Tax update 2018: ‘Cuts and Jobs Act’ will hit LI hard

Cut to cure: Congress thinks the Tax Cuts and Jobs Act will fix the U.S. economy -- but regional tax experts are expecting the new law to hit Long Island where it hurts.

At first glance, the recently passed Tax Cuts and Jobs Act seems to hit Long Island – and all high-tax areas – pretty hard.

One reason: Many businesses on Long Island are pass-through entities in the service sector, which do not qualify for the reduced corporate rate or the additional pass-through deductions.

Pass-through entities, with the exception of service industries, are allowed a deduction (subject to limitations) that effectively taxes their income at a 29 percent rate. Specified services include any businesses performing services in the fields of health, law, consulting, financial services or brokerage services, or any trade or business where the principal asset is the reputation or skill of its owners and employees.

Engineers and architects are specifically excluded. And the qualifications defining “service” and “non-service” are sure to become audit and litigation targets.

Reason No. 2: The $10,000 deduction limit for state and local taxes will significantly affect the high-income and high-tax areas, though some of this will be mitigated by the changes to the alternative minimum tax and increased standard deductions.

Timothy McHale: Winners and losers, stay tuned.

You can still pay your 2018 property taxes prior to year-end for a current deduction, but not your income taxes.

Some key provisions of the new tax laws include:

Business Provisions
+ In 2018, there will be a flat corporate tax rate of 21 percent.
+ Adjusted taxable income for the deductibility of interest expenses will be limited to 30 percent, with exceptions for certain small businesses maintaining less than $25 million in gross receipts.
+ The corporate alternative minimum tax is repealed.
+ For business property placed in service after Sept. 27, 2017, a provision has been temporarily put in place for a full 100 percent expensing of new or newly acquired used property.
+ Section 179 has increased to expensing a maximum of $1 million. (Note: The new law allows increased Section 179 expenses and bonuses, but disallows some of the interest deductions that would almost certainly be needed to finance the purchase.)
+ There is a carried interest provision which requires assets to be held for a minimum of three years to receive capital gain treatment.
+ Like-kind exchanges will be limited to exchanges of real property.
+ NOL carryback has been eliminated and the NOL deduction is limited to 80 percent of taxable income.
+ There are provisions for treating gains or losses from certain intellectual property as ordinary rather than capital.

Individual Provisions
+ The marginal rate tops at 37 percent.
+ The standard deduction has increased to $12,000 for single filers and $24,400 for filers who are married filing jointly.
+ Deductions for personal exemptions and miscellaneous itemized deductions are repealed.+ There is a 20 percent deduction on certain pass-through business income, excluding service industries.
+ There are new limitations on mortgage interest deductions and deductions for state and local taxes not incurred in a trade or business (to $10,000).
+ There are changes to charitable contribution limits.
+ The medical expense deduction has been retained, with a 7.5 percent floor.
+ The above-the-line deduction for alimony payments made pursuant to agreements entered into after 2018 is eliminated.
+ Section 529 accounts can now be used for primary and secondary education.

As with all changes, there will be winners and losers. But it will take some time to see who they are – and to what degree they will or will not benefit from this.

Mr. McHale is a certified public account and partner at Bohemia-based accounting firm Cerini & Associates LLP.