Economy

Tax Cuts and Jobs Act Promises Big Changes for Businesses

posted by Charley Mills - 2.27.18

Many economists believe the Tax Cuts and Jobs Act benefits corporations over individual taxpayers. You may have even heard financial news channels praising the benefits of corporate taxes. The theory is that the lower tax rates will push corporations to invest more in the United States by raising wages, increasing jobs, and expanding operations and capital expenditures, which would unleash unprecedented economic growth.

To begin, The Tax Cuts and Jobs Act, permanently replaced the graduated corporate tax rates that ranged from 15% to 35% with a flat corporate rate of 21%. Furthermore, the tax reform law repealed the 20% corporate alternative minimum tax, which ensured that corporations paid at least some taxes. The repeal allows companies to use loopholes, tax breaks, and write-offs to lower their effective rate below the new 21% flat rate.

With change alone, we’ve seen many corporations pass along their savings to their employees. AT&T announced, shortly after the reform was made law, it would pay a one-time $1,000 bonus to more than 200,000 employees. Banks Fifth Third Bancorp and Wells Fargo both reported raising their minimum hourly pay companywide. Moves like this certainly put more money into the hands of consumers.

The Tax Cuts and Jobs Act, permanently replaced the graduated corporate tax rates that ranged from 15% to 35% with a flat corporate rate of 21%

However, on the other end of the spectrum, we see plenty of corporations claiming they will take a tremendous tax hit because of the repatriation of profits. Under the previous tax laws, American companies owed federal income taxes on their worldwide profits, regardless of where they were generated; however, they could indefinitely defer the taxes on profits earned overseas, as long as those profits stayed overseas. The Tax Cuts and Jobs Act changes that: Companies will have a tax liability between 8% and 15.5% on overseas earnings since 1987. American companies are said to have more than $2.5 trillion in overseas assets. However, the law allows corporations to pay this “repatriation tax” over an eight-year period. That could bring in $200 billion to $300 billion in taxes over the next several years. Going forward, income earned abroad will be subject to federal income taxes of 10.5% or less.

Corporations based in the United States with cash locked up outside our borders should benefit from being on a more even playing field with their international peers headquartered outside the United States, but this doesn’t mean corporations will spend the newly-freed cash on capital projects. Companies have not been starving for the cash needed to buy new businesses, invest in new projects, or launch a new round of research and development. They seem to have been more interested in taking less risk and getting easy returns. Low-interest rates have allowed companies to borrow on the cheap and buy back their own shares, even at what seem to be bloated prices in some cases.

Another feature of the Tax Cuts and Jobs Act is accelerated depreciation. In the past, we’ve seen accelerated depreciation used when the economy is soft to jump-start spending to get out of a recession. This time we are far from a recession, so it will be fun to watch how it plays out. The government has structured depreciation so that a small firm can buy a vehicle, equipment or other asset and write it off 100% in the year of purchase. If there is something a small business has been meaning to upgrade or buy in order to expand, they are more likely to invest their money into their business than to pay more to the government in taxes. Therefore, we believe we’ll see more capital expenditures.

Will this tax law unleash unprecedented economic growth? The key will be how they—both the government and corporations—spend the windfall.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, a financial advisory and wealth management firm that has been delivering comprehensive financial solutions to its individual, corporate, and institutional clients for 30 years. Mr. Lako is a Certified Financial Planner™ professional.

Alternative Minimum Tax - Back To Targeting the Very Rich

posted by Charley Mills - 2.20.18

The alternative minimum tax has been the bane of many middle-income taxpayers for some time. Nearly 50 years ago, the alternative minimum tax (AMT) was designed to impose a minimum tax on high-income taxpayers who were avoiding taxes by claiming legal deductions or other tax benefits—a mechanism that ensured some taxpayers didn’t escape income tax entirely. While Congress has talked about AMT reform, in the past we’ve only seen Congress kick the can down the road by raising the exemption amount every few years.

The Tax Cuts and Jobs Act made changes to medical deductions, state and local taxes, home mortgage interest, miscellaneous itemized deductions, personal exemptions, and standard deductions—some of which may have triggered AMT for the average taxpayer. Furthermore, the tax reform law increased AMT exemption amounts and significantly increased the income threshold at which exemptions phase out.

To start, all taxpayers must calculate their income tax liability the standard way. Then, taxpayers need to add some tax breaks and deductions back to their taxable income to determine AMT income. For example, take a household of a married couple filing jointly with four children. Using 2017 rules, they calculated their tax with an income of $310,000 and deductions of $42,000, which included $18,500 in state taxes, $2,500 in property taxes, $16,000 in mortgage interest, and $5,000 in charitable deductions. As a family of six, they were able to take $24,300 in personal exemptions. However, when they computed their AMT income, personal exemptions are eliminated, and they had to add back $18,500 of state and local taxes paid and $2,500 in property tax.

AMT Info graphic

AMT Infographic via Henssler.com

From AMT income, they subtracted the AMT exemptions based on filing status, and then applied the AMT tax rates to calculate their AMT tax liability. If the AMT tax liability is higher than the standard tax liability, the higher amount must be paid. In our example, AMT increased their overall tax liability by roughly $6,800.

Using 2018 laws, this family only has deductions of $31,000, because state and local taxes are combined with property taxes and are limited to $10,000, while personal exemptions have been eliminated. However, they gain a child tax credit of $8,000. Under the new tax reform law, their standard tax liability calculation is $47,539. For their 2018 AMT calculation, they only must add back the combined state and local taxes and property tax deduction.

In 2018, the AMT exemption amounts have increased to $70,300 for individuals and $109,400 for married filing jointly. These exemptions function similar to a standard deduction, shielding some of your income from tax by reducing your taxable income. AMT exemptions are considerably higher than the standard deductions because of all the deductions and tax breaks that must be added back to their taxable income under AMT rules. The phaseout thresholds were also substantially increased, meaning that the full AMT exemption can be taken by individual taxpayers who earn less than $500,000 or $1,000,000 for married taxpayers filing jointly. These changes result in a 2018 AMT calculation of $38,696—far less than their 2017 AMT calculation of $62,471. However, since they must pay the larger of the two tax calculations, their tax liability for 2018 would be $47,539.

With the larger standard deductions and limited itemized deductions that the Tax Cuts and Jobs Act enacted, fewer households should itemize, making them less likely to be affected by AMT. If you are subject to AMT, you may see your AMT calculations more closely resemble your standard tax liability calculations because of the changes to how your standard tax liability is calculated and the higher exemptions for AMT.
While Congress and President Trump did not repeal the alternative minimum tax for individuals, very few middle-income households should be subject to AMT over the next decade.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, a financial advisory and wealth management firm that has been delivering comprehensive financial solutions to its individual, corporate, and institutional clients for 30 years. Mr. Lako is a Certified Financial Planner™ professional.

EYE ON YOUR MONEY: Not All Business Tax Cuts Are Simple

posted by Charley Mills - 12.29.17

One of the key promises during President Trump’s campaign was to lower taxes for businesses from 35 percent to 15 percent and eliminate the corporate alternative minimum tax. The final version of the tax bill did eliminate the corporate alternative minimum tax, and lowered the tax for corporations to 21 percent in 2018. Furthermore, businesses organized as “pass-throughs” could get taxed at a less than 30 percent rate.

Taxes are never simple – despite the promise to simplify the tax code

Pass-through businesses are your LLCs, partnerships, S corporation, and sole proprietorships, in which the entity is not subject to income tax. Owners are taxed individually on the income, calculating tax on their share of the profits and losses. Because these business owners were at the mercy of their individual tax rates, some business owners could be taxed as much as 39.6 percent, not including the phase out of itemized deductions for high income earners.

In the finalized bill, pass-through businesses receive a 20 percent deduction of their qualified business income. Because taxes are never simple—despite the promise to simplify the tax code—the deduction is actually the lesser of: 20 percent of the taxpayer’s “qualified business income” or the greater of: 50 percent of the W-2 wages with respect to the business, or 25 percent of the W-2 wages with respect to the business plus 2.5 percent of the unadjusted basis of all qualified property.

OK, you want this in English. Qualified business income is income less ordinary deductions that you earn from a pass-through business, such as an LLC, sole-proprietorship, S corporation, or partnership. This does not include wages you earn as an employee. Let’s say you have an LLC (not a “specified service” trade or business), and your share of the qualified business income is $500,000. Multiply that by 20 percent and you get a deduction of $100,000. Woo hoo! Not so fast. There are limitations on the calculation that were added to prevent abuse of the rules.
[the_ad id=”31779″]

How does this work? Let’s look at the example of your LLC of which you only own 40 percent. The company produced $1.25 million in ordinary income. The company paid W-2 wages of $455,000 and holds $200,000 in property. Your allocation of the wages is $182,000 and 50 percent of that is $91,000. One more calculation: 25 percent of the W-2 wages with respect to the business plus 2.5 percent of the unadjusted basis of all qualified property—in our example, this comes to $47,500 ($45,500 + $2,000). You’ve got two numbers: $91,000 and $47,500. The greater of the two is $91,000. This is your income limitation. So, your deduction on your $500,000 qualified business income is now $91,000 versus the simple 20 percent. Mindboggling, isn’t it? And this example was highly simplified for your convenience.

Now, not every LLC is making $1.25 million. Lots of small businesses make around $125,000 a year. There is an exception for you! If your taxable income is less than $157,500 or $315,000 for married filing jointly, you should be able to ignore the W-2 income limitations.

To make things more complicated if you are part of a “specified service” trade or business you will be faced with a phase out.

Wait, what? Yes, “Any trade or business involving the performance of services in the fields of health, law, engineering, architecture, 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.” Will be deemed to be a “specified Service”.

This means if your income is above $207,500 for individuals and $415,000 for joint filers you will not be eligible for the deduction. Welcome to simpler taxes.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, a financial advisory and wealth management firm that has been delivering comprehensive financial solutions to its individual, corporate, and institutional clients for 30 years. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.

What you Think

+
Thank you for visiting Hannity.com. You are about to leave
Hannity.com and proceed to a site owned and operated by a third party.
Hannity.com has no control over the content of this third-party site.
Click OK to proceed.
OK
X
You may if you would no longer like to receive a newsletter.
You have been successfully unsubscribed!
Please see our Terms of Use and Privacy Notice .
If you have any questions or concerns please contact us.