Tax Cuts and Jobs Act
Tax Law Alert 11/08/17 John T. Barry, Gregory L. Lohmeyer
The House Ways and Means Committee released the “Tax Cuts and Jobs Act” (H.R. 1) (the Bill) on November 2, 2017, delivering the first piece of legislation to address long-awaited federal tax reform. The Bill includes several provisions which would significantly impact the federal tax burdens of businesses and individuals.
The Bill is just the first step in what is expected to be a rigorously debated process. The House began amending the bill on Monday, November 6, 2017, and the Senate is expected to release its own version of the bill in the coming days.
Below are some of the highlights identified by the Quarles & Brady LLP tax team:
Reduction in corporate tax rate: Under the Bill, the corporate income tax rate would be a flat 20 percent rate, reduced from a top rate of 35 percent under current law. Personal service corporations would be subject to a flat 25 percent corporate tax rate.
New passthrough rate: The Bill reduces the rate for income derived through passthrough businesses (partnerships, S corporations, etc.) to 25 percent. Owners receiving distributions from active business activities would be able to (i) treat 30 percent as business income (subject to the lower passthrough rate) and 70 percent as wage income (subject to ordinary income rates), or (ii) determine the ratio of business income to wage income based on capital investment. Owners receiving distributions from passive business activities would be able to treat 100 percent as business income subject to the lower passthrough rate.
Repeal of alternative minimum tax: Beginning in 2018, the alternative minimum tax (AMT) would be repealed. In 2019, 2020, and 2021, if a taxpayer would have an AMT credit carryforward, the taxpayer would be able to claim a refund of 50 percent of remaining credits. For 2022, a taxpayer would be able to claim a refund of all remaining credits.
Increased expensing: Businesses would be able to fully and immediately deduct the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023 (or January 1, 2024 for certain property with a longer production period). The provision would expand the property that is eligible for this immediate expensing by repealing the requirement that the original use of the property begin with the taxpayer. Instead, the property would be eligible for the additional depreciation if it is the taxpayer’s first use.
Expansion of section 179 expensing: For tax years 2018 through 2022, the Bill increases the small business expensing limitation to $5 million and the phase out amount to $20 million. The new limitations would be adjusted for inflation.
Limitation on interest deductibility: The Bill limits the amount of interest that is deductible by a company to 30 percent of the company’s adjusted taxable income. This limitation does not apply to companies with gross receipts of $25 million or less.
Repeal of new markets tax credit: No new markets tax credits would be allocated after 2017; however, credits that would have already been allocated may be used over the course of up to seven years.
Repeal of deduction for income attributable to domestic production activities: The deduction for domestic production activities would be repealed for tax years beginning after 2017.
Like-kind exchanges of real property: The current rule allowing deferral of gain on like-kind exchanges would be modified to allow for like-kind exchanges only with respect to real property. This provision would be effective for transfers occurring after 2017. However, like-kind exchanges of personal property would be allowed to be completed if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before December 31, 2017.
Taxation of international operations
Deduction for foreign-source dividends: The Bill provides for a 100 percent deduction for the foreign-source portion of dividends received by U.S. shareholders from certain “specified 10 percent owned foreign corporations.”
Deemed repatriation of certain foreign earnings: Accumulated foreign earnings held in cash or cash equivalents and in illiquid assets are deemed to be repatriated to the U.S. and taxed at 12 percent and 5 percent, respectively. The tax resulting from the deemed repatriation may be paid in equal installments over eight years.
Tax brackets: Effective for tax years beginning after 2017, the Bill provides for four tax brackets: 12 percent, 25 percent, 35 percent, and 39.6 percent. The income levels would be indexed for inflation. The provision would phase out the benefit of the 12 percent bracket for taxpayers with income over $1,200,000 for joint filers and $1,000,000 for individual filers.
Increased standard deduction: The Bill would increase the standard deduction to $24,000 for joint filers, $12,000 for individual filers, and $18,000 for single filers with at least one qualifying child. These increases would be effective for tax years beginning after 2017.
Repeal of personal exemptions: The Bill would repeal the deduction for personal exemptions, effective for tax years beginning after 2017.
Enhanced child tax credit: The child credit would be increased to $1,600. Alternatively, a credit of $300 would be allowed for non-child dependents.
Charitable contributions: The Bill would increase the adjusted gross income limitation on cash contributions from 50 percent to 60 percent and would retain the five year carryover provision.
Mortgage interest deduction: The Bill continues to allow taxpayers to claim an itemized deduction for interest on acquisition indebtedness. However, for debt incurred after November 2, 2017, the $1 million limitation would be reduced to $500,000.
Repeal of alternative minimum tax: Beginning in 2018, the AMT would be repealed. In 2019, 2020, and 2021, if a taxpayer would have an AMT credit carryforward, the taxpayer would be able to claim a refund of 50 percent of remaining credits. For 2022, a taxpayer would be able to claim a refund of all remaining credits.
Repeal of state and local tax deduction: Under the Bill, individuals would not be allowed an itemized deduction for state and local income taxes or sales taxes. However, individuals would continue to be entitled to a deduction for real property taxes paid up to $10,000.
Repeal of medical expense deduction: The itemized deduction for medical expenses would be repealed, effective for tax years beginning after 2017.
Estate and gift taxes
Estate and gift taxes: The Bill increases the federal estate and gift tax exclusion amount to $10,000,000, indexed for inflation, effective for decedents dying and gifts made after 2017. The Bill repeals the federal estate tax, while maintaining a beneficiary’s stepped-up basis in estate property, effective for estates of decedents dying after 2023. The Bill lowers the federal gift tax rate from 40 percent to 35 percent, effective for gifts made after 2023.
As noted above, this Bill is the first step in federal tax reform. The legislation that is ultimately passed, if at all, will look different from the Bill. If you have any questions about federal tax reform, we encourage you to contact any member of the Quarles & Brady LLP tax team.