HOW NEW TAX LAWS COULD RADICALLY TRANSFORM YOUR BOTTOM LINE
BY WALTER DASKOWSKI
Some of the most controversial changes in this year’s Tax Cuts and Jobs Act concern deductions of state and local income taxes, the tax treatment of businesses, and the deducibility of meals and entertainment.
The state and local tax (SALT) deduction permits taxpayers who itemize to
deduct certain taxes paid to state and local governments from their gross
income for federal tax liability purposes. Taxpayers may deduct property taxes, plus either their state income or sales taxes, but not both. Under the newly implemented law, the combined deduction is now capped at $10,000 per year. The significantly higher standard deduction ($12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly) is also likely to reduce the number of lers who itemize, from 30 percent to about 10 percent. According to the U.S. Government, six states (California, New York, New Jersey, Illinois, Texas, and Pennsylvania) have claimed more than half the value of the deduction in the past.
Small Businesses and Pass-Through Entities
Under the tax reform, business income that passes through to an individual from a pass-through entity and income attributable to a sole proprietorship will be taxed at individual tax rates, less a deduction of up to 20%. This sounds straightforward, but the deduction is subject to limits and restrictions. There are two main hurdles for claiming the full 20%: the deduction may be reduced or even eliminated under a test for “specified service businesses” and a “wage and capital” limit. All income from real estate is considered quali ed, and therefore, the 20% deduction applies.
Specified service businesses include virtually every occupation that provides a personal service other than engineering and architecture. If your taxable income exceeds a threshold of $157,500 for single lers and $315,000 for joint filers, the deduction is reduced pro-rata under the “phase-in rule.” The phase-in is complete when income reaches $207,500 for single filers and $415,000 for joint lers. Above these upper thresholds, you get no deduction.
The wage and capital limit deduction is limited to the greater of (a) 50%
of W-2 wages for your business or (b) the sum of 25% of W-2 wages and
2.5% of the unadjusted basis of all qualified business property (i.e.
depreciable property available for use in your business). is limit is phased in pro-rata based on the same income thresholds as the ones stated previously for personal service businesses. Once you exceed the upper threshold, the phase-in of the limit is complete.
Meals and Entertainment Deductions
Business-related entertainment expenses, such as meals and tickets to sporting or other events, used to be 50% deductible. Under the Tax Cuts and
Jobs Act, meals remain at 50% deductible but all business-related entertainment is nondeductible, a significant change. This pivot to non-deductibility for sporting events will most likely cause some friction between organizations like the National Football League and the Trump administration. Working meals, during which an employer provides on-premises food and beverage for its employees consumed while the employees are working, used to be 100% deductible. The new tax law limits this deduction to 50%.
As in the past, each filer is impacted differently by tax law. It is important to contact your CPA now to ask he or she how the tax reform will affect your 2018 tax filings
Walter Daszkowski, CPA, PFS
Daszkowski, Tompkins, Weg & Carbonella CPA, P.C.
1303 Clove Road, Staten Island
T: 718.981.9600 Option 1 / F: 718.981.9601
Additional Offi ce Locations:
278 Route 34, Suite 1 & 2, Matawan, NJ