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US Tax Reform - Summary of the Tax Cuts and Jobs Act

12/20/2017

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On December 15th, the final bill, titled Tax Cuts and Job Acts (TCJA) was agreed upon by the congressional committee. It was approved by the House and the Senate on December 20th and signed by the President on December 22.

The House and Senate conference committee report (legislative text and Joint Committee on Taxation estimate) and the conference committee’s Explanatory Statement are both available for download.

Comparison of Conference Bill and Current Law
Click here our Special Report.

The bill changes everything – how individuals, businesses, estates, nonprofit organizations, etc. are taxed, including tax rates, tax deductions, credits, and more. It is the most massive tax law change since 1986. To put it in a form of an analogy – if the current tax law is a map; we just got a whole new map. Now we have to determine what directions you need to reach your destination (lower tax liability).

Needless to say, the goal of simplicity was not reached. What was accomplished, was simply a change in the rules – lowering rates, removing deductions and creating new calculations to determine taxable income for all types of taxpayers.

The final bill is a $1.4 trillion tax cut where the majority of the corporate tax changes being permanent and the individual tax changes being temporary (generally expiring 12/31/25).

As you review the following high-level bullet point summary, please keep in mind that there are many other changes within the bill that are not mentioned below. We are attempting to highlight the changes we believe to have the broadest impact. With that said, every situation is different and will require analysis to determine the impact and identify what actions you should take to mitigate any unintended consequences (larger tax liability). Other changes not mentioned below may have an impact on your tax situation.

As we approach December 31st, there may be actions you need to take to mitigate any negative impact or take advantage of opportunities. There will also be actions you need to take in the first few months of 2018 and throughout 2018 as regulations and further details of the tax law changes are revealed.

Please reach out to your tax advisor to discuss what matters to you.

Individuals

  • Retains seven brackets, but at reduced rates, including a top marginal rate of 37 percent. The current tax rates of 10%, 15%, 25%, 28%, 33%, 35%, 39.6% rates would be replaced with tax rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Provisions sunset at end of 2025.
  • Increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers, while eliminating the additional standard deduction and the personal exemption. Provisions sunset at the end of 2025.
  • Retains the charitable contribution deduction
  • Retains the mortgage interest deduction for acquisition, but limited (for new purchases) to $750,000 in mortgage debt, while eliminating the deduction for equity debt. Reverts back to $1 million 1/1/26, regardless of when debt occurred. Available for second homes.
  • Caps the state and local tax deduction at $10,000 (property plus choice of income or sales taxes, as under current law), except for taxes paid or accrued in carrying on a trade or business.
  • Medical expense deduction – applies to expenses that exceed 7.5% of AGI in 2017 and 2018, and expenses that exceed 10% of AGI thereafter. The medical expense deduction threshold is lowered to 7.5 percent for 2018, and reverts to 10 percent thereafter. Eliminates other itemized deductions.
  • Increases the child tax credit to $2,000. Of this, $1,400 would be refundable, with the refundable portion indexed to inflation. All dependents ineligible for the child tax credit are eligible for a new $500 per-person family tax credit. Provisions begin to phase out at $400,000 ($200,000 for single filers). Social Security Numbers required for portions of the above. All provisions sunset at the end of 2025.
  • Retains alternative minimum tax (AMT) - Increases the exemption to $70,300 single/$109,400 MFJ) and raises the phaseout threshold to $500,000 single/$1 million for joint filers. (Other exemptions and phaseout thresholds exist for single filers and married filing separately, and are also adjusted.)
  • Expands the use of 529 accounts to cover tuition for students in K-12 private. Allows distributions of up to $10,000 per student tax-free from 529 accounts to be used for elementary, secondary and higher tuition.
  • Retains retirement savings options such as 401(k)s and IRAs
  • Net capital gains and qualified dividends would continue to be taxed at the current 0%, 15%, 20% rates and also would continue to be subject to the 3.8% net investment tax
  • Repeals the moving expense deduction (except for active duty military personnel) and eliminates the alimony deduction effective 2019 (though those receiving alimony no longer count it as income). Retains other above-the-line deductions, including educator expenses and student loan interest. Graduate student tuition waivers also remain in place.
  • Repeals all itemized deductions subject to the 2% floor (home office, license and regulatory fees, professional dues)
  • Retains adoption credit
  • Retains current law ownership period for the exclusion of gain from the sale of a principal residence
  • Continues to allow graduate students to exclude the value of reduced tuition from taxes
  • Continues to allow deductions for student loan interest and for qualified tuition and related expenses

Individual Mandate Penalty

  • Reduces the individual mandate penalty to $0 in 2019, effectively repealing it

Businesses (in general)

  • C corporate tax rate 21% (effective January 1, 2018)
    • Fiscal year end filers may have blended rate for 2018
  • Corporate alternative minimum tax (AMT) is repealed for tax years beginning after December 31, 2017
  • Dividends Received Deduction - Reduces the deduction for dividends received from other than certain small businesses or those treated as “qualifying dividends” from 70% to 50%. Reduces dividends received from 20% owned corporations from 80% to 65%
  • Capital investment - Allows full (100 percent) expensing of short-lived capital investment, such as machinery and equipment, for five years, then phases out the provision over the subsequent five, and raises Section 179 small business expensing cap to $1 million with a phaseout starting at $2.5 million. Allows immediate write-off of qualified property placed in service after 9/27/17 and before 2023. The increased expensing would phase-down starting in 2023 by 20 percentage points for each of the five following years. Eliminates original use requirement. Qualified property excludes certain public utility property and floor plan financing property. Taxpayers may elect to apply 50% expensing for the first tax year ending after 9/27/17
    • Sec. 179 - Expands “qualified property” to include certain depreciable personal property used to furnish lodging, and improvements to nonresidential real property (such as roofs, heating, and property protection systems)
  • Interest Expenses - Caps net interest deduction at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years, and 30 percent of earnings before interest and taxes (EBIT) thereafter. Limits deduction to net interest expense that exceeds 30% of adjusted taxable income (ATI). Initially, ATI computed without regard to depreciation, amortization, or depletion. Beginning in 2022, ATI would be decreased by those items. Regulated utilities generally excepted.
  • NOLS - Eliminates net operating loss carrybacks while providing indefinite net operating loss carryforwards, limited to 80 percent of taxable income. Limits NOLs to 80% of taxable income for losses arising in tax years beginning after 2017. Repeals carryback provisions, except for certain farm and property and casualty losses; allows NOLs to be carried forward indefinitely
  • Repeals like-kind exchanges except for real property
  • Contributions to Capital (Sec. 118) - Retains Section 118; clarifies that such contributions 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
  • Research and Experiment expenses – domestic research expenses required to be amortized over 5 years; foreign research expenses required to be amortized over a 15 year period;
  • Business Credits - modifies, but does not eliminate, the rehabilitation credit and the orphan drug credit, while limiting the deduction for FDIC premiums. Research and development credit is retained without modification from current law.
    • Modifies rehabilitation credit to provide 20% historic credit ratably over 5 years, repeals credit for pre-1936 property
    • Work Opportunity Tax Credit, New Markets Tax Credit, Low Income Housing Tax Credit - Retains current law for WOTC, NMTC, and LIHTC, however, modifies rehabilitation credits for old and/or historic buildings
    • Orphan drug credit survived, but modified - Reduces credit to 25% and generally would need to exceed 50% of the average expenses over a three-year period. Reduced credit applies to amounts paid or incurred in tax years beginning after 12/31/17
  • Domestic Production Deduction (Sec. 199) repealed for tax years after 2017
  • Limits meals and entertainment expenses, including meals for the convenience of the employer
  • Repeals deduction for qualified transportation fringes, including commuting except as necessary for employee’s safety
  • Cash method of accounting - Increases eligibility to businesses with up to $25 million in income; taxpayers that meet the new $25 million threshold are also not required to account for inventories under Sec. 471 or apply 263A; Accounting method changes may be treated as initiated by the taxpayer and made with the consent of the Secretary.
  • Energy provisions - Does not repeal any conventional energy tax credits and leaves untouched the deductibility of intangible drilling costs, taxpayers’ eligibility to take percentage depletion and the designation of certain natural resource related activities as generating qualifying income under the publicly traded partnership rules
  • Provides tax credit to certain employers who provide family and medical leave (sunsets 12/31/19)
  • Executive compensation
    • Expands the Section 162(m) $1 million deduction limit that applies to compensation paid top executives of publicly held companies for TY beginning after 12/31/17
    • Covered employees would to include the CFO and all executives once identified
    • Eliminates the performance-based compensation exceptions and extends deduction limitation to deferred compensation paid to executives who previously held a covered employee position
    • Expands applicability of the deduction limitation to certain foreign private issuers and private companies that have publicly traded debt
    • Provides a transition rule for compensation paid pursuant to a plan under a written binding contract that is in effect on 11/2/17 and is not materially modified thereafter
  • Eliminates deduction for certain fringe benefit expenses
    • Business entertainment activities and membership dues; transportation or commuting expenses are not excludable from income or deductible by the employer
    • Employee achievement awards may not be deducted or excluded from income if the award is paid in cash, gift cards, meals, lodging, tickets, securities, or other similar items
    • No longer exempts employer-provided eating facilities from 50% deduction limitation; in 2026, deductions are completely disallowed for employer-provided eating facilities and meals provided for the convenience of the employer
  • Adds a new income inclusion deferral election allowing deferral of tax for options and restricted stock units issued to qualified employees of private companies; applies on or after 12/31/17

Pass-Through Entities (rules specifically for pass-through entities)

  • Pass-through Income – 20% deduction for pass-through income limited to the greater of (a) 50 percent of wage income or (b) 25 percent of wage income plus 2.5 percent of the cost of tangible depreciable property for qualifying businesses, including publicly traded partnerships but not including certain service providers. Limitations (both caps and exclusions) do not apply for those with incomes below $315,000 (joint), and phase out over a $100,000 range.
    • Allows individual taxpayers to deduct 20% of domestic “qualified business income” (QBI) from a partnership, S corporation, or sole proprietorship (“qualified businesses”) subject to certain limitations and thresholds. Trusts and estates may take the deduction. Effective for tax years beginning after 12/31/17 and before 1/1/26
    • QBI for a tax year means the net amount of domestic qualified items of income, gain, deduction, and loss with respect to a taxpayer’s qualified businesses. “Qualified businesses” does not include specified services trades or businesses such as accounting, law, health, several other professions, service businesses related to investing, but does include engineering and architecture trades
    • Deduction is limited for taxpayers with income above $315,000 (mfj) to the greater of 50% of the W-2 wages, or the sum of 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property. Limitation fully phased-in for taxpayers with income of $415,000 and above (mfj). For taxpayers with income from specified service businesses, deduction starts being phased out at $315,000 (mfj) income amount and fully phases out over a $100,000 range (mfj) at $415,000 (mfj) income amount
    • Other key changes include repeal of partnership technical termination rules; a rule imposing a three-year holding period to treat capital gain as long-term capital gain for certain partnership interests held in connection with the performance of certain services; a rule limiting taxpayers (other than C corporations) ability to deduct business losses for tax years beginning after 12/31/17 and before 1/1/26, with excess business losses carried forward
  • Disallows active pass-through losses in excess of $500,000 for joint filers; $250,000 for all others (sunsets 12/31/25)
  • Tax gain on sale of a partnership interest on look-thru basis
  • Charitable contributions and foreign taxes taken into account in determining limitation on allowance of partner’s share of loss
  • Expands the definition of substantial built-in loss for purposes of partnership loss transfers
  • Modifies treatment of S corporation conversions into C corporations
  • Recharacterization of certain gains on property held for fewer than 3 years in the case of partnership profits interest held in connection with performance of investment services

International Income

  • Moves to a territorial system with anti-abuse rules and a base erosion anti-abuse tax (BEAT) at a standard rate of 5 percent of modified taxable income over an amount equal to regular tax liability for the first year, then 10 percent through 2025 and 12.5 percent thereafter, with higher rates for banks.
    • GILT (global intangible low taxed income (minimum tax on foreign earnings)
    • Foreign derived intangible income (formula) (not just a patent box)
    • Domestic corporations allowed a 100% deduction for the foreign-source portion of dividends received from 10% owned (vote or value) foreign subsidiaries. (Deduction not available for capital gains or directly-earned foreign income)
    • One-time transition tax on post-1986 earnings of 10% owned foreign subsidiaries accumulated in periods of 10% US corporate shareholder ownership. 15.5% rate on cash and cash equivalents, and 8% rate on the remainder
    • Mandatory annual inclusion of “global intangible low-taxed income” (GILTI) determined on an aggregate basis for all controlled foreign corporations owned by the same US shareholder. Partial credits for foreign taxes properly attributable to the GILTI amount
    • Domestic corporations allowed a deduction against foreign-derived intangible income (37.5% deduction initially, reduced to 21.875% for tax years beginning after 12/31/25) and mandatory GILTI inclusion (50% deduction initially, reduced to 37% for tax years beginning after 12/31/25)
    • No deduction for certain related party payments made pursuant to a hybrid transaction or entity
    • If certain thresholds are met, a “base erosion minimum tax” levied on an applicable taxpayer’s taxable income determined without regard to certain deductible amounts paid or accrued to foreign related persons; depreciation or amortization on property purchased from foreign related persons; and certain reinsurance payments to foreign related persons. Generally 10% rate for tax years beginning before 12/31/25, and 12.5% thereafter, but 11% and 13.5% for banks and registered securities dealers
  • Deemed repatriation - Enacts deemed repatriation of currently deferred foreign profits at a rate of 15.5 percent for liquid assets and 8.0 percent for illiquid assets.

Estate Taxes

  • Doubles the estate tax exemption in 2018 (would continue to be adjusted for inflation)

Exempt Organizations

  • 21% excise tax on excess tax-exempt organization executive compensation (certain exceptions provided to non-highly compensated employees and for certain medical services)
  • Unrelated business income separately computed for each trade or business activity
  • Charitable deduction not allowed for amounts paid in exchange for college athletic event seating rights
  • Creates excise tax based on investment income of private colleges and universities with endowment per student of at least $500,000
  • Repeals the substantiation exception for certain contributions