The Tax Cuts and Jobs Act of 2017 (TCJA) is the most massive tax law change since 1986, and there’s a lot to take in. There are numerous changes that employers must make to their processes and accounting. The following six changes are just a small portion of the changes. There are many other federal provisions that have changed and may impact your specific situation.
- Contributions to Capital (IRC. Sec. 118)
Federal tax reform clarifies that contributions to capital do not include any contribution in aid of construction, any other contribution made by non-shareholders, and any contribution made by any governmental entity or civic group. Clarification would generally apply to contributions made after the date of enactment.
- Related Party Interest and Intangible Expenses
Federal tax reform denies deductions for disqualified related party amounts paid or accrued to a hybrid transaction.
- Dividends Received Deduction
Federal tax reform reduces the deduction for dividends received from other than certain small businesses or those treated as “qualifying dividends” from 70% to 50%; and dividends received from 20% owned corporations from 80% to 65%.
- Foreign Dividends and Foreign Tax Credit
Federal tax reform allows a deduction by a domestic corporation of dividends received from a 10 percent owned foreign corporation and disallows a foreign tax credit for foreign taxes paid or accrued with respect to qualifying dividends.
- International Income – Deemed Repatriation
One of the main drivers of federal tax reform was to allow businesses to bring accumulated foreign profits into the U.S. at a lower tax rate to increase investment and jobs in the U.S. Federal tax reform includes a deemed repatriation clause that taxes cash at 15.5 percent and other illiquid assets at 8 percent.
- Federal Net Operating Loss (NOL) Changes
A NOL is the amount by which a taxpayer’s business losses exceed its income. For tax years beginning before January 1, 2018, NOLs were able to offset 100% of taxable income and allowed to be carried back two years and carried forward for twenty years.
Federal tax reform eliminates net operating loss carrybacks while providing indefinite net operating loss carryforwards, limited to 80 percent of taxable income for losses arising in tax years beginning after December 31, 2017.
Update October 26, 2018: The IRS clarified that tax relief for foundation repairs is unaffected by the TCJA’s loss limitations. In a letter to a member of Congress, the IRS Commissioner stated that changes made by the law to casualty losses and NOLs don’t affect safe harbor relief granted by the IRS. That relief allows taxpayers to treat the costs of repairing home foundations damaged by pyrrhotite as casualty losses. Casualty loss deductions that qualify for the relief are treated as business deductions and can create or increase a taxpayer’s NOL.
LBMC is headquartered in the Nashville, Tennessee area, with offices in Knoxville and Chattanooga. Here’s what you need to know about how new federal changes will impact Tennessee.
Keep up-to-date on current happenings with federal tax reform by visiting LBMC’s resource center.