At the end of 2017, the United States Government made the biggest update to the tax code in over 30 years called the Tax Cuts and Jobs Act.
On November 28th, our Tax Senior Manager, Natalie Rasmussen, EA broke down the most important changes that will affect your 2018 tax filings and explained how to properly plan for year-end tax savings.
If you want personal help with your cannabis business taxes, you can contact us to get started.
You can watch the full webinar here:
You can download the slides here.
You can read the full transcript below:
My name is Natalie Rasmussen. I’m an enrolled agent. For those of you that don’t know what an enrolled agent is, I jokingly refer to it as a poor man’s CPA, but what that basically means is that I’ve been certified by the Internal Revenue Service to prepare tax returns, represent people in front of tax court and everything that entails.
Before we get started. I need to let you know that the information contained in the Webinar presentation is meant for guidance purposes only and not as professional, legal or tax advice. Further, it does not give personalized legal tax investment or any business advice in general. Now that we have that out of the way, let’s hop right into it.
So today what I’d like to talk about is this brand new tax legislation that is coming down the pike for our 2018 tax year.
What I’m going to be talking about is the tax cuts and jobs act, the TCJA, which is sort of a mouthful and what that means to you as an individual taxpayer, as a corporate taxpayer, and then I’m going to touch on what it means to cannabis operators. So for today’s agenda I’m going to talk about Green Growth CPAs, who we are, where we came from, where we’re going, and again, like I said, what the tax cuts and jobs act is, who it affects and how comparable tax rates, when will it go into effect and adjustments to gross income and other cannabis issues. We’re also gonna cover a brand new section that Congress put in. It’s called section 199A. it’s a small business tax deduction and I’ll kind of go over how that works. And again, as I said, what the TCJA means for cannabis companies.
So a little bit about GreenGrowth CPAs. We are a cannabis CPA company that’s been in the cannabis space since about 2010. My experience, as I said, I’m an enrolled agent. I’ve been in the industry for about 23 years now. I’ve seen a lot of changes along the way right now we have about 300 cannabis business clients on the tax side, but we also offer licensing, audit, business plans, financials, pro formas, basically anything that you need to start a cannabis business or to continue your cannabis business we can handle.
So what is the tax cuts and jobs act? So at the end of last year, December 22nd, President Trump signed this new tax act, so basically simply put, this is the largest tax reform that we’ve had since 1986 and it’s going to affect everybody in every single tax bracket. Since the signing of the bill. We’ve looked at all the provisions and it’s become obvious that what’s gonna be most detrimental to a large number of taxpayers.
So the first thing we notice is that there’s a loss of exemptions for people who will continue to itemize. What that means is that currently or in old tax, every single person that was listed on your tax return, there was an exemption allowed for that person. That exemption is now gone. There’s also. So which also means the loss of exemptions for your kids or anybody under the age of 17. The big issue is the loss of your unrestricted deduction for state and local income taxes, what’s known as the SALT tax. And I’ll go into that later. You will have a loss of your equity debt interest reduction. I’ll go into that later. And another big issue is the loss of your business expenses deduction if you itemize.
On the other hand, there are lots of revisions that will be beneficial to a large number of taxpayers. Your standard deduction is now increased, basically doubled in a lot of cases. There’s an increased child tax credit, there’s a new section 199A, which I already kind of touched on a little bit. This 20 percent qualified business income tax deduction. You have expanded section 179 and bonus depreciation rules, which I’ll go over again later and the tax rates across the board have decreased. So these issues are just basically the tip of the iceberg of the changes that are going to be affecting you when you file your tax return next year for 2018. So to start, let’s go ahead and take a look at our comparative income tax rates. The TCJ A, it’s a new acronym. So please forgive me if I say it wrong, which I probably will.
So the first thing that you’ll notice is if you remember tax brackets, there was a 15 percent tax bracket, 25, 28, they’re on down the line. The old 15 percent tax bracket is now 12 percent. The old 25 percent tax bracket is now 22 percent. So as you can see, taxes are going down for just about every taxpayer for 2018 and these dollar amounts are all adjusted for inflation and then rounded to the next lowest multiple of 100 for future years. And I know nobody cares about this, but you know the old brackets used a measure of the consumer price index and for 2018 going forward, they’re using a new consumer price index going forward.
If you look at the bracket side-by-side, 10 percent income tax remains unchanged. But like I said, 15 percent is now 12 percent. Twenty-five percent is now 22 percent, 28 percent is now 24 percent and you can read on that down the line. What does not change is the net investment income tax.
So as I pointed out earlier, there isn’t an increase in the standard deduction. So what Congress did is in exchange for increasing the standard deduction, the TCGA repeals personal independent exemption deductions, they replaced them with credits. What did not change is Congress’ and the Internal Revenue Service’s definition of what is a dependent.
What’s a dependent? Most of the time, a dependent is somebody that lives in your home, usually your child that depends on you to basically stay alive. It could be your parents that maybe live with you, who you provide most of their care, a shelter, and feeding. You could have a cousin, anybody that meets the definition, the IRS definition of a dependent which is, you know there are technical nuances there, but generally somebody that you take care of.
As I mentioned earlier, standard deductions have doubled. So if you’re a single person, your standard deduction is $12,000. If you’re a married couple, your standard deduction is $24,000 and if you’re head of household your standard deduction is $18,000. And like I said, there are no more personal exemptions for everyone listed on your tax return.
For 2018, the new child tax credit is $2,000 per child under the age of 17, which is an increase of $1,000. Last year it was a thousand dollars per child. This new tax act also gives us $500 non-refundable credits for qualifying dependents other than qualifying children. So this sort of help makes up the missing personal exemptions on your personal tax return. And like I said before, nothing in the provision changes as far as what the definition of a dependent is on your personal tax return.
So there’s above the line deductions and below the line deductions. And so above the line deduction basically means it’s on page one of your income tax return and it adjusts your adjusted gross income. Below the line deductions are anything after your adjusted gross income and that’s what drives your taxable income.
There are some adjustments, what we call above the line deductions that have changed for 2018. The educator expenses, so you teachers out there, you still get the $250 above the line deduction on your tax return as an adjustment to your adjusted gross income. If you’re a married couple and you’re both teachers, you get $500, so that’s $250 each. If you have more than that, and as we know you, teachers spend a lot more than that per year. The extra you still get to take as an itemized deduction on your individual tax return, which is still subject to the two percent floor, so nothing changes there.
Moving expenses, this is gone, guys! This particular tax act took out all moving expenses. Even if you have to move for a job on the other side of the country, those expenses are no longer able to be taken. Now, the exception to this is if you are moving and you’re a member of the United States, armed forces on active duty, that has to move pursuant to a military order. So if you’re in the military and you have to move, you can still take those deductions. But for everyone else who was not in the military, you’re moving deductions, unfortunately, are gone.
Okay, another big one, alimony, alimony is gone. And if you didn’t know how that worked before in prior years, if you are a recipient of alimony, you claim that as income on your income tax return. If you paid alimony, you got to deduct that or take that above the line deduction as an adjustment on your income tax return. Basically, it reduced your income tax. That has gone. So the good news is if you’re currently in an alimony agreement and it was enforced before the 2018 tax year, those alimony agreements have been grandfathered in so you can still continue to take that deduction for your alimony payments and you’re still going to show that as income if you’re a recipient of alimony.
But if you have entered into the agreement after 2018, these alimony payments are no longer going to be shown as an adjustment on your income tax return. So if you’re filing for divorce in 2018, it’s essential to time the finalization of the divorce or settlement agreement prior to the end of this year. In California, I know that there’s a six month waiting period. So when filing a court date must be scheduled to allow for enough time to get the court date done before December 31, 2018. Again, I can’t say this enough, you have to have it finalized before December 31, 2018 for it to be an above the line adjustment on your tax return. This also goes for if you are modifying the agreement. So if you’re in the middle of modifying your divorce agreement, your alimony agreement, make sure that that’s done before December 31st, 2018.
And like I said, so if you’re a couple and you have a court order, spousal support in place. Before all this happened, before the new tax law was enacted, everything stays the same. This is only for new alimony payment agreements. Spousal support agreements after 12/31/2018. You may have wondered why Congress took this provision away. The house ways and means committee called the alimony deduction. A divorce subsidy arguing that divorced couples can often achieve a better tax result for payments between them than a married couple can. This fix was meant to treat those payments like child support.
So student loan deduction is retained. However, cancellation of debt income from a student loan discharged on account of death or total disability, whatever the situation may be, is excluded from gross income only if the discharge occurs prior to January 1, 2019 or December 31st 2018, the student loan deduction is still allowed. However, you’re still subject to the maximum amount of interest paid per year of $2,500.
Let’s go to your itemized deductions. These are your deductions that you would take in lieu of a standard deduction. If you have a lot of mortgage interest or who you have real estate taxes to pay or things that you can write off your write-offs.
Medical expenses, the act retains the deduction for medical expenses and temporarily reduces the medical expense threshold back to seven and a half percent. What does that mean? What that means is if you have medical expenses, allowable medical expenses, they have to exceed 7.5% of your gross income. So to make that simple, let’s just say your adjusted gross income is $100,000. 7.5% of that is $7,500. So you would have to spend $7,500 at least to have an allowable medical deduction. If you spent $8,000 in medical expenses, $500, that would be deductible. And that’s the difference between your floor, that $7,500, 2% of adjusted gross income and $8,000 that you actually spent.
The big issue for a lot of taxpayers that live in high-income tax states like California, New York is the deduction of state and local income taxes. As you know, you pay taxes on your paychecks, you pay a lot of property taxes and that is now limited to $10,000 for 2018. That’s the sum of both of those items. So what that means is if the state withholding that you see on your paycheck or in your W-2 and your property taxes exceed the, some of those items exceed $10,000, you can only take $10,000. And the rest is nondeductible. And I have an example here just to sort of show you how that measures up from 2017 to 2018. So you can see we have John here who is our single guy last year for 2017, he paid $750 with his prior year tax return. In 2018, he paid $1,200.
So if his state income tax withholding, that’s the withholding that he sees on his paycheck was $10,000 for both years. He also had his, and I’m kind of talking about California, has SDI or State Deduction Withholding, which is also an allowable deduction. The property taxes that he paid on his house or his personal residence was 5,000 in 2017, 51,000 in 2018. There’s not much of a difference there. He also has a rental property which is a bonafide rental property that he pays property tax on and it was about $4,500 in each year. So if you take a look at what he paid in state and local income taxes in 2017, it was a total of 21,248. In 2018 he actually paid 22,000 and change in state and local income taxes. The amount that he was able to write off on his schedule A itemized deductions last year for 2017 was close to $17,000 or $16,748.
In 2018, he’s only allowed to write off $10,000. Meeting that cap and of course on his schedule
E or his rental property, he can still write off the full amount of his real estate taxes. Congress made it very, very clear if you have any sort of business or a rental property that pays state and local income taxes or real estate taxes, these will not be limited. The state and local income taxes and property taxes will only be limited for your personal residence and on your personal income tax return. If you are able to watch the hearings when this new tax act was being passed, Congress made it very, very clear that they were not going to touch anything that was ordinary and necessary business expenses for corporations, which includes state and local income taxes and real estate taxes.
The act also changes how much you can deduct your mortgage interest. In prior years, you were able to write off the interest expense for up to a million dollars in mortgage interest. Starting in 2018, that has been reduced to $750,000. So the new amount that you can write off his mortgage interest up to $750,000. And that’s new mortgage interest or acquisition mortgage interest. If you’re married filing separately, it’s only $375,000. The act also repeals the interest on your home equity line of $100,000. so that means if you have a mortgage and say you wanted to add on a room or make some adjustments or repairs to your house and you could take out a home mortgage line, you were able to write off the interest on that extra mortgage interest up to $100,000. That’s no longer there. Now there’s always a grandfather position. If you already have a mortgage in place, you already have a home equity loan in place, then you have been grandfathered in. So if you have mortgage interest from before 2017, you are not affected by this new tax law. This is only for mortgage interest expense and new mortgages happening in 2018 and beyond.
Charitable contributions, a lot of people are very charitable. They like to give to their church or a cause that they believe in and they were able to write off those expenses. You’re still able to take charitable contributions. The act actually increased the amount that you can deduct. So the tax act increased the AGU limit from 50 percent to 60 percent for charitable contributions to 50 percent charity. So what does that mean? A 50 percent charity? That means, again, I’m going to use the old example of your AGI being a $100,000. AGIi is a just a gross income.
Adjusted gross income. This is your adjusted gross income. If you look at page one of your income tax return, you add up all of your income, your W2, your investment income, interest, income, whatever it is that you have, social security, earnings, whatever it is that you have as income and what leads your lifestyle. That’s your adjusted gross income. Your adjusted gross income is not your taxable income. Like I said, you add up all of your income from everything, your w2’s, everything that you have that you get money from the year. Your taxable income, you see, you take your adjusted gross income and you can either use your standard deduction, which we talked about, which is increasing for 2018 or the itemized deductions that you take. And that is your taxable income amount, that’s where you get your tax brackets, and that’s where you pay your tax from your taxable.
Say Your adjusted gross income is $100,000, 50 percent of that is $50,000. You would not be able to take a charitable contribution expense or deduction for more than $50,000. That’s simply what that means. So now under this new act, you could, if you were able to take a charitable contribution expense or a deduction of $60,000 instead of $50,000, if your adjusted gross income was $100,000. If you have any excess contributions, say you gave more than that, those excess contributions could be carried forward for five years until they’re used up.
The act also took away your casualty losses. So a lot of people, if you had a car stolen or you had some other casualty loss that you were able to write off on your tax return, that’s no longer. Now, there is an exception to that. If you are in a presidentially declared disaster area, you can still write off those disaster losses. So if you are in a presidentially declared disaster areas, say you’re in a wildfire area and the president declares that as a disaster area, you can still write off the loss of your home or your property, but if you happen to have a flood next to a river by your home and it hasn’t been declared disaster area, unfortunately, you’re not able to write off those casualty losses anymore.
What’s gone or your miscellaneous itemized deductions. Everything that was subject to the two percent floor. And again like medical expenses, what that means, two percent floor. Say Your adjusted gross income as $100,000, two percent of that would be $2,000. So anything you spent above and beyond $2,000 for your employee business expenses was shown as an itemized deduction on your personal tax return. However, it’s gone.
So what is gone? Things like tax preparation fees. If you paid a thousand dollars to your CPA to prepare your tax return, can’t write it off anymore. Unreimbursed employee business expenses. Now you know these can be things like your sales expenses, you’re traveling entertainment expenses, outside salespeople expenses. Sometimes you take people out, kind of schmooze them, trying to get the job or the or the contract, your agent expenses, attorney, publicists, fees, that’s all gone. Another big one is your Home Office expense. A lot of employees have a Home Office that they use regularly for their job and they’re able to write off a certain portion of their utilities and other home expenses that normally wouldn’t be deductible. That’s gone as well.
Another big thing is your union dues that were normally deductible or no longer deductible. Also, what’s not deductible…uniforms. And this is going to affect a lot of policemen, firemen, construction workers, all of that stuff. You need special boots or tool belts. You can’t write that off anymore. You’re continuing education expenses. I’ve mentioned your investment advisory fees and attorney’s fees. You can no longer write off.
So now we get into the brand new tax law from the act, it’s called section 199. It’s a small business deduction. What is this and why did they create it? So the TCJA allows for a complete overhaul of the corporate tax rate. So what that means is if you were a corporation and what I’m talking about a C-corporation, you pay tax kind of on a sliding scale that was sort of similar to income tax rates. So the more money that you made, the more tax that you paid.
So for tax year, beginning 2018, this is all changed. Corporations now pay a flat tax rate of 20 percent. You could have a dollar profit, you could have a million dollars profit, you’re all going to pay the same 20 percent on that profit. So Congress, in answer to this, they put in this new section 199A provision. And what that means is individual taxpayers can deduct about 20 percent of their domestic qualified business income from pass-through entities. And what I mean by pass-through entities is if you are a corporation and you’re taxed as an S-Corporation or you are a partnership, those particular entities, they have to file a tax return, but they don’t pay their own tax like a C-Corp does. The passthrough is passed through just like it sounds right to the individuals who own a percentage or own that particular entity, the partnership or the S-Corp. The net income is taxed at the individual income tax rate. The act completely overhauled how corporations were taxed and what I’m talking about now is c corporations, regular corporations that file a separate tax return and regular corporations that pay corporate income tax.
There’s now a new flat rate of 20 percent for all corporations. You can have a dollar in profit, you can have $10,000,000 in profit. You’re still gonna pay the same 20 percent of tax on your profit. So in response to that, Congress said, well, we think that there’s a little bit of a disparity there. What we’re gonna do is we’re going to put in this new provision called section 199A. So C-Corporations are going to get a reduction in their tax rates. We’re going to allow pass-through corporations, S-corporations, and partnerships, same, similar type of deduction. And for those of you that don’t know what I mean by a pass-through corporation, so sometimes corporations can be taxed what’s called an S-corporation or partnerships, and what that means is they have to file a separate tax return, but they don’t pay their own tax. Those taxes are passed through to the owners or members or partners of the corporation and tax at their individual tax rates.
If you have a pass-through amount coming through from your corporation, let’s say of $20,000, you now have the opportunity to take that $20,000 and take 20 percent off of that $20,000 that would be shown on your individual tax return, which in effect will lower your tax rate, lower your adjusted gross income. It’s a very complicated transaction, but I’m just going to sort of gloss over that right now and just say it’s about 20 percent of whatever pass through would be going through to your individual income tax return. So qualified business income can include all kinds of business income, including income from services and income from rental real estate. Like I said before, the qualifying entity that can take this additional 20 percent section 199 deduction are sole proprietorships and pass through income received by from partnerships, s-corporation, trusts and estates, and even real estate investment trusts are included in this as well.
You’re going to be hearing a lot about section 199A and QBI and what QBI is qualified business income. And this is the income that comes from your S-Corp or a partnership that passes through to you the individual, and that’s what you get the deduction on the 20 percent deduction on you’re QBI or you’re qualified business income from this entity, qualified business income or QBI. You’re going to hear me say QBI a little bit. We’ll include all kinds of business income, including income from services and income from rental real estate. So the only exception to this is W2 income. So even if your W2 income comes from your closely held s-corporation or it comes from your partnership, you’re not allowed to take the deduction on your w two income. It’s only for the pass-through and information or the pass through that shows up, you know from your schedule K1 on your income tax return.
Okay, so where is this QBI going to be deducted on your income tax return and that we’re not exactly sure yet. The 2018 forms haven’t been published or released by the Internal Revenue Service, so what we can do right now is sort of guests, but what we think is it’s not going to be shown on page one of your income tax return, so it’s not going to reduce your adjusted gross income. It will, however, reduce your taxable income so it looks at the deduction is going to be taken either around the standard deduction or where the itemized deduction area is on your tax return. As you can see, there’s a draft of a draft of a draft that sort of floating around and it looks like that deduction for qualified business income or QBI is going to be shown like right after your standard deduction or itemized deductions are going to be taken on page two of your 1040 right before where you calculate your taxable income.
How do we get this deduction? It’s very complicated. You just want to think of it in an overall shortcut way. It’s basically 20 percent of your qualified business income that you get to write off, take off the top and reduce your taxable income. Now, this deduction is going to be subject to a lot of phase-outs and it’s also going to be subject to any reduction if you have any other taxable income reductions. The phase-out range is pretty generous actually, so if you’re married filing jointly or if you have any other filing statuses, you can see that your phase out range starts at about $350,000. If you’re married, filing jointly and ending at $415,000. Your other filing statuses started about $157,000 and ended at $207,000.
So what a phase-out range is, if your income from all other sources, you’re W2’s your investment income. If it’s more than this particular show amount shown, $315,000, that qualified business income deduction is going to be reduced. So the more money you make, the less of a reduction that you’re allowed to get from your pass-throughs.
I’ve added a slide here that’s pretty user-friendly that you can take a look at and it kind of goes through your yes and no questions. If you’re allowed to take this qualified business deduction or not. And you know the first question, does the taxpayer have any business income, yes or no, and you just follow the flow chart through to see if you’re going to be allowed to take this qualified business deduction. This qualified business income deduction or section 199A, as I said, is for any pass-through entity.
Service businesses are not going to be able to take the deduction. If you’re a higher income taxpayer and you are in the phase-out range that we showed on the other slides and a year in the service income. Unfortunately, you may be completely phased out of this qualifying business income deduction. So service people are people like in the field of health, in the field of law accountants such as ourselves, actuarial sciences, performing people, consulting people, athletes, financial services, brokerage services. So we really need to take a look at where your income is so we don’t reach phase out because we really want to take advantage of this qualifying business income deduction.
So we’ve talked a lot about the act and how it’s gonna affect you as a taxpayer, as an individual taxpayer and as a corporate taxpayer. Let’s drill that down a little bit more and talk about how it affects you as a cannabis operator.
So what the act did not do, it did not repeal section 280E. So the absolute number one issue with cannabis companies, as you know, is the impact of 280E on your business and your taxation. So you know, prior to the enactment of this law, there were plenty of activists out there in Washington who tried to get 280E off the table and tried to repeal 280E. So, but unfortunately, it hasn’t been repealed. The reason for this Congress said is that it didn’t fit into their budget. It would have to be budgeted as a tax cut. So what the act does do for corporations is that it does make a c corporation more attractive. If you are a cannabis operator, as I discussed earlier, the top rate for c corporations, the actually the only rate is 20 percent. This 20 percent rate is a lot less than what you cannabis operators have normally been paying.
The tax act also makes limited liability companies and all other pass-through entities a little bit less attractive if you are a cannabis operator. So as we spoke about,pass-throughs can now take the section 199A deduction, but the way Congress framed this deduction through the code is that basically, 280E would disallow the deduction as it stands right now. So you cannot take the deduction if you’re a cannabis cultivator, distributor or retailer.
You know, you may have some ancillary companies that work alongside your cannabis company, you can still benefit from 199A, but after the reduction and the disallowed expenses, it’s still kind of makes c-corporations a little bit more attractive if you’re a cannabis operator.
So our key takeaways, one, the TCJA passed in December of 2017, which can affect the 2018 tax year, made several significant changes to the individual income tax. I hope you understand what AGI, itemized deductions and QBI deductions are to know if you qualify and to get you to keep more of the harder and money you make.
These changes all took effect in January of 2018 and will expire in December of 2025 and it maintains the seven tax brackets that could be the most beneficial to you. And if you file your taxes correctly and on time by engaging the services of a CPA or an EA who is knowledgeable with this new tax act, you’ll be able to file your taxes accurately, correctly and maybe get more money back.
So guys, I know it’s a lot. It’s complicated. This tax overhaul is changing everything that we’ve known about taxes for the last 32 years, so it’s complicated, it’s different. If you have any questions at all, please give us a call.
We can file your tax return. We can do financial statements if you need help with your business, your tax return, licensing, consulting, anything that you need help with your business, cannabis or otherwise, please give us a call. We’re here for you.
We understand the new tax law and we’d love to hear from you. You can always visit our website at GreenGrowthCPAs.com. You can always give us a call at 1800-674-9050. Thank you for taking the time to sit with me. I know it’s a lot of information, hopefully, made it all the way through. I hope to hear from you. Thank you again and I hope you all have a great day.