What the Tax Reform Bill Means for Businesses and Individuals

With the recent passing of the Tax Cuts and Jobs Act (TCJA), the most significant reform of the U.S. tax code since 1986, you may be wondering how this affects you as an individual or your business or partnership operating in the U.S. or abroad. Here is an overview of the key changes affecting individual and business taxpayers.

However, keep in mind, these changes are only effective for tax years beginning after December 31, 2017 unless noted below.

Businesses:
  • Corporate Tax Rate: The corporate tax rate is lowered to 21% with no special rate for personal service corporations. The maximum corporate tax rate on net capital gain is repealed.
  • Temporary 100% Bonus Depreciation: Qualified property, new or used, placed in service after 9/27/17,  is eligible for 100% bonus depreciation.
  • Section 179 Depreciation: The amount of 179 expense is increased to $1,000,000 and the phase-out threshold is increased to $2,500,000. The definition of qualified real property is expanded to certain improvements to nonresidential real property such as HVAC and security systems.
  • Cash Method of Accounting: Corporations with gross receipts of $25 million or lessare now eligible to be on the cash method of accounting.
  • Accounting for Inventories: Increases the $10 million average gross receipts threshold to $25 million. Any taxpayer under the threshold is allowed to treat inventories as non-incidental materials and supplies or conform to the taxpayer’s financial accounting treatment, regardless of industry.
  • UNICAP: The average gross receipts threshold for businesses subject to UNICAP increases to $25 million.
  • Business Interest Limitation: Businesses with average annual gross receipts in excess of $25 million are subject to a limitation on business interest to the sum of business interest income plus 30% of the business’ adjusted taxable income. Any excess can be carried forward indefinitely.
  • Entertainment: All entertainment expenses are nondeductible. Food and beverage expenses associated with operating a trade or business will generally be retained. Expenses for employer-provided meals for the convenience of the employer on or near the premises are disallowed.
  • Net Operating Loss Deduction: The election to carryback an NOL is repealed. Current year NOL deductions are limited to 80% of the taxpayer’s taxable income.
  •  Domestic Production Activities Deduction: Repealed.
  • Accounting for Long-term Contracts: Increased the average gross receipts threshold to $25 million relating to the exception to the requirement to use the percentage-of-completion method for long-term contracts to be completed in two years. Applies to post-2017 contracts.
  • Corporate AMT: Corporate alternative minimum tax (AMT) is repealed with no expiration for the provision. Prior year minimum tax credits continue to be allowed to offset regular tax liability.
  • Like-Kind Exchanges: Like-kind exchange rules are repealed except for exchanges involving real property not held primarily for sale.
  • Farming Property Recovery Period: The requirement to use 150% declining balance method for farming property is repealed and the recovery period is reduced to five years for equipment and machinery.
  • Credits: The research and development credit was explicitly preserved. The Work Opportunity credit remains.
  • Dividends Received Deduction: The 80% dividends received deduction is lowered to 65%, and the 70% received deduction is lowered to 50%.
  • Deduction for Excessive Public Company Covered Employee Remuneration: The $1 million yearly limit on deduction for compensation with respect to a covered employee of a publicly traded corporation would be modified to repeal exceptions for commissions and performance-based compensation. No changes take effect with respect to a written contract already in effect as of Nov. 2, 2017, as long as it is not materially modified after that date.

Pass-through entities: 

  • Qualified Business Income Deduction: Certain taxpayers are allowed a new 20% deduction for domestic qualified business income from a partnership, S corporation, or sole proprietorship. The deduction does not reduce adjusted gross income but reduces taxable income.
  • Excess Business Losses: Losses in excess of the sum of aggregate business gross income or gain of the taxpayer plus a threshold amount of $500,000 for married and $250,000 for all other filers are disallowed, but available for carryforward.
  • Qualifying Beneficiaries of an ESBT: Nonresident aliens are eligible to be a current beneficiary of an electing small business trust (ESBT).
  • Charitable Contribution Deduction for an ESBT: Limitations on charitable deductions are determined by rules applicable to individuals, not trusts. Limitations and carryforward provisions apply.
  • Technical Terminations: Repealed.
  • Carried Interest: Subject to short-term capital gain (ordinary income) rates if a three-year holding period is not met.

International:

  • Deduction for Foreign-Source Dividends: 100% deduction for the portion of dividends received by U.S. shareholders from “specified 10% owned foreign corporations”, subject to 1-year holding period. No foreign tax credit or deduction is permitted for foreign taxes paid or accrued with respect to a qualifying dividend.
  • Repatriation: A mandatory tax on post-’86 accumulated foreign earnings of 15.5% for cash (or cash equivalents) and 8% on illiquid assets. Any resulting liability can be paid over an eight-year period.
  • Foreign Tax Credit: Indirect foreign tax credit repealed.
  • Subpart F: Would not modify current Controlled Foreign Corporation (CFC) look-through rules. Repeals current taxation of previously excluded qualified investments (§955) and foreign base company oil related income as subpart F (§954). Stock attribution rules for determining CFC status are modified to treat U.S. corporations as constructively owning stock held by a foreign shareholder.
  • Global Intangible Low-Taxed Income: US corporate shareholders of Controlled Foreign Corporations are subject to current US tax on 50% of “global intangible low-taxed income” (GILTI) with a deduction of 37.5% for foreign-derived intangible income. GILTI is the excess of each U.S. corporate shareholder’s “net CFC tested income” over the shareholder’s “net deemed tangible income return”, computed annually.

Individuals:

  • Tax Rates: Seven tax brackets remain (10% to 37%), but the rates have been reduced in each bracket.
  • Standard Deduction: New standard deduction of $24,000 for joint or surviving spouse, $18,000 for head of household, and $12,000 for single filers. The enhanced standard deduction for the blind and elderly will remain.
  • Personal Exemptions: Exemptions are suspended until 2026.
  • Individual AMT: AMT exemption amount increases to $109,400 for joint filers, and the phase-out of exemption increases to $1 million for joint filers. Generally, fewer taxpayers will be subject to AMT.
  • Miscellaneous Itemized Deductions: The deduction for miscellaneous itemized deductions subject to the 2% floor are suspended until tax year 2026. This includes tax preparation fees, investment fees, safe deposit box fees, and unreimbursed employee business expenses.
  • Itemized Deduction Limitation: The 3% limitation on itemized deductions for certain taxpayers is suspended until 2026.
  • Mortgage Interest: Taxpayers are able to deduct mortgage interest on only the first $750,000 of home equity indebtedness incurred after December 15, 2017. The mortgage interest deduction for home equity indebtedness is suspended until 2026.
  • State and Local Taxes: Sales, income and property taxes are combined into one amount, and the deduction is limited to $10,000 ($5,000 for married filing separate).
  • Charitable Contributions: Deductibility of charitable contributions are now limited to 60% of adjusted gross income, increased from 50%.
  • Medical Expenses: For tax years 2017 and 2018 only, the adjusted gross income floor for the medical expense deduction is reduced to 7.5%.
  • Alimony: For alimony agreements entered into after December 31, 2018, alimony paid will no longer be a deduction and alimony received will no longer be income for the respective taxpayers.
  • Child Tax Credit: The credit is increased to $2,000, with a maximum refundable amount of $1,400, and increased the phase-out threshold to $400,000.
  • Education Savings: Elementary and secondary school expenses up to $10,000 are qualified expenses for qualified tuition programs, including 529 accounts.
  • Moving Expenses: The deduction is suspended except for active duty members of the Armed Forces.
  • Recharacterization of Certain IRA and Roth IRA Contributions: Recharacterization cannot be used to unwind Roth IRA conversions; however, recharacterization still permitted with respect to other contributions
  • Rollovers of Plan Loan Offsets: Employees with a plan loan have until the due date (including extensions) of filing their tax return to contribute the loan balance to an IRA to avoid having the loan amount treated as a taxable distribution, an increase from 60 days before becoming taxable.
  • Affordable Care Act Individual Mandate: Individual shared responsibility payment is reduced to zero for months beginning after December 31, 2018.
  • Discharge of Student Loan Debt: Loan debt discharged due to death or permanent disability are excluded from gross income.
  • Credits: The Earned Income Tax Credit and Adoption credits are both explicitly preserved.
  • Personal Casualty Losses: The deduction is limited to casualty losses incurred as the result of a federally declared disaster. All others are disallowed.
  • Qualified Equity Grants: Allows employees who are granted stock options or restricted stock units (RSUs) to elect to defer recognition of gain for up to 5 years if an election is made within 30 days of specified events.
  • Estate and Gift Tax: The lifetime exclusion amount is increased to $10 million for decedents and gifts made before 2026.
  • Generation-Skipping Transfer Tax: The GST exemption is increased to $10 million for transfers made before 2026.

If you would like more details on how the new law may affect you, please contact a Barnes Wendling tax advisor today.

 

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