| A draft tax reform bill was released by Congress on November 2 titled The Tax Cuts & Jobs Act. Key provisions of the draft bill are:
BUSINESS
· Corporate tax rate: the top corporate tax rate would be reduced from 35% to 20% (25% for personal service corporations) beginning in 2018.
· Sole proprietor and pass-through tax rate: the top tax rate for business income of individuals would be reduced from 39.6% to 25%. The 25% tax rate would apply to passive business income and 30% of active business income. The remaining 70% of active business income would be taxed at regular individual tax rates. Personal service businesses would not be eligible for the 25% rate, and instead taxed at regular individual tax rates. These provisions would go into effect for tax years beginning after December 31, 2017.
· Business property expensing: businesses would be able to fully expense qualified business property acquired and placed in service after September 27, 2017 and before January 1, 2023.
· Interest deductions: businesses with average gross receipts greater than $25 million would see their interest deduction limited to 30% of adjusted taxable income for tax years beginning after 2017.
· Net operating losses: net operating loss carryforwards would be limited to offsetting 90% of business taxable income. Net operating loss carrybacks would be eliminated in most cases. Effective for losses arising in tax years beginning after 2017.
· Cash method of accounting: the availability of the cash method of accounting would be expanded to include businesses with average gross receipts of $25 million or less, even if the business has inventories.
· Entertainment expenses: no deduction would be allowed for entertainment, amusement or recreation activities for amounts paid or incurred after 2017.
· Like-kind exchanges: deferral of gain on like-kind exchanges would be limited to exchanges of real property for transfers after 2017.
· Manufacturing deduction: the special deduction for income attributable to domestic production activities would be eliminated after 2017.
· Business credits: several business credits would be eliminated for tax years beginning after 2017.
INDIVIDUALS
· Individual tax rates: the current seven individual income tax brackets would be reduced to four at 12%, 25%, 35% and 39.6% for tax years beginning after December 31, 2017.
· Standard deduction: the standard deduction would be increased to $24,400 for married couples and $12,200 for singles, which are almost double the current amounts. Would apply to tax years beginning after December 31, 2017.
· Personal exemptions: the personal exemption deduction of $4,150 would be eliminated for tax years beginning after December 31, 2017.
· Child tax credit: the child tax credit would increase from $1,000 to $1,600 for tax years beginning after December 31, 2017.
· Mortgage interest deduction: the deduction for mortgage interest would be limited to interest paid on mortgages of $500,000 or less for homes purchased after November 2, 2017. The mortgage interest deduction would be limited to one qualified residence.”
· Property tax deduction: the deduction for state and local property taxes would be limited to $10,000 for tax years beginning after December 31, 2017.
· State and local income tax deduction: the deduction for state and local income taxes would be eliminated for tax years beginning after December 31, 2017.
· Other deductions: various other deductions would be eliminated, including: alimony payments, moving expenses, tax preparation expenses, medical expenses, and student loan interest for tax years beginning after December 31, 2017.
· Alternative minimum tax: the alternative minimum tax would be repealed for tax years beginning after December 31, 2017.
· Adoption credit: the credit for adoption expenses would be repealed for tax years beginning after December 31, 2017.
· Estate tax: the estate tax exemption would double for tax years beginning after December 31, 2017, with full repeal after six years.
We will continue to keep you posted as additional information is available. If you would like more details about these proposed changes and how they may affect you and/or your business, please do not hesitate to contact Hungerford Nichols at (616) 949-3200.
Brett Karhoff, CPA, MST bkarhoff@hungerford.com
Aaron Sal, CPA, MSA asal@hungerford.com
Jon Sytsma, CPA, MST jsytsma@hungerford.com
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