2017 Tax Reform – Final Tax Cuts and Jobs Act

By December 20, 2017Tax Reform

Below is a look at the final tax proposal – The Tax Cuts and Jobs Act
The House and Senate recently released the final version of “The Tax Cuts and Jobs Act” (“Tax Proposal”), which is intended to decrease taxes for corporations, modify tax deductions, and lower individual rates. Both chambers of Congress voted to pass the measure earlier this week and the legislation is expected to be signed into law by President Trump by the end of the week.

The Tax Proposal includes many changes from the current tax code: decreasing the individual and corporate tax rates, altering the alternative minimum tax (AMT), repealing a number of tax credits and deductions, enhancing the child tax credit, etc. This Tax reform will have a material impact on many taxpayers which means tax planning discussions need to occur.

The Republican view is that this new bill will increase business investment, hiring and raise wages. On the other hand Democrats say the plan will allow corporations to benefit and the middle class will have to pay for it, adding to the already huge federal budget deficit.

The following provides a high level Summary of the Final Tax Plan:

In the new bill income levels would be indexed for inflation for a “chained consumer price index” instead of the “consumer price index.” This change should result in slower inflation adjustments which mean your deductions, credits and exemptions will be worth less.

Highlights of the Proposed Business Tax Modifications

Maximum Corporate Tax Rate
A permanently lowered flat 21% rate taking effect January 1, 2018.

Dividend Received Deduction
80% dividend received deduction would be reduced to 65%, and the 70% dividend received deduction would be reduced to 50%.

Business Income Deduction
A 20% deduction for qualified business income earned by certain pass-through entities. Certain service industries are excluded from this deduction. However, for joint filers the first $315,000, and other filers the first $157,500, can fully claim this deduction on certain service industry income. If the owner or partner in a pass-through also draws a salary from the business they will be subject to ordinary income tax rates.

Corporate Alternative Minimum Tax (“AMT”)
Repealed.

Depreciation
Immediate deduction for the cost of certain equipment purchased after September 27, 2017, and before January 1, 2023. This deduction is then phased out over five more years. Section 179 limit increased to $1 million, and the phase-out threshold is increased to $2.5 million.

Depreciation Life of Buildings
39 years for most non-residential buildings, and 27.5 years for residential rental buildings.

Like Kind Exchange Rules
Repealed except for real property.

Net Operating Loss (“NOL”) Deduction
Carryback repealed, carryforwards limited to 80% of taxable income beginning in 2018.

Research and Development Credit
Retention of research and development credit, however, research and development expenditures paid or incurred after December 31, 2021 should be capitalized and amortized over 5 years.

Domestic Production Activity Deduction
Repealed.

Carried Interest Holding Period
The holding period required for long-term capital gain treatment for partnership interest held in connection with the performance of services will be 3 years.

Deduction of Entertainment Expenses
Elimination of deductions for certain entertainment expenses but preservation of the 50% deduction for food and beverages.

Cash Method of Accounting
The cash method of accounting would be available to businesses with up to $25 million in income.

Technical Termination Rules
A sale or exchange of 50% or more of interest in partnership capital or profits within a 12 month period will no longer cause the partnership to terminate.

Highlights of the Proposed Individual Tax Modifications

Personal Long-Term Capital Gains and Qualified Dividend Tax Rate
Maximum of 23.8% which includes the 3.8% net investment income tax.

Standard Deduction
Married filing jointly – $24,000

Head of household – $18,000

Single – $12,000

This will likely reduce the number of taxpayers using itemized deductions because the standard deduction will now be much higher.

Individual AMT
The AMT exemption amount is increased to $109,400 for married taxpayers filing a joint return and $70,300 for all other taxpayers. The phase-out thresholds are increased to $1,000,000 for married taxpayers filing a joint return, and $500,000 for all other taxpayers (other than estates and trusts). These amounts are indexed for inflation.

Personal Exemption
The personal exemption would be suspended until taxable years beginning after December 31, 2025.

Child Tax Credit
Increases Credit to $2,000 per child from $1,000. It will be refundable up to $1,400. The phase-out will be increased to $200,000 for single taxpayers and $400,000 for married taxpayers.

State Income Tax, and Property Tax Deductions
Limits state and local tax deductions to a combined $10,000 for state and local sales, income and property taxes.

Home Mortgage Interest
Existing debt remains subject to the pre-existing limit of $1.1 million of qualifying debt. For new homes, the mortgage interest deduction will be capped at $750,000 in mortgage debt. The interest on home equity loans will no longer be allowed which is currently allowed on loans up to $100,000.

Charitable Contribution Deduction
The income-based limit for certain cash charitable contributions by an individual taxpayer to public charities and certain organizations is increased from 50% to 60% of AGI. 

Exclusion of Gain from the Sale of a Principal Residence
No change from existing law.

Medical Expense Deduction
The medical expense deduction floor is temporarily reduced to include expenses that exceed 7.5% of AGI instead of 10%.  This applies for the taxable years beginning after December 31, 2017 and before January 1, 2019.

Miscellaneous Itemized Deduction Subject to 2% Floor
All miscellaneous itemized deductions subject to the 2% floor would be suspended for taxable years beginning after December 31, 2017 and prior to January 1, 2016.

Tax Preparation Expense Deduction
Nondeductible.

Deduction for Alimony Payments
Provisions providing for the deduction of alimony payments and inclusion of alimony payments in income would be repealed.

Limitation of Itemized Deductions
No change from existing law.

Estate and Gift Tax Exemption
Exclusion amount for estate and gift tax would be doubled from approx. $5.5 million to $11 million for each individual.

Obamacare Provision
Repealed so that there is no longer a requirement that Americans need to buy health insurance or pay a penalty. This does not take effect until 2019.

Highlights of the Proposed International Tax Modifications

International Tax Regime
Under both versions of the Bill, the U.S. would shift from a worldwide tax system to a territorial tax system by providing a 100% foreign dividend exemption.

Repatriation “Toll” Tax
The Bill would include a one-time transition tax mandating that all taxpayers with previously untaxed foreign earnings held by foreign subsidiaries repatriate those foreign earnings at a reduced tax rate: 15.5% or 8% on cash and illiquid assets, respectively. Taxpayers may pay the transition tax with their 2017 tax return or over the course of 8 years.

As a result, it is imperative that all of our clients with deferred foreign income have a current, accurate accounting of all of their CFCs’ E&P. In order to obtain an accurate accounting of the potential E&P inclusion the client must undergo an analysis of each CFC’s E&P since its inception date, which requires calculating (i) the tax basis of the CFC, (ii) the foreign tax pools, and (iii) any necessary adjustments to the E&P amounts.

Anti-Base Erosion Regime (Inbound)
A new add-on minimum tax equal to the excess of (i) 10% of taxable income (12.5% for tax years after 2025) generally determined without regard to amounts paid or accrued to a foreign related party (other than COGS), including amounts includible in the basis of a depreciable or amortizable asset; over (ii) regular tax liability (determined after reduction by credits other than the R&D credit).

Anti-Base Erosion Regime (Outbound)
Subpart F is generally maintained, and an 80% FTC is permitted.

US shareholders of CFCs subject to current US tax on “global intangible low-taxed income” (GILTI) with a 50% deduction.

Essentially subjects a US Shareholder to tax at a reduced rate on its CFCs’ combined net income above a routing return on tangible depreciable business assets that is not otherwise subject to US tax or to foreign tax at a 12.5% minimum rate.

Deduction for Foreign –Derived Intangible Income
New 951A provides domestic corporations with reduced rates of US tax on their foreign-derived intangible income (“FDII”) and GILTI will allow a US corporation a deduction equal to 37.5% of its FDII plus 50% of its GILTI, if any; only available to C corporations that are not RICs or REITs.

Stock Attribution
Modified attribution rules for purposes of determining whether a US person is considered a US shareholder in connection with determining whether a foreign corporation is a CFC.

Further modifies definition of US shareholder to include any person who owns 10% or more of the total value of shares of all classes of stock.

Interest Expense Deduction Limitation
Modified Section 163(j) to limit a US corporation’s net interest expense to 30% of adjusted taxable income.

Sale of Partnership Interest by Foreign Partner
Creates section 864(c)(8), which treats gain from the sale or exchange of a partnership interest as ECI to the extent the foreign partner would have had ECI had the partnership sold all of its assets in a taxable sale at FMV and allocated to the partner as its distributive share.

Applies to direct or indirect interests in a partnership that is engaged in a US trade or business.

Subpart F Modifications
30-day holding period requirement of a CFC is eliminated.

Foreign base company oil related income is excluded from definition of subpart F income.

Various Modifications
Gain from the sale of inventory property produced by taxpayer is sourced based on location at which the inventory is produced.

Definition of intangible property under section 936(h)(3)(B) for purposes of 367(d) transfers to a foreign corporation is expanded to include workforce in place, goodwill, and going concern value.

Active trade or business exception is repealed on transfers of property from US entities to foreign corporations under 367.

Squar Milner Insights:

The new tax bill is expected to be signed into law by President Trump by the end of the week if all goes accordingly. We will keep you apprised of any major steps forward in the tax reform process. Please feel free to connect with us if you have any question regarding the proposed legislation, or how the proposed legislation can impact you or your business. Further, we are happy to discuss potential tax strategies to take advantage of current tax law or the proposed bill should it be signed into law.