The proliferation of new income tax provisions since the 1986 tax reform effort has led to compliance hurdles for taxpayers, administrative complexity and enforcement challenges for the IRS. The AICPA encourages Congress to examine all aspects of the tax code to improve the current rules. We stand for a code that is simple, practical and administrable (AICPA Guiding Principles of Good Tax Policy). The AICPA has consistently supported tax reform simplification efforts because we are convinced such actions will significantly reduce taxpayers’ compliance costs and encourage voluntary compliance through an understanding of the rules.

Download our tax reform changes charts for individuals and businesses. Use these charts as a reference for individual and business tax law changes that resulted from the Tax Cuts and Jobs Act (TCJA). These charts also provide practical client considerations based on the changes.

Here are some highlights of the changes for individual taxpayers (from 2018 through 2025): 

• The top individual rate is 37%.
• The individual AMT remains, but with increased exemption amounts and increased phase-out levels.
• The mortgage interest deduction limit is reduced to $750,000 on new mortgages ($375,000 for a married couple filing a separate return) and only home equity loan interest on loans used for home improvements or traced to business, investment or passive activity expenditures remains deductible (see Sec. 163(h), Regs. Sec. 1.163-8T and Notice 89-35).
• Individuals are allowed to deduct up to $10,000 in total state and local taxes, which include income or sales taxes plus property taxes. For state and local taxes previously deducted on Schedule C, E, or F, the limit does not apply.
• The child tax credit is increased to $2,000, with up to $1,400 refundable. The phase-out level is increased so more individuals with children under age 17 will qualify for the credit.
• Medical expenses in excess of 7.5% of adjusted gross income (AGI) are deductible in 2017 and 2018 and then 10% of AGI thereafter.
• There are no personal or dependent exemptions under the new tax law.
• No moving expenses are deductible (other than for U.S. armed forces members on active duty).
• No alimony is taxable or deductible starting in 2019 for agreements executed after 2018.
• No miscellaneous itemized deductions.
• No Pease phase-out of itemized deductions.

Listen to the podcast: How tax reform will impact individual taxpayers and download our tax reform changes chart for individuals to learn more.

Yes, generally, it would be deductible (subject to the limitation cap).

From 2018 through 2025, qualified residence interest only includes acquisition debt (not home equity debt). If a home equity loan was used for improvements to the principal or second home and secured by that home, it is acquisition debt and the interest is deductible.

A revised limitation exists for acquisition debt. Such debt may not exceed $750,000. A grandfather provision exists for acquisition debt incurred before Dec. 15, 2017. A special rule also exists for refinancing.

To determine if interest on a home equity loan is deductible, apply the tracing rules of Regs. Sec. 1.163-8T as modified by Notice 89-35 (pay particular attention to the 30-day rule of the notice). If the loan was used for improvements to the principal or second residence and secured by that residence, it likely qualifies as acquisition debt (within the new dollar limits).

Listen to the podcast: Tax reform and itemized deductions: Mortgage interest. Also, view the IRS’s guidance and examples on the subject.

The corporate tax rate has been lowered to a flat 21%, effective in 2018. The legislation repeals the corporate alternative minimum tax (AMT) and provides for passthroughs a 20% deduction (known as the qualified business income or QBI deduction and claimed at the individual level rather than at the passthrough entity level). Every client’s situation is different. Therefore, it’s advisable to do an analysis for your business clients to help them determine if a change in entity structure is appropriate.

We’ve received questions from AICPA members about whether it might be better for CPA firms to organize as C corporations instead of passthroughs, given the lower corporate tax rate. We advise using extreme caution for two reasons: (1) switching could possibly raise taxes and (2) a firm could lose the benefit of the CPA brand.

Read the article: Switching to a C corp: Think twice about it for more guidance including different scenarios to consider.

Here are some highlights of the changes for businesses:

• The new corporate tax rate is a flat 21%.
• The corporate alternative minimum tax (AMT) is repealed.
• The deduction for business interest is limited to the sum of the following: business interest income, 30% of the adjusted taxable income (as defined in the new law), and the floor plan financing interest.
• The rules allow taxpayers to claim a 100% first-year depreciation deduction on qualified property that is acquired and placed in service after Sept. 27, 2017. A phase-out period will begin in 2023 and end in 2027.
• The rules disallow entertainment, leisure, amusement or recreation expenses.
• The rules repeal the carry back of net operating losses (NOLs) for years ending after 2017 and NOLs generated for years beginning after 2017 cannot reduce taxable income by more than 80%.

Download our tax reform changes chart for businesses to learn more.

A fiscal-year corporation should determine its federal income tax for years that include Jan. 1, 2018 by first calculating the tentative tax for the entire taxable year using the tax rates in effect prior to the Tax Cuts and Jobs Act (TCJA) and then also calculating the tentative tax for the entire taxable year using the new 21% rate. Subsequently, the corporation should proportion each tentative tax amount based on the number of days in the taxable year when the different rates were in effect. The sum of these two amounts is the corporation’s federal income tax for the fiscal year. Refer to Notice 2018-38 for details.

The transition tax is also commonly referred to as the repatriation tax or the Sec. 965 tax. In general, U.S. shareholders are required to pay a transition tax on the post-1986 untaxed foreign earnings and profits (E&P) of certain specified foreign corporations as if those E&P had been repatriated to the U.S.

To be subject to a Sec. 965 inclusion, a taxpayer must be a U.S. shareholder of a deferred foreign income corporation (DFIC). A DFIC is defined as a specified foreign corporation (SFC) in Sec. 965(e). That SFC must also have post-1986 accumulated E&P to be construed as a DFIC.

U.S. shareholders subject to a Sec. 965 inclusion fall into two categories of an SFC. The first category is U.S. shareholders of a controlled foreign corporation (CFC), as defined in Sec. 957(a). To be a CFC, more than 50% of the voting power of all classes of stock entitled to vote or 50% of the total value of all stock must be owned by U.S. shareholders. A U.S. shareholder, with respect to any foreign corporation, is a U.S. person (as defined in Sec. 957(c)) who owns (within the meaning of Sec. 958(a)) or is considered owning by applying the rules of ownership of Sec. 958(b), 10% or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation, or 10% or more of the total value of shares of all classes of stock of the foreign corporation.

The second category of U.S. shareholders subject to Sec. 965 inclusions are U.S. corporations that own any share of a foreign corporation, whether that corporation is controlled or not.

Eliminating the estate tax was high up on the Republican tax agenda and was part of the Republican Blueprint and the House Nov. 16, 2017 version of the Tax Cuts and Jobs Act (TCJA). However, the legislation, as passed by Congress and signed by the President (enacted on Dec. 22, 2017), does not eliminate the estate tax. Rather, the tax exemption amount is doubled for tax years 2018 through 2025 from $5.6 million to $11.18 million per person, indexed for inflation.

Yes. The new qualified business income (QBI) deduction under Sec. 199A applies to taxpayers other than C corporations; thus, the deduction is available to estates and trusts.

The qualified business income (QBI) deduction of Sec. 199A is limited to 20% of the excess of taxable income over net capital gain. For example, suppose a taxpayer has $100,000 of QBI, $120,000 of capital gain, and $40,000 of deductions. Taxable income in this example is $180,000, and the excess of taxable income of net capital gain is $60,000. Thus, the tentative tax deduction of $20,000 ($100,000 QBI x 20%) is limited to $12,000 ($60,000 x 20%).

If taxable income is less than $157,500 (single) or $315,000 (married), then the QBI deduction is simply 20% of the lesser of QBI or taxable income other than capital gain (subject to the taxable income limitation), regardless of whether the business is a specified service business (SSTB) or whether the business pays W-2 wages. 

If taxable income is greater than $207,500 (single) or $415,000 (married), and the QBI is from a SSTB, the QBI deduction is $0. However, if the taxpayer has QBI from other sources, a deduction is still allowed for the non-SSTB businesses. If the QBI is from a non-SSTB, the deduction is allowed, but is limited to the greater of:

1. 50% of the taxpayer’s allocable share of the W-2 wages paid by the business, or
2. 20% of the taxpayer’s allocable share of the W-2 wages paid by the business plus 2.5% of the taxpayer’s allocable share of the unadjusted basis of qualified property.

If the taxable income is between $157,500 and $207,500 (single) or $315,000 and $415,000 (married), both the prohibition on SSTBs and the W-2 and property limitations partially apply. See our Sec. 199A flowchart and listen to the podcast: Tax reform: Sec. 199A final regulations.

SSTBs include “any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners; or any trade or business which involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests or commodities.” Engineering and architectural businesses are specifically removed from the definition of an SSTB.

The final regulations retain and slightly reword the definition of a trade or business set forth in the proposed regulations. Specifically, a trade or business is defined as a trade or business under Sec. 162 other than the trade or business of performing services as an employee. The final regulations also provide further interpretation of the disqualified fields.

The final regulations, similar to the proposed regulations, provide a de minimis exception that allows a business that has gross receipts of $25 million or less for the tax year to not be treated as an SSTB as long as less than 10% of the gross receipts of the business are attributable to the performance of services in one of the disqualified fields. 

Listen to the podcast: Tax reform: Sec. 199A final regulations.