On December 22, 2017, the New Tax Reform, also known as the Tax Cuts and Jobs Act (P.L. 115-97) was signed into law and we at LSL are here to help. You may be wondering, “we work for a municipality and don’t pay taxes, how can this affect us?” With the new changes, there are new opportunities and challenges that will affect your facility. We want to help you plan for these changes before it is too late and the facility missed an opportunity or didn’t adapt to the changes to your facility.
There are numerous changes to the tax code that will affect everyone, but we wanted to highlight some key changes that affect your facility.
Tax Rate Changes: Most taxpayers in most tax brackets will see their rates reduced. The maximum individual rate is reduced to 37% (from 39.6% in 2017)
Standard deduction essentially “doubled” from 2017: Standard deduction is increased to $12,000 for those filing Single, $18,000 for Head of Household, and $24,000 for Married Filing Joint. However, there are no more personal exemption deductions allowed.
Increased Child Tax Credit and New Dependent Care Credit: The credit is increased for each child to $2,000 (up to $1,400 of which is refundable for each child) and each non-child dependent can now receive a new credit of $500.
Additionally, the phase-out thresholds for these credits are drastically increased. Married taxpayers filing a joint return can claim the full credits if their adjusted gross income is $400,000 or less ($200,000 for all others). The credits are fully phased out for married taxpayers filing a joint return when their adjusted gross income reaches $440,000 ($240,000 for all other filers). This means that many more taxpayers will be able to claim these credits in 2018 and beyond.
Some New Benefits for Individuals:
- The medical expense AGI threshold will temporarily drop back down to 7.5% of AGI for 2017 and 2018
- AMT threshold is increased, so fewer middle-income taxpayers will be subject to AMT
- Estate tax exclusion has doubled to $11.2 million (and will be adjusted for inflation)
- Preferred capital gains and qualified dividend rates remained unchanged from the previous law
Disappearing Deductions: Beginning with the 2018 tax year, you will no longer be able to deduct the following:
- State Income tax and property taxes will be capped at $10,000
- Moving Expenses (with the exception of certain military)
- Employee Business expenses (previously exceeding 2% of adjusted gross income) such as mileage, travel, entertainment, home office expenses, union dues, tax preparation fees, and investments fees are no longer deductible
- If you purchased a new home and acquired a loan on or after December 15, 2017, interest beyond interest on $750,000 of acquisition debt is not deductible. If you acquired the loan on or before December 14, 2017, are able to deduct interest on mortgage debt up to $1 Million.
- Mortgage interest paid on equity debt – this was previously allowed up to $100,000 and now it is no longer deductible for any taxpayers.
Small business benefits for flow-through and rentals: Beginning in 2018, there will be up to a 20% deduction from net business income for a sole proprietorship, LLC (excluding those taxed as a C corporation), partnership, S corporation, and rental activity.
What does this all mean for your facility? Generally speaking, individual taxpayers will have more disposable income meaning they will have more to spend on events. This should help boost the sales for food and beverage, ticket sales, parking and other ancillary income. This is good for events like comic con, sporting events, expos, etc. You may want to bring in different options for F&B and increase (slightly) parking fees and ticket sales.
One thing to be aware of are events put on by not-for-profit companies that rely on individual donations. Although the charitable contribution deduction did not go away, the standard deduction doubled. This means that for taxpayers that itemized their deductions in 2017 may be taking a standard deduction instead in 2018. Charitable contributions are itemized deductions so if that is the case it may discourage some people from donating to those not-for-profits as they won’t get that tax break for the donation. This could decrease events put on from not-for-profits, or those companies may want to get a lower rate than normal from your facility.
“C” Corporate Tax Rate. One of the more significant new law provisions cuts the corporate tax rate to a flat 21%. Before the new law, rates were graduated, starting at 15% for taxable income up to $50,000, with rates at 25% for income between 50,001 and $75,000, 34% for income between $75,001 and $10 million, and 35% for income above $10 million.
“C” Corporate Alternative Minimum Tax. The corporate alternative minimum tax (AMT) has been repealed by the new law.
“Qualified Business Income” deduction (Section 199A deduction). Beginning in 2018, there will be up to a 20% deduction from net business income for a sole proprietorship, LLC (excluding those taxed as a C corporation), partnership, S corporation, and rental activity.
100% Bonus Depreciation. Previously, an additional first-year bonus depreciation was allowed equal to 50% of the unadjusted basis of new qualified property. Effective 9/27/17, a 100% first-year bonus depreciation deduction for the adjusted basis is allowed for new or used qualified property acquired and placed into service after 9/27/17.
Section 179 expensing election. The new law increases the maximum amount that may be expensed under Code Sec. 179 to $1 million. If more than $2.5 million of property is placed in service during the year, the $1 million limitations is reduced by the excess over $2.5 million. Both the $1 million and the $2.5 million amounts are indexed for inflation after 2018. The expense election has also been expanded to cover (1) certain depreciable tangible personal property used mostly to furnish lodging or in connection with furnishing lodging, and (2) the following improvements to nonresidential real property made after it was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; security systems; and any other building improvements that aren’t elevators or escalators, don’t enlarge the building, and aren’t attributable to internal structural framework.
Depreciation of qualified improvement property. The new law provides that qualified improvement property is depreciable using a 15-year recovery period and the straight-line method. Qualified improvement property is an improvement to an interior portion of a building that is nonresidential real property placed in service after the building was placed in service. It does not include expenses related to the enlargement of the building, any elevator or escalator, or the internal structural framework. There are no longer separate requirements for leasehold improvement property or restaurant property.
Luxury auto depreciation limits. Under the new law, for a passenger automobile for which bonus depreciation (see above) is not claimed, the maximum depreciation allowance is increased to $10,000 for the year it’s placed in service, $16,000 for the second year, $9,000 for the third year, and $5,760 for the fourth and later years in the recovery period. These amounts are indexed for inflation after 2018. For passenger autos eligible for bonus first-year depreciation, the maximum additional first-year depreciation allowance remains at $8,000 as under pre-Act law.
Domestic Production Activity Deduction (DPAD). This deduction, also referred to as the domestic manufacturing deduction, was a tax break for businesses that perform domestic manufacturing and certain other production activities. Under the TCJA, the DPAD deduction is no longer available starting with the 2018 tax year.
Business Entertainment not deductible. The cost to “entertain” clients for business purposes such as season tickets to sports events or golfing with clients was 50% deductible. Under the TCJA, entertainment will no longer be deductible.
Like-kind exchange treatment limited. Under the new law, the rule allowing the deferral of gain on like-kind exchanges of property held for productive use in a taxpayer’s trade or business or for investment purposes is limited to cover only like-kind exchanges of real property not held primarily for sale. Under a transition rule, the pre-TCJA law applies to exchanges of personal property if the taxpayer has either disposed of the property given up or obtained the replacement property before 2018.
Business Interest Expense. Under the new law, every business, regardless of its form, is limited to a deduction for business interest equal to 30% of its adjusted taxable income. For pass-through entities such as partnerships and S corporations, the determination is made at the entity, i.e., partnership or S corporation, level. Adjusted taxable income is computed without regard to the repealed domestic production activities deduction and, for tax years beginning after 2017 and before 2022, without regard to deductions for depreciation, amortization, or depletion. Any business interest disallowed under this rule is carried into the following year, and, generally, may be carried forward indefinitely. The limitation does not apply to taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the three-year period ending with the prior tax year. It also does not apply to Flooring Interest incurred by Auto Dealerships. Real property trades or businesses can elect to have the rule not apply if they elect to use the alternative depreciation system for real property used in their trade or business. Certain additional rules apply to partnerships.
New Fringe Benefit Rules. The new law eliminates the 50% deduction for business-related entertainment expenses. The pre-Act 50% limit on deductible business meals is expanded to cover meals provided via an in-house cafeteria or otherwise on the employer’s premises. Additionally, the deduction for transportation fringe benefits (e.g., parking and mass transit) is denied to employers, but the exclusion from income for such benefits for employees continues. However, bicycle commuting reimbursements are deductible by the employer but not excludable by the employee. Last, no deduction is allowed for transportation expenses that are the equivalent of commuting for employees except as provided for the employee’s safety.
Reimbursable plans vs allowance plans. Employees who had unreimbursed employee expenses would previously file Form 2106 and be able to write off their unreimbursed expenses on their individual return subject to a 2% floor of their adjusted gross income. Under the new law, these unreimbursed employee expenses will no longer be deductible. Therefore, we encourage you to consider a reimbursable plan for your employees’ out of pocket expenses.
What does this all mean for your facility? There is some good and some very bad in this for. The good is that generally speaking, companies will have to pay less in taxes and have more to spend elsewhere. This means that there is an opportunity for your facility to have more Company meetings and different company events may have additional purchases.
Now on to the bad, entertainment used to be 50% deductible and is now non-deductible. This could have a huge impact on your operations. If your facility is an arena or stadium and relies on a lot of income from company suites some of that may be going away. Companies now must determine whether to provide that without being able to deduct it or to not purchase those suites at all. This also relates to company parties at convention centers. There is a chance that there would be not as many Company parties than before. Your facility needs to be very proactive with this, possibly sending out polls and other communication to see if your repeat customers plan on changing their activities. This needs to be identified in the budget process and the budget might need to be adjusted based on this.
Our aim is to provide you peace of mind as it relates to you and your facility. Because everyone’s situation is unique, we encourage you to reach out so we can help you understand how this new tax legislation could potentially affect you. If you believe you will be affected by this tax law, please contact Adam Odom at 714.672.0022.
After graduating with an accounting degree in 2006, Adam was immediately hired as a staff auditor. He joined LSL in 2013 as an audit manager to oversee a variety of audit engagements and to train staff. Among private companies, he has particular experience with auto dealerships, manufacturing and construction. In addition, he has experience working with entertainment venues including convention centers, stadiums, arenas and theaters. He performs 401(k) audits for larger companies as well as reviews, compilations and audits of financial statements. He will also consult on best practices and controls for specific areas of a client’s business or organization.
You can reach Adam at 714-672-0022.
Read Adam’s full bio.