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Tax Cuts and Job Act Review

Tax Reform Highlights:
Business Deductions and Credits
• 100% Bonus Depreciation:
The Act allows 100% expensing for qualified property placed in service after Sept. 27, 2017.The
definition of qualified property is expanded to include property that was not used by the taxpayer
before the taxpayer acquired it (currently applied solely to a brand new assets).

• Section 179 Expensing:
Section 179 allows taxpayer to expense certain property in the year placed in service. The Act
increases the amount that a taxpayer may expense under §179 from $510,000 to $1,000,000.
The Act also increases the phase-out threshold from $2,030,000 to $2,500,000. These amounts
are indexed for inflation for tax years beginning after 2018.

The Act expands the definition of qualified real property eligible for Sec.179 to include all
qualified improvement property and certain improvements (roofs, heating, ventilation, and air-
conditioning property, fire protection and alarm systems, and security systems) made to
nonresidential real property.

• Vehicles:
The Act increases the depreciation limitations for passenger automobiles placed in service after
Dec. 31, 2017, 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. (Currently at
3,160; 5,100; 3,050 and 1,875 respectively)
The $25,000 cost limitation for SUVs is also indexed for inflation beginning in 2019.

• Farming:
Provides a 5-year recovery period for machinery or equipment used in a farming business,
effective for property placed in service after Dec. 31, 2017.

Limitation on Business Interest Expense Deduction
The Act limits the deduction for net interest expenses incurred by a business to the sum of
business interest income and 30% of the business’s adjusted taxable income. Businesses with
average annual gross receipts of $25 million or less are exempt from the limit. Disallowed interest
could be carried forward indefinitely.

The Act allows real property trades or business that use the ADS depreciation methods and
farming businesses to elect not to be subject to the business interest deduction limitation.
Electing farming businesses must use ADS to depreciate property with a recovery period of 10
years or more.

Applies to taxable years beginning after Dec. 31, 2017.

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Tax Cuts and Job Act Review

• Deductions for Income Attributable to Domestic Production Activities:
Deduction repealed for all taxpayers for tax years beginning after Dec. 31, 2017.

• Entertainments Expenses Deductions:
No deduction is allowed for entertainment, amusement, or recreation; membership dues for a
club organized for business, pleasure, recreation, or other social purposes; or a facility used in
connection with any of the above.

Deduction for 50% of food and beverage expenses associated with operating a trade or business
generally is retained. Expands the 50% limit to include employer expenses associated with
providing food and beverages to employees through an eating facility meeting de minimis fringe
requirements. The Act also disallows employer deductions for expenses associated with meals
provided for the employer’s convenience on, or near, the employer’s business premises through
an employer-operated facility that meets certain requirements

The Act disallows deductions for expenses associated with providing any qualified transportation
fringe to employees, and except for ensuring employee safety, any expense incurred for
providing transportation (or any payment or reimbursement) for commuting between the
employee’s residence and place of employment.

• NOL Deduction:
The Act limits the NOL deduction to 80% of taxable income and provide that amounts carried to
other years be adjusted to account for the limitation for losses arising in tax years beginning after
Dec. 31, 2017.

The Act eliminates carrybacks (except for farming NOLs, which would be permitted a two-year
carryback) and allows unused NOLs to be carried forward indefinitely.

• Like-Kind Exchanges of Real Property:
Limits the nonrecognition of gain for like-kind exchanges to real property that is not held
primarily for sale. The Act applies to exchanges completed after Dec. 31, 2017.

Reduces the corporate tax rate to a flat 21% for tax years beginning after Dec. 31, 2017. Repeals
the maximum corporate tax rate on net capital gain as obsolete. Does not require a special rate
for personal service corporations.

Repeals the corporate AMT for tax years beginning after Dec. 31, 2017

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Tax Cuts and Job Act Review

Pass-Through Entities
For tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, taxpayers who have domestic
business income from a partnership, S corporation, or sole proprietorship are entitled to
deduction of the lesser of such qualified business income or 20% of taxable income.

Taxpayers with pass-through income from specified service businesses in the fields of health, law,
accounting, actuarial science, performing arts, consulting, athletics, financial services, and
brokerage services are not eligible for the deduction.

The deduction is generally limited to the greater of either: (a) 50% of the W-2 wages paid by the
business, or (b) the sum of 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified
depreciable assets.

Neither “W-2 wage” limit nor the prohibition on specified services businesses applies to a
taxpayer with taxable income not exceeding $157,500 ($315,000 in the case of a joint return).
These limitations are fully phased in for a taxpayer with taxable income in excess of 207,500
($415,000 joint return).

Individual Tax Returns
Lower Individual Tax Rates
The legislation creates lower individual income tax brackets of 10%, 12%, 22%, 24%, 32%, 35%,
and lowers the top rate from 39.6% to 37%, respectively. (The current rates would be restored in
2026, i.e., 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%, respectively).

Alternative Minimum Tax (AMT)
The legislation retains the AMT for individuals but increases the exemption amount and phase-
out thresholds so fewer people will pay it. From 2018 through 2025, a higher AMT exemption will
apply to income, beginning with $109,400 for joint filers and $70,300 for other taxpayers in 2018.

The exemption will phase out at $208,400 for joint filers and $156,300 for other taxpayers.

Increase in the Standard Deduction
Beginning in 2018, the standard deduction increases significantly from $12,700 to $24,000 for
joint filers, from $9,350 to $18,000 for heads of households, and from $6,350 to $12,000 for

Elimination of Personal Exemptions
In exchange for lower tax rates and increase in the standard deduction, personal exemptions
(currently at $4,050 per person) no longer may be claimed beginning in 2018.

Child and Dependent Credits
The child tax credit is increased from $1,000 to $2,000 per child under 17. As much as $1,400 of
the credit will be refundable, thus allowing recipients to benefit even if they do not owe taxes.
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New nonrefundable tax credit of $500 for dependents other than qualifying children was added.
The legislation also expands eligibility for the credit by increasing the phase-out threshold to
$400,000 of adjusted gross income for joint filers (up from $110,000 under current law), with a
threshold for all other filers set at $200,000.

$10,000 Cap on State Income Tax and Property Tax Deduction

The legislation will allow individuals to deduct no more than $10,000 of any combination of the
following taxes - state and local income taxes, property taxes, and sales taxes. The income taxes
cannot be prepaid beyond 2017 tax year. The excess prepayment will be not deductible. Real
estate taxes can be prepaid for both installments.

The $10,000 limitation does not apply to property taxes and sales taxes incurred by trade or
business, including rental real estate.

Limits on Mortgage Interest Deduction
The tax reform act reduces the amount of mortgage indebtedness on which taxpayers may
deduct interest to $750,000 for mortgages incurred after December 15, 2017. The $1 million
limitation remains for older debt. Interest on your principal residence and a second home are

Beginning in 2018, interest on home equity indebtedness no longer is deductible, regardless of
when it was incurred.

Medical Expense Deduction
Individuals may continue to deduct medical expenses in 2018 and 2019 if the expenses exceed
7.5% of adjusted gross income. The threshold returns to 10% of adjusted gross income in 2019.

Elimination of Miscellaneous Itemized Deductions
All miscellaneous itemized deductions that are subject to 2% floor under present law, such as
employee business expenses, tax preparation fees, appraisal fees, investment fees, and safety
deposit box rent, will be eliminated after December 31, 2017.

The above-the-line deduction for certain teacher expenses is increased to $500.

Personal Casualty Losses Deduction
The deduction for personal property losses will be allowed only for losses incurred as a result of
federally-declared disasters.

Moving Expenses Deduction
The deduction for moving expenses is available only for active duty members of the Armed

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Tax Cuts and Job Act Review

Alimony Deduction
The tax legislation repeals the above-the-line deduction for alimony paid for divorces or
separations executed after December 31, 2018. After that date, alimony payments will not be
included in the recipient's income and the payments no longer will be deductible by the payor.

Distributions from College Savings Funds
The qualified education expenses that may be paid out of the college savings funds will include
elementary and secondary school expenses of up to $10,000 per year.

Affordable Care Act Individual Mandate
The Act reduces the individual penalty for not having health insurance coverage to zero beginning
December 31, 2018.

Estates and Trusts
The Act increases the federal estate and gift tax unified credit basic exclusion amount to $10
million effective for decedents dying and gifts made after 2017.

If you have reviewed the information provided and have additional questions or would like more
information, please do not hesitate to call our office.

Godecke Clark
CPA Professionals…Accountable to You
44-875 Deep Canyon Road
Palm Desert, CA 92260
Phone: (760) 346-3861
Fax: (760) 568-9123

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