By ROGER MORRIS
Special to Delaware Business Times
The 2017 Tax Cuts and Jobs Act represents a significant overhaul of America’s tax system, the first in 31 years, and will have an effect on the amount of taxes almost every taxpayer and every business will pay and how those taxes are calculated. It also means that there may be many reasons for owners to rethink strategic business planning.While there are still some details waiting to be spelled out by the IRS, Delaware Business Times sat down to discuss the law’s implications for individuals and businesses with Brian Stetina and Alison Houck of Faw Casson certified public accountants and business consultants in their Dover offices.
DBT: First off, what are the big impacts of tax reform on individuals?
Houck: In previous years, the individual tax rates ranged from 10 percent to 39.6 percent, and the new rates are from 10 percent to 37 percent. There will still be seven brackets, but the rates have decreased and the income threshold levels have changed.
Stetina: There have also been changes in the child tax credit. Going forward it will be worth up to $2,000 for each qualifying child up to age 17, instead of the current $1,000, and the credit phase-out rises to $400,000 per married couple.
Houck: Those individuals that have been facing a penalty for the ACA health insurance shared responsibility can breathe a sigh of relief, as the individual mandate penalty is eliminated beginning in 2019.
Stetina: It is important to note that this is only on the individual side, as businesses of more than 50 employees will still face a penalty if they fail to offer health insurance.
Houck: Some people have in the past been required to pay AMT — alternate minimum tax — in addition to their regular taxes, and that changes somewhat, raising the exemption phase-out level to $1 million for married filing jointly and $500,000 for filing single.
Stetina: Another big change that will affect taxpayers is that the standard deduction has been raised to $24,000 for married couples and $12,000 for single filers. This is more than most people would normally be itemizing, especially since many itemized deductions have changed.
Houck: You can certainly still itemize, but fewer people will be likely to do so.
Stetina: Mortgage interest deduction will also be going down. Interest deductions on new mortgages for homes purchased after 2017 will be limited to a total of $750,000 of debt, for first and second homes combined. Older mortgages will be grandfathered in, following the prior rules. Home equity loans have also been impacted. You used to be able to get a home equity loan to fund a number of common life expenses, and the loan would be deductible. Now, home equity loan deductions must be only for actual home improvement.
Houck: Deductions for state and local taxes, whether for property or income, have been capped at $10,000 married or single. That will be major hit for people with higher income, particularly those who live in nearby states with high-tax rate.
Stetina: Another reason for people, especially retirees, to move from neighboring states to Delaware!
Houck: Previously, miscellaneous deductions for things such as investment services and advisor fees and unreimbursed employee expenses were allowed at 2 percent of adjusted gross income. There is no allowance for those deductions under the new law. We also saw moving expenses removed from the list of deductible situations, with the exception of certain military personnel.
Stetina: Casualty losses were another deduction that have been eliminated unless you’re in a federal disaster area.
Houck: We also saw the limit for medical expenses altered. Through 2018, taxpayers can deduct qualified medical expenses that exceed 7.5 percent of their adjusted gross income. This threshold had been set at 10 percent prior to the reform.
DBT: Is there anything else individual taxpayers should have on their radar?
Stetina: Personal exemptions have been eliminated for everyone. There will be some relief for people with families due to the child tax credit being raised, as we discussed earlier. Also, for new alimony agreements entered into after 2018, payments will no longer be deductible, nor will they be included as income.
Houck: As far as the gain for sale of principal residences is concerned, it will still be a $250,000 exclusion for filing single and $500,000 for filing jointly.
Stetina: Lastly, estate and gift tax exemptions will double to $11.2 million for individuals and $22 million for married couples.
DBT: That leads us to businesses — what are the biggest impacts of the tax reforms on businesses?
Stetina: First and foremost, if you are a C Corporation, the tax rates have been significantly reduced to a flat 21 percent. Previously, they had ranged from 15 percent to 35 percent. Also, the corporate alternative minimum tax or AMT has been eliminated.
Houck: Depreciation saw some major changes as well. Bonus depreciation, for example, was previously only available on new property, and then only at 50 percent of the cost. It has now been raised to 100 percent, and can be used on qualified property purchases, on new or pre-owned property.
Stetina: In addition, under IRC Section 179, which is the expensing of asset purchases, if a business owner buys a qualified asset, the amount able to be deducted has doubled to $1 million with an investment limitation of $2.5 million. Another item that has been modified is vehicle depreciation for business purposes. Essentially, the depreciation is accelerated, with depreciation limitations to $10,000 for the year in which the vehicle is placed in service and $16,000 for the second year.
Houck: There are also big changes in NOLs, or net operating losses. Under the new law, NOLs generated after 2017 will be limited to 80 percent of taxable income and can no longer be carried back over previous years, only carried forward.
Stetina: Businesses with greater than $25 million in gross receipts may be limited in deducting interest expenses to 30 percent of taxable income.
Houck: Another item that has been removed is the deductions for entertainment, membership dues and other social business activities which, for the moment, appears to also include the 50 percent deduction for business meals. It is the opinion of many in the accounting industry that the section of the new law regarding business meals does not accurately reflect Congress’s intent. IRS guidance is still pending.
DBT: There’s been a lot of talk about how reform will impact the type of business entity a company can choose to be. What kind of questions are you getting from small-business owners?
Stetina: One of the most talked about, and one that we are already discussing with clients who own businesses, is the 20 percent reduction against net income for business activities for pass-through entities, such as LLCs, S corporations and sole proprietorships. However, it does not include “specified service businesses.” Our profession is waiting for further IRS guidance on the exact businesses that will be excluded. This will have a large effect on many taxpayers and raises a lot of issues for tax and business planning.
Houck: Many of these tax changes are set to expire January 1, 2026.
In summation, the tax reform will have a significant impact, for most individuals and business. Both individuals and business owners should take this opportunity to revisit their tax strategies and make adjustments for any changes that may impact them.
MEET THE PANELISTS
As a Partner and Director of Tax Services, Brian Stetina keeps Faw Casson’s clients educated on developments in tax law. He assists them in creating and honing their financial plans to meet their business and personal goals by proactively and strategically planning for their future.
He graduated from York College of Pennsylvania with a bachelor’s degree
in accounting in 1998, and has worked in the accounting industry ever since.
He is also active in many local organizations, serving on the Boards of the Central Delaware Chamber of Commerce, the CenDel Foundation and Mom’s House
of Dover. He is also involved in the Delaware Society of CPAs.
Alison Houck serves as the Managing Partner of the Rehoboth Beach location, and is an Entrepreneurial Services leader. She keeps Faw Casson clients up to date on not only the ever-changing tax regulations, but the health of their business.
Graduating from University of Delaware, she has been a Delaware accountant since 1998. She is the recipient of the BPW Young Careerist Award and NAWBO Bridge Builder Award. She was named as Best Accountant in Sussex County from 2014 to 2018, and Best Charity Volunteer in 2016 by Coastal Style Magazine. She serves on several boards and committees for the Beebe Medical Foundation; the Accounting and MIS Advisory Board for Lerner School; and the Board of Directors of Children & Families First of Delaware. In 2015, she was appointed by Gov. Jack Markell for a three-year term as a member of the State Board of Accountancy, currently serving as the president.