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Examining the impact of the Tax Cuts and Jobs Act

On Dec. 22, President Trump signed into law the Tax Cuts and Jobs Act. The bill speedily made its way through both the House and Senate with limited amendments. Below is a summary of the tax reform legislation – provided by the Equipment Dealers Association (EDA) – including the amendment that the EDA worked to secure on behalf of dealers across the country.

EDA extended its appreciation to its regional dealer association partners who worked tirelessly to target key legislators during the process and industry experts, including Rex Collins, partner with HBK, and Curt Kloeppel of Equipment Dealer Consulting, who aided the efforts. In addition, EDA is deeply appreciative of its dealers who took action and reached out their Congressional Representatives and Senators to express their support of the legislation.

“The Tax Cuts and Jobs Act is a major win for dealers across the United States,” said Collins. “EDA spearheaded the effort to obtain an amendment for floor plan financing for dealers and fought vigorously to ensure the preservation of LIFO. Through these coordinated efforts, I provided direct input to members of the Ways and Means Committee and the Senate Finance Committee on this issue. It is exciting to see the hard work of EDA dealers pay off in such a big way.”

The following changes will be effective for the 2018 tax year through 2025.

Personal Income Tax Rates and Provisions

While the primary changes in this tax reform relate to corporate tax rates, there are significant changes to individual rates, as well. The legislation retained the seven-bracket tax structure, but widened the bracket widths

 

 

Key Provisions Affecting Final Individual Taxable Income

  • Standard Deduction doubled to $12,000 for individuals or $24,000 for married couples.
  • Itemizing

SALT (State and Local Tax) Deduction limits the state and local tax deduction to a combined $10,000 for income, sales, and property taxes;

Home Mortgage Interest Deduction is maintained for one home up to $750,000;

Charitable Deduction is maintained.

  • Capital Gains rates are largely left unchanged.
  • 1031 Like-Kind Exchanges are maintained for real property transactions.
  • Retirement Savings Provisions around 401(k)s and IRAs are maintained.
  • Health Insurance
  • Individual Mandate is repealed beginning January 1, 2019;
  • Medical Expense Deduction is maintained for expenses exceeding 7.5 percent of AGI in 2018, and 10 percent beginning in 2019;
  • Health Savings Accounts tax treatment is maintained.

 

  • Child Tax Credit is expanded to $2,000 per child (phase-out begins at $400,000 income).
  • Alternative Minimum Tax is retained on personal filings, but raises the exemption on the alternative minimum tax from $86,200 to $109,400 for married filers, and increases the phase-out threshold to $1 million.
  • Estate Tax relief is granted by doubling the exemption amounts ($11 million for individuals; $22 million for couples) through 2025; reverting to current amounts thereafter.
  • Stepped-up basis is maintained.

 

 

Business Income Tax Rates and Provisions

  • Corporate Rate permanently reduced to 21 percent beginning in 2018.
  • Pass-Through Businesses Income establishes a 20 percent deduction of qualified business income from certain pass-through businesses. Specific service industries, such as health, law, and professional services, are excluded. However, joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries. This provision would expire December 31, 2025.
  • Alternative Minimum Tax for corporations is eliminated.
  • Interest Deductibility
  • Small Business Exemption fully maintained for businesses with less than $25 million in revenue. Farming businesses with income greater than $25 million can retain interest deductibility if they use the Alternate Depreciation System for investments.
  • Limitation on Deductibility with Floor Plan Interest Amendment* Deduction limited to the sum of (1) business interest income; (2) 30 percent of the taxpayer’s adjusted taxable income for the tax year; and (3) the taxpayer’s floor plan financing interest for the tax year. Any disallowed business interest deduction carried forward indefinitely (with certain restrictions for partnerships).
  • Definition of Floor Plan Financing Interest: Interest paid or accrued on indebtedness used to finance the acquisition of farm equipment held for sale or lease to retail customers and secured by the inventory so acquired. Does not include construction machinery and equipment.
  • Trade-Off for Using Floor Plan Interest: Full expensing disallowed if floor plan interest factored into deduction. Sec. 179 expensing still maintained if floor plan interest used.
  • Full Expensing allows full and immediate expensing of short-lived capital investments for five years.
  • 179 Expensing limits are increased to $1 million per year with phase-out beginning at $2.5 million, indexed for inflation after 2018.
  • Cost Recovery (Bonus Depreciation) is allowed for used property, and is permitted at the 100 percent rate through 2022, and phased down by 20 percent each year thereafter.
  • Net Operating Loss eliminates net operating loss carrybacks and limits carryforwards to 80 percent of taxable income. Farming businesses are still allowed a two-year NOL carryback.
  • Agricultural Cooperatives receive a 20 percent deduction on pass-through income that will be calculated on the gross income of the cooperative beginning in 2018 in lieu of the domestic production activities deduction (section 199), which is repealed.
  • Cash Accounting is maintained for farming businesses.
  • LIFO accounting method is maintained.
  • Repatriation enacts deemed repatriation of currently deferred foreign profits at a rate of 15.5 percent for cash and cash-equivalent profits and 8 percent for reinvested foreign earnings.
  • Territorial System eliminates worldwide system and moves to a territorial system with base erosion rules.

* Floor Plan Interest Amendment: The business interest deduction limitations as written in the original House Ways & Means bill was unduly burdensome for equipment dealers. Working with the House and Senate EDA and our Regional Association partners successfully secured the floor plan interest language that accounts for the unique circumstances of farm equipment dealers.

 

“As a Missouri native, I am proud to work with Representative Vicky Hartzler and Representative Jason Smith,” said Natalie Higgins, VP of government affairs, EDA. “They have both routinely worked with EDA in the past on legislative issues and have appeared for EDA’s Legislative Fly-In. Representative Hartzler and Representative Smith have a number of equipment dealer constituents and understand the importance of the equipment dealer network. Because of their past work with EDA and their understanding of the needs of dealers in Missouri, they were instrumental in obtaining this amendment. Rex Collins of HBK and Curt Kloeppel of Equipment Dealer Consulting were also invaluable resources. Their input and calculations were relied upon by the House Ways & Means Committee members and staff during deliberation on this amendment. Rex even led the amendment working group through a number of hypotheticals to help demonstrate the impact of the interest deduction limitation on dealers.”

Added Kim Rominger, president and CEO of EDA, “EDA will continue to provide dealers with resources to understand the implications of the upcoming tax changes including an upcoming webinar in January. The summary contained in this press release is a nice overview but is not a substitute for tax advice. We recommend consulting Rex Collins with HBK for specific tax advice questions.”

 

If dealers have specific questions about the impact of these tax reform provisions or others for their dealership, they are encouraged to contact EDA’s trusted industry tax experts, Rex Collins of HBK at 317-504-7900 or RCollins@hbkcpa.com or Curt Kloeppel of Equipment Dealer Consulting.

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