Tax reform: What you need to know
Money Matters
By Jason P. Wainscott, JD, March 1, 2018
Every dermatologist needs to know 2017 saw widespread changes to the federal tax code. There are many cuts and additional exemptions — for individuals and corporations— but it’s important to note not all are permanent.
Whether you are an employee, or own a practice, or have retired, you need to be aware of the recent changes so you can actively plan for 2018. While the changes have been the subject of extensive media coverage, it can be difficult to parse through commentary to get the facts. The following is a quick summary of a few meaningful provisions of the Tax Cuts and Jobs Act of 2017.
Personal income taxes
Most notably, the taxable income levels for the brackets for married taxpayers filing jointly are now:
The personal income tax rates are currently set to expire Dec. 31, 2025, if Congress does not extend them. These rates are separate from the 3.8% Medicare tax that applies to higher income taxpayers on earned income in excess of $250,000 when considering both the employer and the employee portion. They are also separate from the Net Investment Income tax imposed under the Affordable Care Act on unearned income such as rents, royalties, investment income and capital gains of higher income taxpayers. The Affordable Care Act penalty for the individual mandate was reduced to $0.00 (starting in 2019).
The estate tax was not repealed. Instead, the Act increased the exemption to $11 million per person (adjusted for inflation) beginning in 2018 (and sunsets after 2025). The exemption applies to estates of persons dying after Dec. 31, 2017.
The standard deduction increased to $24,000 for married taxpayers filing jointly and $12,000 for single filers. The individual Alternative Minimum Tax was retained with exemptions for incomes up to $500,000 for single filers and $1 million for joint filers (these exemptions expire on Dec. 31, 2025). State and local income, sales, and property tax deductions are now capped at $10,000 for personal filers. The Child Tax Credit has increased from $1,000 to $2,000 ($1,400 of that credit is refundable). No change was made to holding periods with respect to other capital gains.
Regarding mortgage interest: for indebtedness incurred (and in some cases refinanced) after Nov. 2, 2017, the Act limits the amount of mortgage indebtedness to $750,000 (down from $1 million) for the period from Jan. 1, 2018, through Dec. 31, 2025. In addition, interest on home equity indebtedness will no longer be deductible.
Corporate taxes
Many of the most significant changes came on the corporate side. For dermatologists who own their own practices, which are taxed as C corporations, the corporate income tax rate was lowered to 21% (from 35%) with a 2018 effective date, and the corporate Alternative Minimum Tax was repealed. Therefore if your practice was previously taxed as a personal service corporation at a flat rate of 35%, the new 21% rate means an effective 40% rate decrease for you! Of course, compensation you receive from the practice will still be taxed at your individual rates and profits distributed to you from the practice will be subject to tax at qualified dividend rates which did not change.
For pass-through entities, there is a 20% deduction for qualified business income; the deduction is generally limited to the greater of 50% of W2 wages or 25% of W2 wages plus 2.5% of the cost of tangible depreciable property. Note, qualified business income does not include income from certain “specified services” businesses (e.g., lawyers, doctors, actors, athletes, etc.). Dermatologists will only see the benefit of this deduction if their taxable income is below $157,500 for single taxpayers and $315,000 for married taxpayers. If your dermatology practice is taxed as an S corporation, a partnership, or a sole proprietorship, you are a pass-through entity and fall under these rules. Even if your taxable income allows you to take the qualified business income deduction, it will not be applicable to guaranteed payments from your partnership or to W2 wages received from your S corporation.
Regarding interest deductibility — in general, no deduction is allowed for interest expense of a business to the extent it exceeds 30% of the business’s adjusted taxable income plus floor plan financing interest. A widely reported prior provision with respect to a further limitation on worldwide interest was not included in the final bill.
The Act includes a significant tightening of the limits on the deduction for meals and entertainment. The 50% deduction continues to apply to business-related food and drink expenses. However, entertainment expenses and membership dues related to entertainment are no longer deductible. Fringe benefits for employees related to transportation, on-premise athletic facilities, and other conveniences are no longer permitted as business deductions unless they are included as income for the employee receiving the benefit.
As it relates to expensing — in general immediate expensing of 100% for qualified property placed in service after Sept. 28, 2017 (new and used tangible personal property) through 2022, phasing down by 20% each year through 2026. You can now amortize research and experimental expenditures.
Expenditures paid or incurred after Dec. 31, 2021, must be capitalized and amortized over a five-year period.
What now?
We tried to touch on the themes that could affect you and/or your practice, but we could not fit in everything. What does this all mean? How will it affect you, your family, and/or your business? It’s impossible to discern from a quick article. Our hope is you will see the extent of the changes and reach out to your tax preparer to start planning now. If you usually procrastinate and wait until the last minute to prepare — you could be unpleasantly surprised. Start thinking about it now.
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
