How Will 2018 Tax Reforms Impact You?
Mar 06, 2018 02:16PM ● Published by Emily Stevenson
President Trump recently signed into law a bill that CNN called “the most sweeping overhaul of the tax system in 30 years.” The Tax Cuts and Jobs Act (TCJA) will have widespread implications for companies, the American economy, and individuals. It’s already influencing many executives’ business decisions!
Like most legislation, TCJA presents both pros and cons. Tax cuts will add $1.5 trillion to the federal deficit over ten years, according to the nonpartisan Congressional Budget Office. This has drawn criticism from some economists, including Princeton University professor and former Federal Reserve chair Alan Blinder, who recently wrote in the Wall Street Journal, “The economy doesn’t need fiscal stimulus. Further, as we look to the future, we see an aging population putting great pressure on government budgets, especially for health care and pensions…So, unlike 2009, this is a particularly bad time to cut taxes—or to do anything else that worsens the government’s long-run fiscal position.”
Proponents, however, say that economic growth caused by the Act will boost tax receipts, offsetting budget shortfalls. The nonpartisan Joint Committee on Taxation estimates that GDP (the total value of goods produced in America) will grow nearly 1 percent, employment will rise .6 percent, and personal consumption will increase .6 percent through 2027.
Although TCJA will impact many facets of the American economy, large businesses will reap the greatest benefits. Credit Suisse reported that reforms could improve U.S. company profits by 8 percent in 2018, and Verizon alone may generate an extra $4 billion this year, according to the Wall Street Journal.
Citing TCJA reforms as their reason, more than 200 businesses have increased their spending in 2018. Dozens of America’s largest companies, including AT&T, FedEx, Home Depot, and Walmart, are dishing out $2 billion in bonuses and salary increases to more than 1 million employees, according to USA Today. Target recently raised its minimum wage to $11 per hour as well.
TCJA lowers corporate tax rates from 35 percent to 21 percent, which should entice corporations to base operations in America rather than other low-tax countries. In fact, many businesses have announced plans to hire additional employees and open new factories, stores, and production facilities in America. JPMorgan Chase plans to open 400 new bank branches employing 3,500 people, increase small business lending by $4 billion, and donate $2 billion to charities.
Our accountant, Frank Thomas, CPA, noted, “The new law focuses on business investment and jobs creation.” When large corporations expand U.S. operations, they feed revenue into smaller businesses that produce supplies, parts, labor, and materials. According to trickle-down economic theory, these actions create jobs, and employees will reinvest into the economy. The Wall Street Journal reported, “Retailers are positioned to benefit from middle-class consumers with their thicker wallets.”
Some experts expect the new tax incentives, business investments, and increased consumer spending to ignite the economy at a rate not seen in two decades. Josh Mitchell of the Wall Street Journal reported, “Several developments are helping the economy perk up. Among them: Synchronized global economic growth and renewed investment spending by U.S. firms, which had spent years hunkering down. Those factors have converged with low employment, tame inflation, low interest rates, and a booming stock market to boost business and household optimism and spending.”
Based on our research, these are some important points to consider about TCJA:
Businesses can immediately write off most business equipment purchased in 2018 under Section 179 (bonus depreciation deductions). Thomas believes that the commercial real estate market will boom under new allowances because buying and renovating buildings is attractive with bonus expensing. (Plus, South Carolina provides additional tax credits for renovating abandoned buildings vacant for five years.) Companies can also write off purchases of business vehicles faster, with increased limits.
Company owners file about 35 million “pass-through” tax returns accounting for about 41 percent of U.S. business net income each year. Under the new law, for owners with taxable incomes below $315,000 (filing jointly) or $157,500 (single), 20 percent of the net income of pass-through businesses—limited liability companies, partnerships, s-corporations, and sole proprietorships—can now be deducted, lowering the income reported on the owner’s personal tax returns. However, for incomes above these levels, additional regulations will reduce or eliminate benefits. While the new deduction applies to income tax, it doesn’t reduce self-employment tax.
New individual withholding tax tables have been released, and the Tax Policy Center indicated that up to 80 percent of households will see less money taken out of their paychecks for federal income taxes. However, if South Carolina’s legislature doesn’t alter the state tax code to reflect the federal government’s changes, 27 percent of S.C. taxpayers will see state tax increases in 2019, according to the S.C. Revenue and Fiscal Affairs Office.
Of course, while the new tax act has many benefits, there are drawbacks (as well as a fair amount of confusion).
Expensing customers and others’ entertainment is no longer allowed.
The Alternative Minimum Tax (AMT) remains in place, although at reduced rates. Going forward, AMT will affect higher-income taxpayers who have a large portion of their income taxed at the 15-20 percent capital gain/dividend rates.
Businesses with incomes exceeding $25 million can’t fully deduct interest expense.
Pass-through business owners with income above the thresholds face limits based on payroll size and capital business investments.
For companies performing services in the fields of health, law, consulting, athletics, financial, and brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners, there are even more restrictions. If the specified service business owner’s taxable income is below the limits mentioned above, the owner can claim the 20 percent deduction. If taxable income is above these thresholds, deductions are phased out over the next $100,000. There doesn’t seem to be concrete reasoning behind which types of businesses are allowed the pass-through deduction and the exclusions. For example, architects and engineers may take the 20 percent deduction, but doctors and lawyers can’t!
At this point, the IRS and U.S. Treasury have clarified only a few clauses out of dozens likely to necessitate formal regulations. Additional guidance may take time, as regulators must pore through thousands of pages in the new law. Audits, litigations, and court rulings will also impact how the law is interpreted.
Due to the confusion surrounding some parts of TCJA, many CPAs are puzzled over how best to guide clients. “Many thought that the new law would simplify the tax code, but it made it even more complex,” Thomas said. He advised, “Consult with your CPA before making any strategic decisions or purchasing plans and cautiously proceed as kinks in the law are worked out.”
The bottom line: The recent tax reform is likely to stimulate the American economy in the coming years, but some economists worry about its long-term effects. The big question is: “Will TCJA generate enough new tax revenue to offset the $1.5 trillion deficit it will create?”
When Ronald Reagan was running for president, he proposed lowering taxes, balancing the budget, and increasing military spending. At the time, we questioned how it would be possible, but his administration and Congress did it with optimism. Let’s hope that this tax reform will produce similar results!
About the Authors: Our corporate and personal purpose is to “create opportunities to improve lives” by sharing our knowledge, research, experiences, successes, and mistakes.
Mike DuBose received his graduate degree from USC, has been in business since 1981, and authored The Art of Building a Great Business. He owns Columbia Conference Center, Research Associates, DuBose Fitness Center, and The Evaluation Group. His nonprofit website, www.mikedubose.com, features a free copy of his book; published business, travel, and personal articles; and health articles written with Dr. Surb Guram, MD.
Blake DuBose graduated from Newberry College Schools of Business and Psychology. He is president of DuBose Web Group (www.duboseweb.com).
Katie Beck serves as Director of Communications for the DuBose Family of Companies. She graduated from the USC School of Journalism and Honors College.