The tax changes will benefit IBs, CPOs and CTAs since most are organized as corporations or pass thru entities (LLCs , LPs and S-Corps) . The following will give you a summary of some of the main tax changes that will be effective in 2018. If you can defer income to 2018 from 2017 it could be tax beneficial to you.
The new tax law under the Tax Cuts and Jobs Act includes many changes to the current law and will impact virtually every individual and business on a level not seen in many years.
At the business level, the corporate tax rate has been reduced from 35% to 21% and the corporate alternative minimum tax has been repealed. Pass-through businesses currently pay tax at individual rates, the highest rate at 39.6%. The new tax law allows a temporary deduction in an amount equal to 20% of qualified income of pass-through entities. For owners otherwise subject to the top 37% individual tax rate, the effective tax rate on qualified income will be reduced to 29.6%. Pass-through owners whose taxable income exceeds $315,000 for a joint return (or lower amounts for single filers) are subject to restrictions on the deduction in situations where the business did not have a specified level of wage payments or a specified amount of tangible, depreciable assets used in the business. In addition, restrictions on the deduction apply to certain service businesses and other businesses described in the new law.
The new law introduces changes with regard to carried interest. The holding period for long term capital gains is increased to three years with respect to certain carried interests in certain investment or real estate funds. Net interest expense is capped at 30% of adjusted taxable income, among other criteria. There are exceptions for small businesses.
Some international tax provisions a mandatory taxation of deferred foreign earnings at a reduced rate. U.S. corporations and certain individuals who own at least 10 percent of the voting shares of a foreign corporation must take into current income, for 2017, their pro rata share of the untaxed earnings of the corporation. This income is subject to tax at either a 15.5 or 8 percent rate depending on whether such earnings are attributable to cash or tangible assets of the foreign corporation. Dividends paid in 2017 to U.S. shareholders subject to these rules will not be taxed as regular dividends but will be taxed at these rates. Taxpayers may elect to defer payment of the actual additional taxes resulting from this mandatory inclusion over an eight-year period. However, because the first payment will be due on the date when the taxpayer’s final tax payment for 2017 is otherwise due, taxpayers should be prepared to pay an additional amount with their 2017 extension.
Michael Coglianese can regularly be found educating the industry on important issues such as this at the NIBA conferences and in print. For an initial consultation on your current tax structure to evaluate whether or not your firm could benefit from changes to the tax code, please contact Mike directly at 630-351-8942 or email Mike@cogcpa.com.