Tax Cuts and Jobs Act | New Tax Law 2017

The Tax Cuts and Jobs Act: What It Means for You

 

This information is current as of December 27, 2017.

At the request of our clients, we have summarized some of the more important provisions of the sweeping new tax law (“TCJA”), which was signed into effect on December 22, 2017.  Please note that all of these provisions are subject to interpretation by the Internal Revenue Service.  We will not know the true effect of the law until the IRS publishes regulations in the coming years.

These changes do not affect the tax return that you will file next year for 2017.  The changes will take effect with the tax return you file in 2019 for tax year 2018.

We cannot emphasize enough that this new tax law marks the biggest change to our tax system since the 1980s.  Your individual tax situation and your company’s tax situation may have changed dramatically.

To understand fully how the new tax law will affect your particular circumstances, you should consult your tax professionals.  In particular, everyone who owns or operates a business should make an appointment with the company’s tax professionals early in 2018 to consult on the effect of the new tax law.  To the extent those recommendations affect the company’s structure, corporate legal advice should also be sought before any changes are made.

However, here is an executive summary of a few things that you should think about doing now, meaning before December 31, 2017; or that you should think about doing very early next year.

Income Tax For Individuals

Tax Rates

The new law keeps a seven-bracket structure, but cuts tax rates in five of those brackets, and generally raises the threshold for each higher bracket. The top bracket — for individuals earning more than $500,000 per year, and married couples earning more than $600,000 per year – will be 37% in 2018, down from 39.6% in 2017.

Suggestion: To the extent possible, defer acceptance or recognition of income to 2018.

Standard Deduction

For single filers, the standard deduction has increased from $6,350 to $12,000.  For married couples filing jointly, it’s increased from $12,700 to $24,000. The net effect of that change is that fewer taxpayers will itemize their deductions, because many more taxpayers will be better off taking the standard deduction instead.

Suggestion: If you think you may not itemize next year on your personal tax return, consider making this year’s and next year’s contributions to charity by December 31, 2017, to get the itemized deduction benefit now.

Suggestion:  If you have been thinking about donating an old car or other property to charity, consider doing it by December 31, 2017 to get the itemized deduction benefit now.

Personal Exemption

Gone.  Previously, you could claim a $4,050 personal exemption for yourself, your spouse and each of your dependents.  The new law eliminates the tax savings from those personal exemptions.

Property Tax and Sales Tax

Beginning in 2018, the deduction you can claim for property taxes and sales taxes will be limited to a total of $10,000.

Suggestion: Make sure you pay 2017 and prior property taxes by December 31, 2017.  These are the property taxes for which you already have a bill from the county tax assessor-collector.

Suggestion: Consider prepaying your 2018 home property taxes by December 31, 2017, if your county allows you to do so.  These are property taxes for which you do not yet have a bill, so you would have to estimate the correct amount.  We have confirmed that Dallas County allows prepayment of an estimated amount.  The county clerk requests that taxpayers clearly indicate 2018 prepayments on the check’s memo line, along with the property account number.

NOTE on Prepaying 2018 Property Taxes:   The IRS has now come out saying it will disallow deductions for property tax 2018 pre-payments on the theory that the tax has not yet been levied.  Many  advisers are saying that the IRS’s position does not comply with the language of the new law.  The TCJA expressly disallows prepaid income tax (which of course does not apply to Texas, because Texas does not have state income tax), but does not disallow prepaid property tax.  The argument is that if Congress had intended to disallow prepaid property tax, it could have done so with the same few words it used to disallow prepaid state income tax — ergo, Congress did not intend to disallow prepaid property tax.  The short answer is that nobody knows at this time whether prepaying your 2018 property tax will save you money, or will cause you more trouble than it’s worth.

For more information, please consult the IRS advisory opinion.  Most news sources are carrying articles on this issue, including the Dallas Morning News.

Suggestion: If you are contemplating a large purchase that is subject to sales tax (such as a car, RV, boat, aircraft, etc.), consider making that purchase by December 31, 2017, to maximize the deductibility of the sales tax.

Charitable Deductions

For those who itemize, the new law allows taxpayers to deduct contributions to public charities of up to 60% of their income, rather than limiting deductions to 50% of income.

Child Tax Credit

The new law doubles the child care credit to $2,000 per child under 17, and is available at higher income levels.

Mortgage Interest Deduction

Beginning in 2018, you may deduct the interest paid on new home mortgage loans of only $750,000 or less.  If you bought your home before December 15, 2017, you will still be able to deduct the interest on up to $1M of mortgage loan. The new $750,000 limit will apply to the aggregate of loans for one primary residence and one vacation home.

HELOC Interest Deduction

Gone.  Interest paid on a home equity loan is no longer deductible.

Alternative Minimum Tax

The alternative minimum tax (AMT) remains in effect.

Student Loans

If you have student loans, you may continue to deduct up to $2,500 per year in interest.

Medical Expenses

For 2018, you may deduct medical expenses to the extent they exceed 7.5% of your income.  For 2017, that threshold was 10% for most people.  This tax break for medical expenses will expire in 2019, and the threshold will return to the current level.

Suggestion:  If you are planning to have an expensive, uninsured medical procedure, 2018 is a good year financially to do so.

Health Insurance Mandate/Penalty

The tax bill repeals the “individual mandate” to purchase health insurance, effective for the 2019 tax year.  The mandate remains for 2018, so the economic effect of the repeal will not be known for several years.  However, the Congressional Budget Office estimates that, by 2027, 13 million fewer Americans will have health insurance, and that, because fewer healthy people will apply for insurance, health insurance premiums will increase as the pool of applicants consists of sicker people.  The brunt of premium increases will be felt primarily by families of four who make more than $98,000 per year.

Electric Car Credit

Drivers of plug-in electric vehicles can still claim a credit of up to $7,500.  Just as before, the full amount is good only on the first 200,000 electric cars sold by each automaker. GM, Nissan and Tesla are expected to reach that number some time next year.

529 Savings Accounts

If you have been making contributions to a tax-free 529 savings account for the next generations, you may use that money, beginning in 2018, for elementary and secondary school costs, as well as for higher education costs.

Alimony

If you pay alimony pursuant to a divorce that is final after December 31, 2018, the amount will no longer be deductible.

Moving Expenses

Moving expenses for job relocation will no longer be deductible.

Estate Tax for Individuals

The new tax law doubles the amount of money exempt from the gift and estate tax, which in 2017 was $5.49M per person.  Each individual can now give away, during lifetime and/or at death, $11.2M without incurring the estate tax.  Amounts in excess of $11.2M that an individual gives away during lifetime or at death will be taxed at the current rate of 40%.  This increase in the exemption will expire in 8 years, at which time the exemption amounts will return to $5.6M per person.

Income Tax for Businesses

Corporate Tax Reduction

The new law cuts the tax rate for C-Corporations from 25% to 21%, starting in 2018, and eliminates the Alternative Minimum Tax for corporations.

Suggestion: To the extent possible, defer recognition of income to 2018.

Suggestion:  If you are currently an S-Corp or LLC with relatively high revenue, you should seek legal and tax advice very early in 2018 to determine whether it would be more advantageous to you to elect C-Corp taxation status.

Pass-Through Entity Tax Reduction

The new law provides a 20% deduction to owners of certain S-Corporations, LLCs, partnerships, and sole proprietorships.

Suggestion: To the extent possible, defer recognition of income to 2018.

Suggestion:  If you are currently a C-Corp with relatively low revenue, you should seek legal and tax advice very early in 2018 to determine whether it would be more advantageous to you to elect S-Corp taxation status or to convert to an LLC.

Multi-National Company Tax Breaks

The U.S. is switching to a territorial system of taxation, which means companies will not owe federal taxes on income they make offshore. To take advantage of this long-term benefit, companies will be required to pay a one-time tax on their existing overseas profits — 15.5% on cash assets and 8% on non-cash assets.

Sexual Harassment Payments

Beginning in 2018, companies can no longer deduct any settlements, payouts, or attorney’s fees related to sexual harassment claims if the payments are subject to non-disclosure agreements.

Suggestion:  If you are contemplating settlement of such a claim, consider closing the deal by December 31, 2017.

1031 “Like Kind” Exchanges

Nontaxable exchanges of appreciated property for similar property will now be limited to real estate only.  Trades of other types of property will be treated as sales and will trigger capital gains tax.

Suggestion: If you are contemplating a 1031 exchange of art or other personal or business property that has appreciated in value, consider completing that exchange by December 31, 2017 to avoid a capital gains tax in 2018.

Income Tax for Nonprofit Organizations

Standard Deduction Effect on Charitable Donations

For single filers, the standard deduction has increased from $6,350 to $12,000.  For married couples filing jointly, the standard deduction has increased from $12,700 to $24,000. The net effect of that change is that more taxpayers will take the standard deduction rather than itemize their deductions. Because a taxpayer must itemize deductions to be able to deduct charitable contributions, fewer taxpayers will be able to deduct charitable contributions from their taxes.  To the extent that a donor is motivated in whole or in part by the deductibility of his or her contribution, the donor is arguably less likely to give to nonprofit organizations.  Generally speaking, 501(c)(3) organizations may see a decrease in donations by middle-income individuals.

501(c)(3) Deduction AGI Limit Increase

For those donors who do itemize, the new law allows taxpayers to deduct contributions to public charities totaling up to 60% of their income, rather than limiting those deductions to 50% of income.

Highly Paid Executives

The new law imposes a 21% tax on certain nonprofits that pay a salary above $1M to an executive.

Unrelated Business Income (UBI)

Unrelated Business Income, or UBI, refers to certain types of income for which a nonprofit must pay taxes, even though the organization is tax-exempt.  The new law prevents nonprofits from setting off losses in one stream of UBI against gains from another stream of UBI.  To know how the various “streams” of UBI will be defined, nonprofits must wait for the IRS to issue its regulations.  Suffice to say, though, that the IRS will be looking closely at UBI in the coming years.

Suggestion:  Nonprofits should consider an organizational audit in 2018 to ensure that they are accounting for UBI correctly.

Employee Benefits

The value of certain previously nontaxable employee benefits, including parking, transportation, and on-site athletic facilities, will be subject to Unrelated Business Income Tax beginning with the first pay period of 2018.

Donations Tied to Collegiate Season Tickets

Donations to a college or university to obtain the right to buy season tickets to sporting events are no longer deductible.

Private Foundations

The new law does not significantly affect taxation of private foundations.

Luxury Property | SPE | Special Purpose Entity

Luxury Property Special Purpose Entities

Portions of this article were originally printed in Dallas Bar Association Headnotes, December 2017.

 

 

When it comes to luxury property, such as beach houses, lake houses, ski condos, hunting leases, aircraft, watercraft, limousines, and the like, two rules almost always apply:  First, they are expensive to own and operate.  Second, they tend to sit dormant much of the time.  In order to spread out costs, decrease waste, and mitigate damage, it often makes sense for multiple owners to combine resources and share ownership of this type of property.

Whether friends or family, parties wishing to maximize these advantages often hold the property in special purpose entities or “SPE”.  But ownership of luxury property involves legal and practical problems that differ from those of the standard, for-profit world.  The tips below will help practitioners recognize and address the problems.

Entity Choice

LLCs are generally the entity of choice for luxury property SPEs in Texas.  General partnerships lack appropriate liability protection, while limited partnerships are more expensive and complicated.  Although double taxation may not be an issue, corporations nonetheless raise tax concerns, such as increased potential for violating the nonrecognition provisions of IRC §351.  Also, LLCs provide a level of privacy which can be valuable.

Usage Rules

Parties to a luxury property SPE must determine how, when, and by whom the property can be used.  Options include reservation systems, drawing lots, or simply a first come, first served rule.  Similarly, guests, family members, pets, and smoking should be addressed. Parties should also expressly permit or forbid outside rental of the property.

Contributions

Rules for sharing costs and expenses are also very important.  Who will determine what expenses are proper?  How and when will contributions be required?  Should costs be shared pro rata, per capita, or otherwise?  Many usage charges are difficult to track, which leads to infighting.  Requiring users to pay for fuel may be appropriate, but allocating a hangar fee may not.  Also, budgeting for expenses well in advance and providing limitations on increases can provide comfort.

Penalties are another important concern.  Unlike for-profit entities, luxury property SPEs require regular cash contributions for upkeep, taxes, and other expenses, so mechanisms are required to hold owners to their obligations. Thus, interest charges, as well as forfeiture of usage, voting rights, or even the ownership interest itself may be appropriate.

Contributions must be carefully defined.  If Uncle Bob takes his favorite recliner to the ski condo for a few years, is it contributed or can he take it back?  Answers to such questions will depend on the circumstances and may change over time.

Management

Especially where many owners are involved, appointing and empowering capable managers is important.  Expecting family factions to agree on a cable package for the old family homestead is unrealistic.

Managers’ powers should provide flexibility because they may need to make quick decisions.  A company agreement can provide broad direction and allow managers to set specific policies and procedures internally, allowing for simpler, quicker amendments.

Ownership and Voting

Permissible owners of luxury property SPEs should be well defined.  Transfers within this class should be easily made, while transfers outside the class should be difficult, but not impossible.  Similarly, assignees’ rights should be clearly defined, particularly in the context of unintended transfers.  For example, should assignees hold usage rights?  Also, it may be helpful to limit ownership by disallowing fractionization of interests.  For example, transferees receiving less than a whole unit might can be made assignees until the entire unit is held by one person.

Voting rights present other problems.  Small luxury property SPEs will likely function better with a per capita voting whereas larger ones work best where votes are cast pro rata.  Also, the threshold for supermajority voting should typically be lower with a luxury property SPE than with a for-profit enterprise because the entity represents a liability to its owners and they should have a more available exit strategy.

 

To summarize, many of the above considerations either play out differently or simply do not apply in the context of for-profit companies.  Further guidance can be found in the rules applicable to social clubs and fraternal organizations.  Unlike those organizations, however, additional flexibility is required with a luxury property SPE.  If the parties are willing to exercise good planning, show a little patience, and adapt their systems, they will reap great benefits.

 


Christian Kelso | Farrow-GIllespie & Heath LLP | Dallas, TX

Christian S. Kelso, Esq. is a Senior Associate at Farrow-Gillespie & Heath, LLP.  He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law.  He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.