The Tax Cuts and Jobs Act of 2017 (TCJA) is the most significant tax code overhaul since the Tax Reform Act of 1986. The TCJA had four goals; tax relief for middle-income families, simplification for individuals, economic growth and repatriation of oversea income. It cut individual income tax rates, doubled the standard deduction, eliminated personal exemptions and capped state and local itemized deductions. While on the surface tax compliance now sounds simpler, as you will see, this isn’t the case.
First and foremost, the new 1040 tax form is now postcard sized. However, smaller is not always simpler; the new tax forms have become more complicated than ever. The new form omitted many front-page line items and tallied them up in accompanying worksheets. There are also many additional worksheets adding unnecessary complexity and confusion.
While the individual tax rates decreased, the withholding rates decreased as well. This resulted in many taxpayers coming out of pocket on April 15th. The withholding tables were updated by the IRS and reflected the changes in the new law. However, it appears these tables do not correlate well to the individual tax brackets. Individuals should review their W-4 to ensure they are withholding sufficient taxes from their pay.
163(j) and 199A Code Sections
As we have seen with some of the new code provisions enacted by the TCJA, such as IRC Section 163(j) and Section 199A, understanding your filing has become more difficult. There are significant drafting errors in the original legislation and Treasury is working through them. Many regulations have since been issued to expand and provide greater detail of the law. Needless to say, the TCJA has brought many new complex issues and analysis for taxpayers and tax professionals alike.
One of the hot topics from the TCJA is the Business Interest Expense Limitation, IRC section 163(j). The Business Interest Expense Limitation allows for the deduction of business interest expense to be limited to 30% of adjusted taxable income, plus business interest income, plus floor-plan financing interest. If the business interest expense is greater than the limitation calculation, then the excess interest expense is disallowed and carried forward until the next year. On the surface this sounds like it does not affect or complicate individual tax filing, however the code section is applied to every taxpayer that is a partner, member or shareholder of the business.
The IRS has since released regulations that businesses (pass-throughs) must disclose information, such as preceding average gross receipts, to the partners/shareholders whether they are subject to the limitation or not. This additional disclosure information complicates both the entity and individual tax returns and creates extra compliance work and additional tax professional fees for businesses and individuals.
Another hot topic from the TCJA is the infamous Section 199A, also known as the 20% Qualified Business Income deduction. This provision offers significant planning opportunities in form and structure for business. At the simplest level, the deduction allows individuals to take a 20% deduction on income from qualified pass-through businesses. The deduction, however, can be lost in part or entirety if above certain threshold amounts and if the business is considered a Specified Service Business. For taxpayers with qualified trade or business income over the threshold amounts, the 20% deduction is subject to another limitation. This hurdle limits the 20% deduction to the greater of 50% of W-2 wages paid by the business or 25% of W-2 wages plus 2.5% qualified property owned by the business.
In addition, individuals can elect to aggregate their trades or businesses to maximize the qualified business income deduction. The aggregation of multiple trades or businesses was not provided in the original law and was added via regulations. By aggregating, taxpayers may increase the 20% deduction by combining W-2 wages and unadjusted basis of qualified property. To aggregate, there are additional requirements. Like the 163(j) code section, the 199A limitation and aggregation rules create additional compliance work and tax professional fees for businesses and individuals.
Qualified Opportunity Zones
Qualified Opportunity Zones have become another hot area of the TCJA. The law created the IRC Section’s 1400Z-1 and 1400Z-2, which contain new Opportunity Zone provisions. The Opportunity Zone incentives encourage long-term investment in low-income geographical areas as designated by the governors of each state and approved by Treasury. The original code sections in the bill were only a few pages and left a mountain of questions. Since the TCJA, the IRS has issued two separate sets of regulations providing much-needed direction and insight for taxpayers. Visit our Qualified Opportunity Zone Resource Center for more information.
With the enactment of the TCJA, tax compliance has become more complicated and sophisticated. There have since been numerous drafting errors uncovered and IRS regulations issued that expand upon, and plug holes in, the law as written. It’s up for debate if the TCJA has met any of its four goals; however, we are certain it fails to simplify anything. The Tax Warriors® at Drucker & Scaccetti are highly adept at cutting through the complexity created by the TCJA. Call on us with your questions about the new tax law.