Sikich Series on Tax Reform: Tax Madness – NCAA vs. TCJA

Our unique dictionary in which March Madness meets Tax Madness

It’s that special time of year. As a long cold winter begins to melt away, potholes pop up on every road, and everywhere you go brackets are in the air. You might be thinking about March Madness and the brackets for the NCAA basketball tournament. Yes, this is a thrilling sports time of year when college hoops, the start of another baseball season, and the Masters golf all come together. But there are some other brackets folks are concerned with now. Tax Brackets. This is the first year dealing with the recent tax reform bill, the “Tax Cuts and Jobs Act” (TCJA). There are many changes to consider, including lower tax brackets, but there are also several new deductions and limitations on other deductions that we must keep in mind. In addition, there are many complex rules and regulations from the IRS intended to help interpret these new changes. It’s March Madness of a different sort—“Tax Madness”—as everyone (individuals and businesses alike) tries to dribble through these new rules to score some tax savings.

We thought we would rollout our unique dictionary in which March Madness meets Tax Madness; where some basketball terms intersect with tax terms found in the TCJA. Some of these are lay-ups and you’ll follow along, while others you’ll need to jump up to make the connection. Read through the following definitions between games this weekend and maybe even score some points for you or your business:

• Airball. An airball by the shooter comes up short – it’s worth nothing. A TCJA airball might relate to many itemized deductions that had some value before TCJA, but now are worthless. Some examples include investment expenses, unreimbursed business expenses, tax preparation fees, and most interest expenses on home equity loans.
• BEAT. After all the hype, the games finally begin, and the teams battle it out to beat each other. TCJA also established its own BEAT program. One of the new international tax reforms was a tax known at the BEAT, or the “Base Erosion and Anti-abuse Tax.”
• Bonus. You may have already figured this one out. One of the key provisions in TCJA was the expansion of “bonus” depreciation. Companies can now write off 100% of qualifying capital expenditures (CapEx), which is up from 50%. In addition, the “double bonus” is that the 100% bonus depreciation now applies for new and used property.
• Brackets. As mentioned above, everyone is filling out their brackets. But tax brackets were also one of the main changes in TCJA. The corporate tax brackets were significantly reduced to 21%. Individual tax brackets were also lowered, and the income ranges for these brackets expanded. Brackets, Brackets, Brackets.
• Baskets. TCJA brought about many changes in international taxes, including complicated new rules for separate “baskets” of income for foreign tax credit purposes.
• Double Dribble. In the past, some taxpayers only had a handful of itemized deductions. The slow dribble of deductions may have left them claiming the standard deduction. One of the key individual changes in TCJA was to double the standard deduction up to $24,000 for married couples and $12,000 for single taxpayers. This doubling of the dribble is worth more after TCJA.
• Dunk. After TCJA, several deductions were dunked and thrown away by Congress. This includes entertainment expenses (the 50% that had been deductible is no longer), employee parking expenses, and certain fines and penalties.
• Elite Eight. This is when the field gets down to eight teams – only one win away from the final four. TCJA made many changes for businesses and most of these were permanent. For individuals, however, many of these changes and savings last only eight years from 2018 through 2025.
• Final Four. This isn’t in reference to the four teams that end up in Minneapolis this year, but four accounting methods from TCJA directed at providing tax incentives to small businesses. Please click here to see if your business might benefit from one or more of these.
• Opportunity Zone. Teams look for good shooters to make shots from the opportunity zone beyond the three-point arc. TCJA offered its own opportunity zones that permit taxpayers who recognize capital gains from deferring these gains by investing in qualified opportunity zone funds. IRS guidance is still needed on this topic.
• Paid Leave. Many of you may be at work over the next few days but might “occasionally” check in or watch some of the many games. You are still getting paid, but you leave your work alone. Well, we have another tax article that covers this as well. It addresses a new tax savings tool by TCJA that provides businesses a tax credit if they offer paid family and medical leave. While the leave is required for most employers at the federal and state levels, it does not need to be paid. But, if businesses do pay employees for this leave, they may be entitled to this new tax credit. Read up on this new incentive.
• Sweet Sixteen. Teams that survive the first weekend of the tournament end up in the “Sweet Sixteen.” This year there was an expansion by TCJA of the child tax credit from $1,000 to $2,000 for dependent children ages 16 or under. And the range at where this credit is phased-out was significantly increased. A sweet tax savings for 2018.
• Technical. In TCJA, one of the major CapEx changes (discussed above) was for “Qualified Improvement Property” (QIP). QIP was supposed to qualify for bonus depreciation, but a technical glitch (a drafting error in Congress) resulted in no bonus depreciation. QIP should have qualified for this accelerated deduction, but it technically didn’t meet the letter of the law. This glitch has yet to be fixed by Congress.
• Traveling. If you want to travel overseas, make sure you have settled all your prior tax obligations. If you have any unpaid federal taxes owed from previous years, you will not be able to obtain or renew your passport until that tax is paid to the IRS. This change was not part of TCJA but still something to be aware of.
• Upset. Every year there seems to be a surprising upset or two. That’s what makes the tournament so exciting and fun to follow each year. An upset also applies for many taxpayers with several of the TCJA changes, especially with the new limitation on business interest expense. Not only will many taxpayers possibly have some interest expense disallowed, but they will also need to deal with complicated rules and added compliance. Many taxpayers are upset with these new rules, and more will join them as they learn about this new provision.

That’s it for now. Wall-to-wall basketball, and some tax tips as well. Speaking of tips, it’s almost tip-off time. Enjoy March and Tax Madness!