But how – and how much – is very much a work in progress and it’s important that you monitor what happens next
Finally, after more than 30 years, true tax reform has become law. Most small and midsize businesses (SMBs) in Hawaii will save on federal taxes, but how that happens and how much you save will depend primarily on your unique situation and how your tax preparer completes your tax return.
Here are some highlights effective in 2018 for both business and personal taxes since many SMB owners file Schedule C’s on their personal tax returns:
- Tax rates through 2025 are being reduced.
- Some flow-through entities like subchapter S corporations, partnerships and LLCs will see a 20 percent deduction for “qualified business income.” CPA firms and attorneys are excluded from this break.
- Corporations will get a flat 21 percent rate, down from 35 percent.
- The corporate alternative minimum tax is gone. Personal AMT remains but has a higher exemption, which means fewer people will be hurt by it.
- The cash basis accounting method is now available for SMBs with revenues up to $25 million, a big increase from the previous ceiling of $5 million.
- Depreciation amounts for luxury automobiles have increased.
- The standard deduction essentially doubles to $24,000 for married couples filing joint returns.
- The interest deduction is now capped at mortgage debt up to $750,000 (it was $1 million). No deduction is now allowed for home equity loans, which many SMBs use to fund their businesses.
- There is a $10,000 cap on deducting state income and real estate taxes from your federal income taxes. Many taxpayers in Hawaii pay more than $10,000 a year in state income and real estate taxes, and so will suffer from this cap.
- The individual mandate that requires you to pay a hefty penalty if you don’t have medical insurance has been eliminated.
- One interesting surprise is that alimony is no longer deductible to the payer nor taxable to the receiver.
How does this impact you? The answer remains uncertain not only because everyone’s tax and business circumstances are unique, but also because the signing of the Tax Cuts and Jobs Act is only the end of the beginning. There is much work to do.
Congress and the IRS need to figure out how to implement all the various changes. Technical corrections are needed to correct unintended errors in the legislation. IRS and tax software and protocols need to be updated and revised. Staff need to be trained. New tax forms need to be written with appropriate instructions. There will be some twists and turns along the way to full implementation, which is not unusual with such a massive reform of tax rules and regulations.
The Hawaii system also needs to change because many Hawaii tax provisions mirror federal rules. Change the federal rules and you need to change the state system. That will be a very interesting process. Our Legislature tends to move slowly when syncing our rules with federal rules.
Bottom line: Educate yourself on how the details of tax reform progress during 2018. Focus on the aspects of tax reform that will impact you and your SMB. Stay in contact with your tax preparer, ask them to keep you informed and bounce ideas off them during the year. These efforts could bring huge tax savings and let you keep more of what you have worked so hard to earn. Remember, what matters is not how much you make, but how much you keep.