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The "Big Winners" of The New Act

The New Act

The “Big Winners” of The New Act

The “Big Winners.”

We are one month away from the end of the first year under The Tax Cuts and Jobs Act of 2017 (the “New Act”). In prior articles we discussed that the tax rate for C-Corporations was reduced from 35% to 21% clearly making all 1.7 million of the C-Corporations strong contenders for the “Big Winners” First Place Award 1. We also discussed the Impact on the 141.2 million Individual Taxpayers whose tax rate was reduced from 39.6% to 37% 2. Individuals also saw their state and local tax deduction limited to $10,000.

In this Holiday Edition we discuss how the New Act treats “pass-through” entities such as Sub S Corporations, Limited Liability Companies, Partnerships and Sole Proprietorships 3. Then we will conclude by announcing the “Big Winners” under the New Act.

The New Act was advertised as legislation intended to provide tax code “Simplification” and “Middle-Class Relief”.

The New Act changes the tax structure for “pass-through” entitles by providing a new deduction of up to 20% of “Qualified Business Income” or the “operating profits” of a Trade or Business. New Code Section 199A contains all the complicated rules governing this deduction including income limits for the phasing out of the deduction for certain Specified Service Businesses including most professional service providers. This reduces the effective tax rate for “pass-through” entities from 39.6% to 29.6%.

THE FOLLOWING IS A SUMMARY OF THE OVERALL CHANGES:

Taxpayer

Old Tax Rates

New Tax Rates

Number of Taxpayers/Entities

Individuals

39.6%

37%

141.2M

S-Corps

39.6%

29.6%

4.2M

C-Corps

35%

21%

1.7M

Pass-Through Entities

39.6%

29.6%

3.3M

Sole Proprietorship

39.6%

29.6%

24.0M

Lost Revenue — Originally, the Cost of these Tax Cuts was estimated at $1.4 Trillion based on a 20% corporate rate. The tax rate was raised to 21% to make sure the Cost does not exceed $1.4 Trillion in lost tax revenue.


Who are the “Big Winners” under The Tax Cuts and Jobs Act of 2017?

First Place

C-Corporations

A 14-point tax rate cut and can re-invest at the lower 21% tax rate which over the long-term is extremely valuable.


Second Place

Individuals who own a profitable Trade or Business.

Special Recognition Award – Singled out for special recognition are architects, engineers and real estate professionals because under Section 199A they have no limits on their business income and no phase-out of their 20% deduction like other professions.


Third Place

Individuals that are employees of the above.


FINAL TAX TIP – See Footnote Below 6

Questions or Comments? If you have any year-end tax planning questions or concerns please feel free to contact us at (360) 876-6425.

FOOTNOTES

  1. C-Corporations make up the bulk of the corporate wealth in this country. The New Act carries out what became apparent to many lawmakers during the early 2000’s that corporate tax rates were too high. The New Act brings back a pre-1981 tax structure which was the last time that corporate rates were significantly lower than individual rates. The New Act has been referred to as a “hybrid” that combines new and old tax rate models. The theory for privately held C-Corporations to get the lowest tax rate is to create parity between double-taxed entities with single-taxed entities recognizing that owners of privately held C-Corporations are taxed twice, once at the corporate level and again at the individual level.
  2. Individuals were rewarded with a double standard deduction, but they lost their individual exemptions so the two offset each other for no “net gain” for individuals, but families with dependent children had their child tax credit doubled from $1k to $2k per child.
  3. What are Pass Through Entities? These are called “pass-through” entities because the income generated by these entities for tax purposes “passes through” to the individual owners and taxed at individual rates.
  4. Determined as follows- 37% individual rates times 80% (1-.20) = 29.6%).
  5. Other professionals are limited to $157,500 ($315,000 for married couples filing jointly) of annual income before the phase out of the deduction starts.
  6. ONLY THOSE THAT THIS APPLIES TO – GET YOUR DIVORCE FINALIZED IN 2018! For divorce settlements entered into after 12/31/18 alimony will no longer be deductible and no longer included as income to the recipient.