In 2019, the biggest changes candidates will see on the CPA Exam will be on the Regulation (REG) section. Keep reading to learn more about where these REG changes came from, when the new tax law will be tested, what we recommend to candidates, and a list of exactly what those changes entail.
The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) was signed by President Trump and became public law in December 2017. The tax overhaul is the first of its kind in over 30 years, resulting in significant changes to both individual and corporate income taxes. Most of the cuts are effective starting in 2018; the individual tax cuts generally expire in 2025 while the business tax cuts will remain permanent.
Normally, when material on the CPA Exam changes, the new content becomes eligible for testing in the later of: (1) the first testing window beginning after the pronouncement’s earliest mandatory effective date or (2) the first testing window beginning six (6) months after the pronouncement’s issuance date. However, the TCJA impacted the Regulation section to such an extent that the AICPA needed time to incorporate those changes and decided that no provisions of the TCJA, including those retroactive to periods before December 31, 2017, would be eligible for testing until January 1, 2019.
Sitting for REG in 2018 vs 2019
Given the major changes that will hit in January 2019, we strongly recommend that students who have already begun to study, recently graduated, or have tax experience sit for REG in 2018. By getting this out of the way, you won’t have to learn the new REG standards and will be able to save major study time and aggravation.
On the other hand, we recommend that students without any REG knowledge hold off on sitting for the exam until 2019. Why? Many of the new REG standards have been simplified! This is good news for candidates who are starting from scratch.
How Surgent CPA Review is Helping Students Prepare for REG Changes
Because the 2019 REG changes are so substantial, Surgent has rolled out updated content ahead of schedule. All Surgent students have access to both 2018 and 2019 REG content, and simply need to choose the outline they’d like to study. These updates, like all updates, are always automatic and free of charge to our students.
Moreover, Surgent CPA Review offers students thorough transparency into and feedback on their CPA Exam readiness. Thanks to ReadySCORE™, students are able to dive into their CPA Exam readiness by content area and topic, and by question type. Once students reach the Review Phase of the software, they’re presented with their combined ReadySCORE, which estimates what they’d score on the CPA Exam if they took it that day. How accurate is ReadySCORE? Our analysis has shown that the average student’s combined ReadySCORE at the time they sit for the exam is with 4% of their actual exam score.
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Summary of 2019 REG Changes from TCJA
Changes to Individual Taxes
- Imposes a new tax rate structure with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers and $600,000 for married couples filing jointly. Brackets are indexed for inflation to the chained CPI measure.
- Increases the standard deduction to $24,000 for joint filers (and surviving spouses) and $12,000 for individual filers. Single filers with at least one qualifying child could claim a standard deduction of $18,000. Amounts are adjusted for annual inflation.
- Eliminates the personal exemption.
- Limits the mortgage interest deduction to the first $750,000 in principal value.
- Simplifies the “kiddie tax” rules: the net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates.
- Limits the state and local tax (SALT) deduction to a combined $10,000 for income, sales, and property taxes.
- Expands the child credit to $2,000 per qualifying child and the maximum refundable amount of the credit to $1,400. The credit temporarily provides for a $500 nonrefundable credit for qualifying dependents other than qualifying children, such as an elderly parent. The phase-out for the combined child credit, the non-child dependent credit, and the credit for other taxpayers is increased to $400,000 (for joint filers) and to $200,000 (for single filers).
- Effectively repeals the health care individual mandate penalty by lowering the penalty amount to $0, effective January 1, 2019.
- Eliminates the deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2% of adjusted gross income (AGI).
- Eliminates the itemized deduction for casualty and theft losses except for losses incurred in a federally declared disaster.
- Eliminates the deduction for job-related moving expenses, except for certain military personnel. The exclusion for moving expense reimbursements has also been suspended.
- For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.
- Increased the estate and gift tax exemption has been increased to $11,180,000.
- Increases the alternative minimum tax (AMT) exemption to $109,400 for joint filers, $54,700 for married taxpayers filing separately, and $70,300 for unmarried taxpayers. The exemption is phased out for taxpayers with alternative minimum taxable income over $1 million for joint filers, and over $500,000 for all others.
- Creates Section 199A: Sole proprietors, S corporation shareholders, and partners in a partnership will be entitled to a deduction equal to 20% of their allocable share of business income (§199A), with certain limitations:
- the deduction cannot generally exceed 50% of the taxpayer’s share of the W-2 wages paid by the business or, in the alternative, 25% of the taxpayer’s share of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis (the original purchase price) of property used in the production of income, and
- certain personal service businesses (accountants, doctors, lawyers, etc.) are not eligible for the deduction unless their taxable income is less than $157,500 (if single; $315,000) if married.
Changes to Business Entities
- Eliminates the corporate alternative minimum tax.
- Lowers the corporate income tax rate permanently to 21%.
- Allows full and immediate expensing of short-lived capital investments for five years. Increases the Section 179 expensing cap from $500,000 to $1 million.
- Limits the deductibility of net interest expense to 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years, and 30% of earnings before interest and taxes (EBIT) thereafter.
- Eliminates net operating loss carrybacks and limits carryforwards to 80% of taxable income.
- Eliminates the domestic production activities deduction (Section 199) and modifies other provisions, such as the orphan drug credit and the rehabilitation credit.
- Enacts deemed repatriation of currently deferred foreign profits, at a rate of 15.5% for cash and cash-equivalent profits and 8% for reinvested foreign earnings.
Susan J. Cox, M.Acc., CPA is a Senior Technical Editor for Surgent CPA Review. Susan received her graduate and undergraduate degrees from Florida State University. Prior to joining Surgent, Susan worked as a technical editor for Thomson Reuters, an accounting instructor for the University of South Florida, a senior internal auditor for GTE, and an experienced senior auditor for Arthur Andersen & Co.