On December 22, 2017, Congress passed, and the President signed, the Tax Cuts and Jobs Act (TCJA). The bill had numerous provisions that lowered tax rates, eliminated deductions and implemented new tax concepts into the tax law. The lowering of rates and elimination of deductions are fairly straightforward to incorporate into our planning, compliance work, and the advice we give to you. For many questions regarding deductions, the answer is now NO, and different tax rates are a one-time change to computer formulas.
However, the IRS and the Treasury Department are still writing regulations regarding the new tax concepts, and we as a profession are interpreting those regulations in real time. In the past, there were a few variables that had to be weighed against each other, and the result was generally an issue of timing and character – do you pay taxes now or later, and do you pay taxes at ordinary or capital gain tax rates. With the creation of the deduction of 20% of Qualified Business Income, the rules have changed significantly, and more importantly, the 20% deduction is a permanent deduction (through 2025) – meaning it is not a tax deferral issue but a tax elimination issue.
The major issues being debated are:
- whether your activity generates Qualified Business Income, and if it does,
- do you qualify for the deduction; and if you do qualify,
- do you get to deduct some or all of your interest expense, and
- are there any other adjustments that you can/should make to qualify for the deduction
In each of those steps, there are lengthy and still uncertain rules and regulations that must be dealt with to come up with the appropriate answer for each taxpayer. In many instances, the best answer will require us to look not only to the current year results but into the future and your plans for the business.
Why are we telling you all of this now?
We want to clarify that completing the compliance activity (the tax return) quickly may not yield the best answer. We may have many more questions regarding your plans for the business, and, if you have partners or shareholders, what their plans and situations are as well. As you can imagine, all of this additional activity may increase the cost of your return as well. We believe the additional cost is worth it to effectively implement, to your best advantage, the very confusing and conflicting law that Congress passed.
For Minnesota filers, this complexity is exacerbated by the fact that Minnesota has not yet changed its tax law to conform to these Federal changes. Numerous adjustments are required to translate your taxable income under the new Federal law into taxable income for Minnesota filing purposes. Many of the deductions that were eliminated under the TCJA still exist for Minnesota, so the simplification that was a goal for the TCJA has not yet been achieved for Minnesota filers.
Below are some links to additional articles detailing some of the new tax rules from the TCJA:
For more information, contact us at 952.893.9320 or learnmore@BoulayGroup.com.
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