On December 20, 2017, Congress passed its comprehensive tax reform bill, the Tax Cuts and Jobs Act (“the Act” or “the Bill"). The Bill represents one of the most extensive modifications to the U.S. tax code in recent history, significantly modifying U.S. taxation for individuals and businesses. Most provisions in the bill take effect on January 1, 2018. Below you will find a summary of some of the provisions included in the Tax Cuts and Jobs Act for businesses.
Corporate tax rate.
The corporate tax rate will be a flat 21% rate, as opposed to the current graduated rates, with the top rate currently at 35%.
Dividends received deduction (“DRD”).
Under current law, a corporation is allowed a DRD of 80% of the related dividend from a 20%-owned domestic corporation, and a DRD of 70% of the related divided from other corporations. The 80% and 70% rates will be reduced to 65% and 50%, respectively.
Alternative minimum tax.
The corporate alternative minimum tax will be eliminated. The current corporate AMT rate is 20%, with an exemption amount of up to $40,000.
Section 179 property expensing.
The maximum amount of qualifying property that can be expensed under Section 179 in a given tax year will be increased to $1 million (from $500,000), and the phase-out threshold will be increased to $2.5 million (from $2 million).
Cost recovery of qualifying business assets.
The current 50% bonus depreciation is increased to 100% for qualified assets placed in service after September 27, 2017 and before December 31, 2022. For assets placed after 2022, the amount of bonus expensing allowed will decline by 20% each year until it phases out completely for qualified property placed in service after December 31, 2026.
Limitations on business interest deduction.
Taxpayers will be subject to a disallowance of a deduction for net interest expense in excess of 30% of the taxpayer’s net adjusted taxable income, which is calculated before net operating losses, depreciation, amortization, and depletion. A special rule applies to pass-through entities, which requires the disallowance to be determined at the entity level (i.e., at the partnership level rather than the partner level). An exemption from this limitation applies for taxpayers with average annual gross receipts for a rolling three-year tax period that do not exceed $25 million.
Net operating loss.
Net operating losses arising after tax years beginning after December 31, 2017 will be carried forward indefinitely, as opposed to the current carryforward period of 20 years, but may only offset 80% of taxable income. Further, the current two-year carryback period will be repealed.
Effective for transfers after December 31, 2017, the rule allowing the deferral of gain on like-kind exchanges is modified to allow for like-kind exchanges only with respect to real property that is not held primarily for sale. That is, deferral would no longer be allowed for exchanges of intangible property, or tangible personal property such as artwork.
Cash method of accounting.
Under current law, C corporations and partnerships with a C corporation partner may use the cash method of accounting only if its average annual gross receipts did not exceed $5 million during the three-year period ending with the previous tax year (the “gross receipts test”). For tax years beginning after December 31, 2017, the gross receipts test is modified such that a taxpayer may use the cash method of accounting if, during the three-year period ending with the previous tax year, its average annual gross receipts do not exceed $25 million.
Excessive employee compensation.
Under current law, a deduction for compensation paid to a “covered employee” of a publicly traded corporation is limited to $1 million per year, with exceptions for commissions and performance-based compensation. The Bill repeals these exceptions, and clarifies the definition of “covered employee” to include the principal executive officer, the principal financial officer, and the three other highest paid employees. Further, once an individual is a covered employee, he or she will remain a covered employee for all future tax years.
Movement to territorial tax system.
The Bill movies the U.S. closer to a territorial tax system by providing a 100% DRD for foreign-source dividends received by U.S. corporations from certain foreign subsidiaries, effective for distributions made after 2017. The 100% DRD would only be available to certain domestic C corporations that are neither real estate investment trusts nor regulated investment companies. Dividends from passive foreign investment companies also would not qualify for the 100% DRD.
As part of the transition to a more territorial tax system, there will be a one-time repatriation tax on certain foreign subsidiaries’ previously untaxed foreign earnings and profits (“E&P”). Generally, this “repatriation toll charge” will apply to post-1986 E&P of a controlled foreign corporation, or a foreign corporation that is at least 10% owned by a U.S. corporation. Foreign tax credits for the portion of earnings subject to the toll charge would be available to offset the tax.
Unrelated business Taxable income (“UBTI”).
Tax-exempt organizations will be required to separately calculate the net UBTI of each unrelated trade or business. Losses derived from one unrelated trade or business may no longer offset income from another unrelated trade or business. Current law allows a tax-exempt organization, in calculating UBTI, which operates multiple unrelated trades or business to aggregate income and deductions from all such trades and business.
Excise tax on investment income of private colleges and universities.
For tax years beginning after December 31, 2017, an excise tax equal to 1.4% is imposed on net investment income of private university and colleges with at least 500 tuition-paying students (who are more than 50% located in the U.S.) and with assets, other than used for the institution’s exempt purpose, of at least $500,000 per student. Currently, private universities and colleges are not subject to excise tax on net investment income.
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