This should help with year-end planning
By Paul Impellicceiri
A.F. McGervey & Co., LLC
Following a year fraught with dramatic changes to the tax laws, 2019 appears to be a year of clarification and implementation. Congress has issued additional guidance regarding some of these laws, and in most cases has not made any significant changes. This should help with year-end tax planning for both businesses and individuals.
Major provisions recently passed that affect businesses:
- The tax rate for C-corporations was reduced to a flat 21 percent. As a result, many business taxpayers have continued to re-evaluate their entity structure, as well as their compensation structure, to determine if any changes are necessary.
- To even the playing field for pass-through entities, Congress enacted a law allowing for a 20 percent Qualified Business Income deduction. Those entities that meet the requirements of the law have the opportunity to pass-through a deduction that reduces the taxable income to its owners by 20 percent. This provision applies to S-corporations, partnerships, and sole proprietorships. Additional guidance has been provided further identifying the businesses and activities eligible for this deduction, as well as establishing certain safe harbors that can be used by taxpayers.
- 100 percent bonus depreciation was extended for tax years through 2022, at which time it will be phased out over several years. In addition, bonus depreciation was expanded to include some used equipment purchases.
- The Section 179 expensing limit was increased to $1 million, and the phase-out limit was increased to $2.5 million for 2019. These limits will continue to be indexed for inflation.
- The new law eliminated the deduction for certain entertainment and related expenses. This provision has added some additional record keeping requirements, as certain expenses, such as business meetings and employee functions, may still be eligible for the 50 percent deduction, and must be accounted for separately.
Major provisions affecting individual taxpayers:
- The Individual tax rates were reduced across the board, including a reduction in the highest tax rate from 39.6 percent to 37 percent.
- The standard deduction for single and married individuals was increased significantly in 2018, which appears to have simplified tax reporting for many taxpayers who no longer need to track their itemized deductions. For others who are close to the limit, the timing of their deductions has become important. In particular, this applies to charitable contributions. Donor advised funds have become a vehicle for many taxpayers to group their charitable contributions in a specific year, which may enable them to take a tax deduction.
- Personal exemptions and Miscellaneous itemized deductions have been eliminated.
- State and local income taxes, real estate taxes and other taxes are limited to $10,000 in total.
- The child tax credit has been increased to $2,000 per child under 17.
- The alternative minimum tax exemption has been increased. In addition, the income limitation before the exemption phases out has been increased significantly. This has reduced the number of taxpayers affected by the alternative minimum tax, but is still a potential factor for planning purposes.
- The mortgage interest deduction has been limited on new mortgages which exceed $750,000. As part of this provision, the deduction for home equity debt, not used to purchase or improve a residence, has been eliminated.
After a year of implementing these tax code changes, taxpayers and tax preparers are becoming more comfortable with their understanding of the law. The additional clarifications and guidance, issued during 2019, should help with the tax preparation and planning processes.
Paul Impellicceiri is a partner at Pittsburgh-based accounting/auditing firm, A. F. McGervey & Company, LLC, and can be reached for comment at email@example.com or (412) 653-6101.