in which the income is taken into account as income on an applicable financial statement (AFS) or another financial statement under rules specified by IRS (subject to an exception for long-term contract income under Code Sec. 460 ).
The Act also codifies the current deferral method of accounting for advance payments for goods and services provided by Rev. Proc. 2004-34 , to allow taxpayers to defer the inclusion of income associated with certain advance payments to the end of the tax year following the tax year of receipt if the income also is deferred for financial statement purposes. In addition, it directs taxpayers to apply the revenue recognition rules under Code Sec. 452 before applying the Code Sec. 1272 original issue discount (OID) rules.
For any taxpayer required by this provision to change its accounting method for its first tax year beginning after Dec. 31, 2017, the change is treated as initiated by the taxpayer and made with IRS's consent.
Cash method of accounting - For tax years beginning after Dec. 31, 2017, the cash method of accounting may be used by taxpayers (other than tax shelters) that satisfy a $25 million gross receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor. This means that taxpayers with annual average gross receipts that do not exceed $25 million (indexed for inflation for tax years beginning after Dec. 31, 2018) for the three prior tax years are allowed to use the cash method.
As under pre-Act law, qualified personal service corporations, partnerships without C corporation partners, S corporations, and other pass-through entities are allowed to use the cash method without regard to whether they meet the $25 million gross receipts test, so long as the use of the method clearly reflects income.
Accounting for inventories - For tax years beginning after Dec. 31, 2017, taxpayers that meet the $25 million gross receipts test are not required to account for inventories under Code Sec. 471 , but rather may use an accounting method for inventories that either (1) treats inventories as non-incidental materials and supplies, or (2) conforms to the taxpayer's financial accounting treatment of inventories.
Capitalization and inclusion of certain expenses in inventory costs - For tax years beginning after Dec. 31, 2017, any producer or re-seller that meets the $25 million gross receipts test is exempt from the application of the Code Sec. 263A UNICAP rules.
Accounting for long-term contracts - For contracts entered into after Dec. 31, 2017 in tax years ending after that date, the exception for small construction contracts from the requirement to use the percentage of completion method (PCM) is expanded to apply to contracts for the construction or improvement of real property if the contract: (1) is expected (at the time the contract is entered into) to be completed within two years of commencement of the contract and (2) is performed by a taxpayer that (for the tax year in which the contract was entered into) meets the $25 million gross receipts test.
Use of this PCM exception for small construction contracts is applied on a cut-off basis for all similarly classified contracts (so there is no adjustment under Code Sec. 481(a) for contracts entered into before Jan. 1, 2018).
Tax incentives for investment in Qualified Opportunity Zones - Effective on Dec. 22, 2017, temporary deferral applies for capital gains that are re-invested in a Qualified Opportunity Zone Fund. The maximum amount of the deferred gain equals the amount the taxpayer invested in a QO Fund during the 180-day period beginning on the date of sale of the asset to which the deferral pertains. Capital gains that exceed the maximum deferral amount are recognized and included in gross income.
New deduction for pass-through income - For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act adds a new deduction for noncorporate taxpayers for qualified business income-also referred to as the "pass-through deduction."
The deduction is generally 20% of a taxpayer's qualified business income (QBI) from a partnership, S corporation, or sole proprietorship. QBI is defined as the net amount of items of income, gain, deduction, and loss with respect to the trade or business. Certain types of investment-related items are excluded from QBI, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business). as are employee compensation and guaranteed payments to a partner.
Taxpayers in service related businesses, such as healthcare professionals, law, accounting, actuarial science, performing artists, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business whose principal asset is the reputation or skill of one or more of its employees are eligible. However, the deduction with respect to service businesses is phased out if the taxpayer's taxable income exceeds the threshold amount of $157,500 ($315,000 in the case of a joint return).
Taxpayers whose taxable income exceeds the threshold amount of $157,500 ($315,000 in the case of a joint return) are also subject to limitations based on the W-2 wages and the adjusted basis in acquired qualified property.
For partnerships and S corporations, the deduction is taken at the partner or shareholder level. Trusts and estates are eligible for the deduction, subject to apportionment between the trust or estate and the beneficiaries.
Repeal of partnership technical termination - For partnership tax years beginning after Dec. 31, 2017, the Act repeals the "technical termination" rule of Code Sec. 708(b)(1)(B)-i.e., the rule that a partnership is considered as terminated if there is a sale or exchange of 50% or more of the total interest in partnership capital and profits within any 12-month period.
Look-through rule applied to gain on sale of partnership interest - For sales and exchanges after Nov. 26, 2017, gain or loss from the sale or exchange of a partnership interest is effectively connected with a U.S. trade or business ("effectively connected") to the extent that the transferor would have had effectively connected gain or loss had the partnership sold all of its assets at fair market value as of the date of the sale or exchange. Any gain or loss from this hypothetical asset sale by the partnership must be allocated to interests in the partnership in the same manner as non-separately stated income and loss.
For sales, exchanges, and dispositions after Dec. 31, 2017, if any gain on the disposition of a partnership interest is treated as "effectively connected" under the above rule, the transferee must withhold 10% of the amount realized on the disposition, unless the transferor certifies that it's not a foreign person.
Partnership "substantial built-in loss" modified - For transfers of partnership interests after Dec. 31, 2017, the definition of a substantial built-in loss is modified for purposes of Code Sec. 743(d) , affecting transfers of partnership interests. In addition to the present-law definition, a substantial built-in loss also exists if the transferee would be allocated a net loss in excess of $250,000 upon a hypothetical disposition by the partnership of all partnership's assets in a fully taxable transaction for cash equal to the assets' fair market value, immediately after the transfer of the partnership interest.
Charitable contributions and foreign taxes in partner's share of loss - For partnership tax years beginning after Dec. 31, 2017, a partner's distributive shares of partnership charitable contributions and taxes paid or accrued to foreign countries or U.S. possessions are taken into account in determining the amount of a partner's loss. However, for charitable contributions of property with a fair market value that exceeds its adjusted basis, the partner's distributive share of the excess is not taken into account.
Treatment of S corporation converted to C corporation - If an S corporation converts to a C corporation, cash distributions made by the C corporation to its shareholders during a post-termination transition period (PTTP) are-to the extent of the amount in the corporation's accumulated adjustments account (AAA)-tax-free to the shareholders and reduce the adjusted basis of the stock, to the extent of the amount in the accumulated adjustment account. The Act provides that distributions made after Dec. 22, 2017 from an "eligible terminated S corporation" are treated as paid from its AAA and from its earnings and profits on a pro rata basis. Resulting adjustments are taken into account ratably over a 6-year period. An eligible terminated S corporation is any C corporation that (i) was an S corporation on Dec. 21, 2017, (ii) revokes its S corporation election during the 2-year period beginning on Dec. 22, 2017, and (iii) had the same owners on Dec. 22, 2017 and on the revocation date (in the same proportion).
Excise tax on excess tax-exempt organization executive compensation - For tax years beginning after Dec. 31, 2017, a tax-exempt organization is subject to a tax at the corporate tax rate (21% under the Act) on the sum of: (1) the remuneration (other than an excess parachute payment) in excess of $1 million paid to a covered employee by an applicable tax-exempt organization for a tax year; and (2) any excess parachute payment (as newly defined) paid by the applicable tax-exempt organization to a covered employee. A covered employee is an employee (including any former employee) of an applicable tax-exempt organization if the employee is one of the five highest compensated employees of the organization for the tax year or was a covered employee of the organization (or a predecessor) for any preceding tax year beginning after Dec. 31, 2016. Remuneration is treated as paid when there is no substantial risk of forfeiture of the rights to such remuneration.
UBTI separately computed for each trade or business activity - For tax years beginning after Dec. 31, 2017 (subject to an exception for net operating losses (NOLs) arising in a tax year beginning before Jan. 1, 2018, that are carried forward), tax-exempt organizations may not use losses from one unrelated trade or business to offset income derived from another unrelated trade or business. Gains and losses have to be calculated and applied separately.
Repeal of the rule allowing recharacterization of Roth IRA contributions - Under pre-Act law, an individual could elect to recharacterize a contribution made to one type of IRA (traditional or Roth) as made to the other type of IRA in a so-called "conversion contribution" by making a trustee-to-trustee transfer to the other type of IRA. The Act provides that for years beginning after Dec. 31, 2017, the rule allowing recharacterization of IRA contributions does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization can't be used to unwind a Roth conversion.