A few months ago, I wrote about the new tax law. At that time there was a question regarding how to treat home equity debt.
Under pre-Act law, taxpayers could deduct as an itemize deduction qualified residence interest, which included interest paid on a mortgage secured by a principal residence or a second residence. The underlying mortgage loans could represent acquisition indebtedness of up to $1.0 million ($500,000 for married filing separately), plus home equity indebtedness of up to $100,000. It did not matter what the $100,000 was used for to deduct the interest.
For tax years beginning after December 31, 2017 and before January 1, 2026, the deduction for home equity indebtedness is suspended, and the deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married filing separately). For tax years after December 31, 2025, the pre-Act law is restored. The suspension for home equity indebtedness also ends for tax years beginning after December 31, 2015.
Responding to many questions received from taxpayers and tax professionals, the IRS said that despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit or second mortgage, regardless of how the loan is labeled.
Under the Act, as an example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debt, is not.
Example one: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value $800,000. In February 2018, the taxpayer takes out a $250,000 home equity loan to put on an addition on the main home. Both the loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off credit cards, the interest on the home equity loan would not be deductible.
Example two: In January 2018, taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.
Example three: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgage is deductible. A per percentage of the total interest paid is deductible.
Guidance on the “20 percent deduction”
Of all the provisions of the Tax Cuts and Jobs Act, none are likely to cause more confusion than the new IRS Code Section 199A. Put simply, the deduction, effective for tax years beginning after December 31, 2017, and before January 1, 2026, is generally 20 percent of taxpayer’s qualified business income from partnerships, S corporations, or sole proprietorships. Will this be deduction be available to the public relations industry? Yes and no!
To take this deduction, the PR firm must be a qualified trade or business other than a specified trade or business or the business of performing services as an employee.
A specified trade or business is any trade or business involving the performance of services other than engineering or architecture. So where does this leave the PR industry? Right now, I believe that part of the PR (or integrated marketing services) entities that render a service will not be eligible.
However, there is a threshold exception to exclusion of specified service trade or business. If for any tax year, the taxable income of any taxpayer is less the $157,500 ($315,000 in the case of a joint return), the exclusion for specified service trade or businesses does not apply and the deduction is available to the taxpayer, for that year. This means that the individual PR professional or any service business professional for that matter will be able to take the 20 percent deduction.
Richard Goldstein is a Partner at Buchbinder Tunick & Company LLP, New York, Certified Public Accountants.