A Very Long Summary of The Tax Cuts and Jobs Act

The Back Alley Presents

A Very Long Summary of

The Tax Cuts and Jobs Act

(also known as TCJA)

A Very Long Overview by

Timothy J. Gordon

Cover Design of President Trump

poking Congress by

Amy Gordon

Table of Contents

Title Page

Introduction

Super Big Disclaimer That You Definitely Agree To Even If You Didn’t Read This Part

Much Smaller Disclaimer

We’re Living in a Political World

Background to The Law a.k.a. The Tax Nerd Bona Fides

Changes That Don’t Fit In Any Other Categories

Changes in Inflation Spell Long Term Pain

Head of Household Now A Preparer Penalty

IRS Levies Suck. Here’s Some Relief

Some Things Didn’t End Up Changing

A Brief Diversion into Estate Taxes

Qualified Opportunity Fund & Qualified Opportunity Zones

Individual Changes

Above the Line Changes

Alimony

Moving Expense

Standard and Itemized Deductions

Standard Deduction

State and Local Tax Deduction

Mortgage Interest

Charitable Contribution

Medical Expense

Casualty Losses

Miscellaneous Itemized Deductions

Not All Miscellaneous Deductions Are Disappearing

Other Individual Changes

Education Incentives

ABLE accounts

Tax Rates

Kiddie Tax

Child Tax Credit

Combat Zone

Electing Small Business Trusts

Individual Mandate

AMT Individual Changes

Sunset Provision

A Note On States

Business Changes

Changes Only for Passthrough Entities

Qualified Business Income

How QBI Interacts with Retirement Plan Limitations

Limitation of Deductibility of Losses

Changes Only for Partnerships

Technical Terminations

Built In Loss

Basis Change

Carried Interest

Changes Only for C Corporations

Tax Rates

Dividend Received Deduction – Domestic Edition

Dividends Received Deduction – Foreign Edition

Corporate AMT

Contribution of Capital

Changes for All Business Entities

Like Kind Exchanges

Bonus Depreciation

179 Expensing

Luxury Auto

Transportation Fringe Benefits

Cash Method

Uniform Capitalization (UNICAP)

Domestic Production Activity Deduction (DPAD)

FMLA Credit

Fines and Penalties

Citrus Plants

Net Operating Losses (NOLs)

Sexual Harassment

Entertainment Expense

Meals Expense

Interest Deduction Limitation

Qualified Improvement Property

Type of Business you should use

International Taxes

Money Kept Overseas No Longer

The Carrot and the Stick – FDII & GILTI

Global Intangible Low-Taxed Income

Foreign-Derived Intangible Income

Foreign Penalties

Let’s Hit the BEAT

Closing Remarks

About the Author

Introduction

Hi! Thanks for buying my book about the Tax Jobs and Cuts Act, or TCJA for short (pronounced Tick Jaw if I have my way)!

Or at least thank you for reading the free sample pages in your favorite digital book store. That’s cool, too. But it does mean that I have to convince you to buy the book in the next couple paragraphs…

And I probably shouldn’t lie.

Hmm.

How about this. If you buy this book, I personally guarantee I won’t go out of my way to rat you out to the IRS.

I can feel the buy buttons clicking now.

Alright, with that out of the way, let’s move on to the real introduction.

I am a tax nerd. I’ve been doing the tax thing for a while now, working in both public and private fields, in companies big and small(ish). While I haven’t seen every possible weird tax combination in this wild world of compliance, I’ve seen a lot, especially for domestic individuals and entities.

If anyone’s wondering, yes, I still practice compliance crap like this every day (during busy season, unfortunately—just weekdays the rest of the year). Does that make my viewpoint better than a thoughtfully written explanation by a tax professor? If you still haven’t purchased my book, then of course it does.

For everyone else, I like to think it helps. I love digging into those professional thinker analyses of new developments in the tax world, but it’s also good to hear the thoughts of those in the trenches.

What about my writing ability? I might know the topics, but it doesn’t do any good if I can’t write it down in a way that makes any sense.

Here’s my background on that. I’ve written a bunch of steamy romance novels about the passionate love exuding from pocket protected accountants and hidden them in the Dark Web. But that’s not important right now.

My actual tax updates have been plugged onto a website called backalleytaxes.com. Some people may claim that it’s the best tax website in the world. I’m not one of those people, but it has received a steadily increasing stream of traffic over its seven year life, which seems like a good indicator that somebody’s finding it helpful. Or that they confused the site with your grandma’s travel photos. Who can really tell these days?

Whatever brought you here, I’m glad you’re with me now. We live in exciting times, my friend. Tax Reform is real, and we have a lot to discuss before deciding to submit that next return to the IRS.

Super Big Disclaimer That You Definitely Agree To Even If You Didn’t Read This Part

A few years ago, nearly every document sent from an accounting firm had the IRS Circular 230 digitally (or in a few cases literally) duct taped to the bottom. We’re talking everything: memos, tax returns, faxes, emails. I’ve never been a Tinder user, but I’m sure at least a couple Big 4 partners stuck that notice on the bottom of their dating profile.

Why was it there? Because accountants don’t want to get sued because the reader confused the document for tax advice.

IRS Circular 230 was the official warning that just because the document talks about taxes, just because the document seems to be tax advice, and just because the document may be a tax return with tax positions taken on it that would absolutely be interpreted as tax advice by any reasonable jury in the US, the underlying document should not be taken as tax advice.

We really didn’t want anyone to get the wrong idea. And we really, really hoped it would keep the lawsuits down.

Then the IRS came out and told us to cool it. Just because we didn’t plaster IRS Circular 230 on our documents like monkeys throwing feces at walls doesn’t mean the document would automatically be considered tax advice.

I lay that out for the following reasons. First, most accountants are really risk averse, so anything that could be read as a threat of penalties would be read as a threat of penalties (it seems like I should put in a mattress tag gag here about how removing one will land you in prison, but I think that one played out before I hit middle school…).

Second, even though I haven’t stuck an IRS Circular 230 warning on the cover of this book, you shouldn’t sue me if something isn’t correct in here, or if you took something the wrong way.

Yes, you might have bought the book, but that doesn’t mean anything in here is tax advice.

Or, put another way:

Ask your accountant if this deduction is right for you.

Yes, I am an active CPA in the state of Colorado, and yes, I do give tax advice. This isn’t it. I charge WAY more for that shiz.

Much Smaller Disclaimer

This is a book about taxes. I probably can’t say that enough. If you were expecting something interesting, you came to the wrong place.

We’re Living in a Political World

One word on politics:

Trump.

I probably should expand that a little.

Governments collect taxes, and governments are run by politicians. That makes taxes inherently political.

While we’re talking about Tax Reform, I can’t escape the fact that these changes came from a law, The Tax Cuts and Jobs Act (Tick Jaw). This law (as I’ll discuss a little more later) was introduced by politicians, voted on by politicians, and signed into the Book of Life by politicians.

That means everything I touch in here has the potential to be a political land mine.

President Trump signed the law, Republicans voted in the law. None of that matters for these purposes. It’s the law, that’s all that matters.

If you like the politics of it, great. If you don’t, well, I’m just the messenger here.

Background to The Law a.k.a. The Tax Nerd Bona Fides

At times, this book will repeat itself.

My initial intention for these topics was to make a bunch of blog posts. Then I realized I should bundle everything up and sell it with extra tidbits. Because I like money.

That being said, most people will not read this text straight through, instead jumping to the topic they want to know more about.

To help with that, this book will repeat itself.

Mostly basic items. Background. Definitions. Things like that.

Each will have a different amount of detail.

So it’ll repeat itself.

Got it? Again and again like a math homework assignment.

Let’s do this the first time. The Background of the Law.

My office was watching this bill progress as if it were March Madness. Maybe we were missing the brackets on the wall and money changing hands, but there was still an intensity that’s usually reserved for the fans in the stadium.

This was our life it was messing with. We were on pins and needles, wondering how it would turn out.

Here’s the foundation.

Our corporations had a 35% Federal tax rate for a long time. Add to that an average state tax rate of around 5%, and most companies were looking at 40% of their income going to the government.

For a long time, that was fine. I mean, companies complained, but what were they going to do? Most corporations were selling most of their crap to the people down the street, so it’s not like they were going to set up shop in high tax England or Germany.

Then the world became more flat.

Not literally, of course. We did have one of those conventions here in Denver recently, but my tin foil hat didn’t fit, so I had to skip it.

I’m referring to competition becoming global. Things could easily slide from country to country without missing a beat.

As with all good competition, prices started going down. Countries began playing around with their tax rates hoping to nurture homegrown corporations and flicker that shiny lure to other companies around the world.

To put things in perspective, by the time I graduated from college (which was closer to the original release of Despicable Me than today), the US had the third-highest corporate tax rate of any industrialized country. Shortly thereafter, we had the highest rate.

What is that high corporate tax rate buying you? It’s easy to justify a higher price when you’re getting a filet mignon rather than a greasy burger from a cockroach-infested back alley, but how much more are you going to pay for that filet when you can get one just as good from the shop down the street?

Our tax rates were higher than the burger countries, but suddenly we were competing with places it takes a particularly strong imagination to see as backwards hellholes. England. Germany. Switzerland.

Sure, most companies aren’t going to pick up and relocate (though some have, and more have attempted it. Remember the Inversion hoopla from a few years back), but we have no way of knowing how many companies chose to start somewhere else because of our high rates.

But few companies actually pay that rate! Or so I heard on the news from the Talking Heads. That might be true in that a surprising number of companies are losing money. I don’t really see it in my money making clients, though.

Certainly a number of large companies were paying expensive tax accountants and lawyers to come up with innovative schemes to lower their tax rates, which is basically trading taxes for professional fees. Yes, a net positive to the bottom line, but hardly the boon that so many made out.

SIDE NOTE: one of the most commonly noted companies to benefit from these schemes was GE, which was delisted from Dow Jones in 2018 after 110 years of being on there. I’m not saying that’s because of their tax schemes screwed them over, but those schemes certainly didn’t prove to be a magic bullet keeping them profitable.

Anyway, back to my point. Money to the government, money to lawyers, money to tax accountants. It was all money that was a significant cost for the privilege of doing business in the US.

SIDE NOTE: Before looking up my address to figure out how best to apply that Costco sized pack of raw eggs you just purchased, see my note up above about politics. Agree or disagree with the analysis, this is the argument that was going around in the business and political world.

Many politicians noted that our rates, like the rent in New York City, were too damn high. I’m not talking about just one side of the isle. During the 2012 Election, I had way too much time to read random crap due to being on an assignment in downtown Dallas, a location that has (or had at the time) less to do in the evenings than a video gamer when the power goes out. So I read both political platforms.

Guess what both included? A very prominent blurb about the corporate tax rates being too damn high.

They may have used different language. I would need to go back and check.

Despite a government that claimed to actually find a point of unity, something that was in short supply from 2010 through 2016 (and beyond), no corporate tax rate changes made it to the President’s desk.

Then 2016 happened. The Republicans took office, and tax rates became a top priority.

Here’s the thing that gets lost in all of the political shouting: political parties are big tents. Self-interested politicians trying to garner enough votes to stay in office until we develop Altered Carbon body switching tech to transfer into a hot young body (sorry, Orrin Hatch, the Futurists tried) will support some weird positions that don’t line up with that D or R next to their names.

Republicans, as a group, wanted Corporate Tax Cuts, but that doesn’t sell well to Joe Blow and Jane Blane on the campaign trail when they demand to know what you’ve done for them lately.

You gave Apple a rate cut? Google? But not me?

So the Washington DC Think Tanks decided to mix the economically necessary but politically painful corporate tax cuts with the frivolous but delicious individual changes.

(Again, see my notes on politics)

What does this have to do with anything?

This means is that, in order to get the votes needed to pass what they wanted—corporate tax cuts—the dudes and dudettes on Capitol Hill dreamed up a million little compromises. Some of them were good. Some of them were chosen. . .poorly.

The end result was a bill that made the corporate tax changes permanent (or as permanent as any law), along with a mishmash of individual and other changes that will run out sometime between the date it was signed and 2025.

More important, what it means is a lot of fun that will make things more confusing year after year as things change and reverse.

Yay! More work for me.

With that said, let’s get down to the actual changes.

Changes That Don’t Fit In Any Other Categories

Most of the updates I’ve read about TCJA threw up the information in such a disorganized mess that it took almost as much time separating it out as actually understanding what happened.

I’m trying to do it better. Push the vomit into its own little categories so you know if this or that change is applicable to you, as well as what Congress has been eating at state-sponsored events.

That being said, some items are just going to be a mess no matter what. I’ve thrown those under this header, the orphan topics that really just don’t belong.

Changes in Inflation Spell Long Term Pain

Takeaway: Inflation is now slower

Some parts of taxation are so boring that even tax accountants will only talk about them when tied to a chair and injected with massive doses of caffeine. Inevitably, those parts all stray into the world of economics.

What’s the difference between an accountant and an economist? When it comes filing time, you’re willing to give your accountant a day of your time. That’s one more day a year than you’ll ever give an economist.

All this ripping on economists is because we’re going into their deep, dark domain to talk about inflation.

It is a pain to change tax laws. We got front row seats to a real, bona fide change, the first major one since 1986. Thanks to the way the economy works, we know $100 now will not be worth nearly as much 50 years from now (which will probably be the next time we seriously consider a tax code change).

So the government uses this one weird trick to get them out of having to debate tax numbers every year: They link the numbers to inflation.

Think about some of those limitations you bump into every year: FSA or HSA contributions, IRA contributions, other 3-letter contributions. The amount you can put in bumps up every year or so magically, all without Congress having to lift a gavel.

Are there gavels in Congress? That seems like something I should know.

Sometime around the end of each year, the sacrificial IRS intern opens up a trap door leading into the Treasury’s basement, where they toss in papers reporting the prices of various goods. Those prices are devoured by the chained-up pack of economists.

The intern then throws down a smoke bomb to force the economists back to their cages. She then digs through the remains of the paper and pulls out something called the Consumer Price Index, or CPI.

With the CPI number in hand, the IRS uses their massive computers (massive since they’re from the 80’s) to figure out all the limitations to use on the tax return.

That whole process hasn’t changed. We still have the Economic Dungeon and the sacrificial intern. Or however they come up with those numbers. What we lost thanks to TCJA, though, is the CPI.

From now