At first glance the recently passed Tax Cuts and Jobs Act seems to hit Long Island and all high tax areas pretty hard for a few reasons:
1. Many businesses on Long Island are pass-through entities in the service sector which do not qualify for the reduced corporate rate or the additional pass-through deductions. Pass through entities, with the exception of service industries, are allowed a deduction (subject to limitations) which has the effect of taxing their income at a 29% rate. Specified service or business includes any business involving the performance of services in the field of health, law, consulting, financial services, brokerage services or any trade or business where the principal asset of such trade or business is the reputation or skill of its owners and employees. Engineers and architects are specifically excluded. The qualification as service or non-service is sure to become an audit and litigation target.
2. The $10,000 deduction limit for state and local taxes will significantly affect the high income and high tax areas. Some of this will be mitigated by the changes to the alternative minimum tax and increased standard deduction amounts.
You can still pay your 2018 property taxes prior to year-end for a current deduction but not your income taxes.
Some of the key provisions effecting individuals and entities are as follows:
1. In 2018, there will be a flat corporate tax rate of 21%.
2. There will be a limitation to 30% of adjusted taxable income for the deductibility of interest expenses with the exceptions for certain small businesses that maintain less than $25 million in gross receipts.
3. The repeal of the corporate alternative minimum tax.
4. For business property placed in service after September 27, 2017, a provision has been temporarily put in place for a full 100% expensing of new or newly-acquired used property.
5. Section 179 has increased to expensing a maximum of $1 million. Note: They are allowing increased 179 expenses and bonus but disallowing some of the interest deduction that would almost certainly be needed to finance the purchase.
6. There is a carried interest provision which requires assets to be held for a minimum of three years to receive capital gain treatment.
7. Like kind exchanges will be limited to exchanges of real property.
8. NOL carryback has been eliminated and the NOL deduction is limited to 80% of taxable income.
9. There are provisions for treating gains or losses from certain intellectual property as ordinary rather than capital.
1. The marginal rate tops at 37%.
2. The standard deduction has increased to $12,000 for single filers and $24,400 for filers who are married filing jointly.
3. The repeal of deduction for personal exemptions and deduction for miscellaneous itemized deductions.
4. There is a 20% deduction on certain pass-through business income, this excludes service industries.
5. Limitations on mortgage interest deduction to interest on $750k of acquisition indebtedness and deduction for state and local taxes not incurred in a trade or business to $10,000. There are also changes to the charitable contribution limits.
6. The retention of the medical expense deduction, along with a 7.5% floor.
7. The above-the-line deduction for alimony payments made pursuant to agreements entered into after 2018 is eliminated.
8. The use of Section 529 accounts for primary and secondary education.
As with all changes there will be winners and losers. It will take some time to become evident on who they are and to what degree they will or will not benefit from this.
Should you have any questions or concerns, please contact Tim McHale, Tax Partner at firstname.lastname@example.org.