With the passing of The Tax Cuts and Jobs Act (TCJA) in December 2017, there have been significant changes in tax law, the majority of which are effective for the 2018 tax year. This is part one in a four-part series on the most significant changes in tax law that will impact the dental industry, considerations for practices and individual tax situations for dentists.
Outlined below are some of the key changes affecting individuals and considerations to be aware of when planning.
The two most significant changes to the tax bracket for both married filing jointly and single taxpayers are in the reduction of the top rate to 37 percent from 39.6 percent and the general widening of each tax bracket (graphs below).
The alternative minimum tax (AMT) saw a change with the increase of the exemption amount and phase-out thresholds. This will likely result in far fewer taxpayers being subject to AMT in 2018 and beyond. The new limitations of the state and local tax deduction will also lead to fewer taxpayers being subject to AMT.
The standard deduction was doubled for married filing jointly taxpayers to $24,000 and single taxpayers to $12,000. As a result of this change, personal exemptions are suspended until 2026. In addition, other changes to itemized deductions include suspending the following items until 2026:
As for estate-planning considerations, alimony is no longer deductible for divorce/separation agreements finalized after 2018, and the estate tax limit doubled to approximately $11 million per individual. Additionally, the child tax credit was doubled to $2,000 and the income phase-out for the credit now begins at $200,000 for single taxpayers and $400,000 for married taxpayers.
The Domestic Production Activities Deduction (DPAD) for in-house manufacturing of crowns and other restorations was eliminated.
Several changes were made to depreciation rules, the majority of which are favorable for taxpayers, including:
The changes above increase the benefits of a cost segregation study, which is an in-depth analysis of the costs associated with the construction, acquisition or renovation of owned or leased buildings and can identify assets eligible for shorter tax recovery periods, rather than real property periods (typically 39 years). Read more on the changes to bonus depreciation rules, recovery periods for real property and expanded section 179 expensing.
Entertainment expenses are no longer deductible, and meals with a business purpose remain 50 percent deductible. Read more on meals and entertainment expenses for 2018.
The TCJA created a new general business tax credit for employers that voluntarily offer more than two weeks of paid family and medical leave annually to qualifying employees if the employer pays more than 50 percent of an employee’s wage during their leave.
One of the most asked about topics is the new qualified business income (QBI) deduction on domestic income that is available to pass-through entities and sole proprietorships. The deduction is calculated as a 20 percent reduction of income generated by a trade or business and is subject to the following limitations:
The deduction is currently set to expire after 2025 and effectively reduces the top tax rate to 29.6 percent from 37 percent on income from a trade or business.
The corporate tax rate was reduced to a flat 21 percent for tax years beginning after Dec. 31, 2017, which is the same rate for personal service corporations. Previously, the highest rate was 35 percent.
The reduction in corporate rates has led to a lot of questions regarding corporate structure and whether a practice should remain a pass-through entity or become a C corporation. When determining the best approach for your dental practice, various factors should be taken into consideration other than simply looking at the rate differential between individuals and corporations, including:
Dental practices should contact their advisor earlier in the year as tax planning will be more in-depth for 2018. When discussing how to maximize tax savings and planning opportunities in 2018, dental practices should consider the following:
For more information on this topic, or to learn how Baker Tilly dental practice specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.