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Connecticut CPA
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March/April 2018
Alimony relating to any divorce or separation agreement
executed or potentially modified after December 31, 2018
is not deductible by the payor spouse and is not included in
the income of the payee spouse.
Carried interest A new three-year holding period is
required to qualify for long-term capital gain treatment.
The new tax law retains, but modifies to some degree, the
individual alternative minimum tax (AMT). An increase
in the income level exemption and elimination of state
tax deductions will likely reduce the number of taxpayers
subject to AMT.
Distributions from 529 Plans can be used to fund tuition and
various expenses at elementary, secondary, and religious
schools. Historically, distributions have been limited to
postsecondary education.
Business Taxes
Pass-through businesses such as S corporations, LLCs,
partnerships, and sole proprietors receive a new 20%
deduction from their income. That benefit is phased out
for professional service businesses owned by individuals
with taxable income of more than $157,500 (single filers)
or $315,000 (joint filers). The deduction is equal to 20%
of qualified business income. However, there are several
limitations, including a limitation based on W-2 wages and
assets relative to the qualified business.
Taxpayers other than corporations may not deduct excess
business losses. Excess business losses are equal to
aggregate deductions for a trade or business minus the
sum of business income plus $250,000 (or $500,000 for
joint filers). The $250,000 and $500,000 amounts will be
indexed for inflation. This rule is applied at the partner (or
S-corporation shareholder) level. Essentially, an individual
taxpayer with a business loss from a flow-through entity
can only use up to $500,000 (if married filing jointly) or
$250,000 (if single) of losses from such entity to offset
income from other sources (wages, interest, dividends,
capital gains, etc.).
The corporate AMT is repealed.
There is a new corporate tax rate of 21%, replacing the
35% maximum tax rate.
The dividends received deduction percentages are
reduced. There is an increase in the Section 179 limit,
increasing the maximum deduction from $500,000 to
$1 million and increasing the phase-out of such deduction
for assets placed in service during the year from $2 million
to $2.5 million. Qualified property now also includes
Qualified Improvement Property (QIP) and improvements
to non-residential rental property placed in service after the
property was first placed in service, such as roofs, HVAC,
fire protection, and alarm systems. The updated rules are
effective for the 2018 tax year.
Small taxpayer provisions The limitations in Section 448
(relating to the use of the cash method of accounting) have
been modified so that taxpayers with annual average gross
receipts under $25 million (historically under $5 million
"Small Taxpayers") are permitted to use the cash method of
accounting. Small Taxpayers with inventory are no longer
required to apply uniform capitalization rules (UNICAP).
Also, Small Taxpayers subject to Section 460, utilizing
long-term contact accounting methods, would no longer
be required to use the percentage of completion method of
accounting.
When reviewing full expensing, subject to certain
limitations, 100% bonus depreciation applies to qualified
property acquired and placed in service on or after
September 28, 2017. For the 2017 tax year, taxpayers can
choose to simplify their bonus depreciation calculation by
electing to apply 50% bonus depreciation to all assets
placed in service that year in lieu of applying 50% bonus
to assets placed in service before September 28, 2017
and 100% bonus to assets placed in service on or after
September 28, 2017. Qualified property is expanded to
include used property.
Beginning in 2022, research and development costs must
be capitalized and amortized over five years.
Revenue recognition Revenue cannot be deferred for
tax purposes beyond the time the revenue is recognized for
financial statement purposes. The new tax law also codifies
a rule similar to the rule set forth in Rev. Proc. 2004-34 for
deferred revenue.
Interest expense limitation Interest expense is limited
to business interest income plus 30% of "adjusted taxable
income." The Act contains numerous exceptions to this
rule, as well as special rules relating to flow-through entities.
Limitation on net operating loss (NOL) usage NOL usage
is limited to 80% of taxable income. Additionally, the new
tax law repeals the ability to carry back NOLs (historically
a two-year carryback was allowed) and increases the NOL
carryforward from 20 years to until the NOL is used.
Like-kind exchange Section 1031 exchanges are limited
to real property only.
Limitation on fringe benefits Most entertainment
expenses are no longer deductible. Business meals are still
deductible subject to the existing rules (50% limitation).
Repeal of 199 deduction The Section 199 (domestic
production activities) deduction is repealed.
Carried interest A new three-year holding period is
required to qualify for long-term capital gain treatment.
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