by Jeremy S. Herman, CPA – Tax Partner with Plante Moran
The Tax Cuts and Jobs Act (TCJA), passed just a few days before the close of 2017, is a significant piece of legislation and affects nearly everyone in the senior housing industry—no matter the size, specialty, market or corporate structure.
As with any tax change, what may seem simple on the surface tends to be much more complex upon closer examination. This complexity, while frustrating at times, can also provide a lot of opportunities for planning for senior housing entities.
This series of articles will summarize key areas of the law that could impact senior housing. This third and last installment addresses tax reform impact to individuals and the expansion of the definition of small business in relation to tax accounting methods.
1. Small taxpayer method changes – Method of accounting
Tax accounting method is the method by which income and expenses are reported for taxation purposes. Changing tax accounting methods can be a very valuable tool in year-end tax planning. Some changes can be automatic while others require IRS approval.
Examples include changing between the cash and accrual methods, cash method taxpayers deferring collections of receivables and accelerating payment of expenses, paying bonuses or commissions before year end or changing bonus plans to ensure that year-end accruals are deductible, or prepaying items that would be eligible for accelerated prepaid deductions.
Certain methods of accounting can only be used by “small taxpayers” which is defined by the level of average annual gross receipts over a prior 3-year period. Under tax reform, taxpayers with less than $25 million in average annual gross receipts over the prior three years can now utilize the cash method of accounting. Also, they can be exempted from long-term contract accounting.
No tax discussion would be complete without commentary on the impact to individual taxpayers.
The individual tax brackets have been widened, and the top rate has been reduced from 39.6% to 37%. The “marriage penalty” was substantially reduced, but not eliminated in the 35% and 37% brackets. Like prior law, the TCJA includes phase-outs and catch-up provisions that would result in significantly higher effective tax rates at certain levels of income.
The new tax brackets are shown below:
A summary of the key other changes are as follows:
– Key item for business owners: Net business losses of individuals are only able to offset up to $500,000 of nonbusiness income ($250,000 for single filers). Excess is treated as a net operating loss carryforward, with no expiration
– Eliminated personal exemptions
– Increased standard deduction from $6,500 to $12,000 for a single return, $13,000 to $24,000 for joint return
– $10,000 limitation on state and local tax deductions. This is the same for single and joint returns. This limit includes the combined real estate and state and local personal income or sales taxes paid.
– Mortgage interest deduction limitation changed from $1 million of mortgage debt to $750,000 for new debt incurred after Dec. 15, 2017
– Repeal of home equity interest deduction
– Elimination of miscellaneous itemized deductions
– Elimination of itemized deduction phase-out
– Increase in child tax credit from $1,000 to $2,000 and increase in phase-out thresholds to $200,000 and $400,000 for single and joint returns
– Alternative minimum tax (AMT) has been retained for individuals—but the exemption phase-out has been increased so that many taxpayers will now be able to claim an exemption that they could not under prior law
While the new law has been signed and is in effect, there are many corrections and clarifications expected over the coming months. Companies should work with the rules, as currently written, and consult with their advisors on the best way to take advantage of opportunities that exist and understand what the new tax law means to your organization and personal tax picture.