On December 20, 2017, the U.S. Congress passed one of the most significant overhauls of the U.S. tax code in more than forty years. The tax reform act (formerly known as the Tax Cuts and Jobs Act or the “Act”) has far reaching effects on businesses in the U.S. as well as those abroad. We will highlight ten key areas of the new law and its effect on your U.S. based business.
1. A New Lower Corporate Tax Rate.
Under the new law, C corporations (and businesses taxed as C corporations) are taxed at a rate of 21%. This is reduced from the previous rate of 35%.
2. Territorial Taxation.
Under the previous worldwide taxation regime, US companies were taxed on income, regardless of where in the world it was generated. The new method of territorial taxation means earnings abroad are exempted from taxation in the US and taxed only by geographic region.
3. A New 20% Pass-Through Deduction. Establishes a 20% deduction of qualified business income from certain pass-through businesses. Specific service industries, such as health, law, and professional services, are excluded. However, joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries.
4. Expenses Treated as an Operating Cost and Deducted from Income. Allows full and immediate deduction from taxpayer income (expensing) of short-lived capital investments for five years. Increases the section 179 expensing cap from $500,000 to $1 million.
5. Enacts a Mandatory One Time Tax on Accumulated Foreign Profits (AKA Deemed Repatriation). Enacts deemed repatriation of currently deferred foreign profits, at a rate of 15.5 percent for cash and cash-equivalent profits and 8 percent for reinvested foreign earnings.
6. No Corporate Alternative Minimum Tax. The new law eliminates the corporate alternative minimum tax.
7.Net Operating Loss Carry Backs are Eliminated and Carry Forwards are Limited. The Act eliminates net operating loss carry backs and limits carry forwards to 80 percent of taxable income.
8.No Domestic Production Activities Deduction. Eliminates the domestic production activities deduction (section 199) and modifies other provisions, such as the orphan drug credit and the rehabilitation credit.
9.Increased U.S. Gross Domestic Product, More Jobs, and Decreased Federal Revenue. Our analysis finds that the Tax Cuts and Jobs Act would reduce marginal tax rates on labor and investment. As a result, we estimate that the plan would increase long-run GDP by 1.7 percent. The larger economy would translate into 1.5 percent higher wages and result in an additional 339,000 full-time equivalent jobs. Due to the larger economy and the broader tax base, the plan would generate $600 billion in additional permanent revenue over the next decade on a dynamic basis. Overall, the plan would decrease federal revenues by $1.47 trillion on a static basis and by $448 billion on a dynamic basis. The remaining difference is explained by temporary dynamic revenue growth from the bill’s numerous expiring provisions.
10.Estate Tax. For companies that have a trust or estate plan as part of their succession planning, it is important to note that the new tax law doubles the estate tax exemption from $5.6 million to $11.2 million. This exemption expires on December 31, 2025 yet will increase with inflation.
** Please note that the above is provided as an overview of the new tax changes and how they will change the corporate tax landscape yet does not constitute tax or legal advice. All information should be further discussed with your tax professional or corporate legal counsel.