Understanding Key Provisions of Tax Cuts and Jobs Act 2017

Final Version Renamed and Signed Into Law Dec 22, 2017
Effective for 2018 Onward

Welcome Surprise for Businesses

  • Many industries will benefit from new tax cuts: retail, hospitals, oil
    and gas, real estate, construction, agriculture, and realtors and
  • However, interest deduction limitation to business interest income
    plus 30% of EBITDA can bite many businesses especially capital intensive

Tax Reform Bill – How Does It Affect Business?

Huge Tax Cut for Corporations:

  • 21% flat tax rate for corporations

-As compared with top 35% graduated rate under current law

  • Will benefit large corporations the most
  • Corporate AMT (Alternative Minimum Tax) Repealed

Business Tax Changes – International Tax

  • More immediate expensing of certain qualified property
  • Like-kind exchanges limited to real property
  • Net Operating Losses (NOL) limited to 80% of taxable income,
    indefinite carryforward period – rule becomes effective in 2022
  • Most carrybacks eliminated

Tax Reform Bill – Pass Through Businesses

  • Current: Pass Through Income – taxed at individual tax rates
  • e.g. Most small businesses organized as S-corps, LLCs, LLPs, LPs, Sole
    Proprietorships – income passes through to and is taxed at individual income
    tax rates;
  • Senate Plan: Deduction for 20% of pass through income for Service
    Business Owners:
  • Deduction limited for service businesses (law firms, doctors’ offices etc.)
    for pass through income up to $315k MFJ/$157500 for Single filers
  • Architects and Engineers are now excluded from definition of ‘specified
    service’ businesses;

Tax Reform Bill – Pass Through Businesses

  • What does this mean for Professional Service Businesses?
  • 20% deduction is unlimited if the business is not Specified Service Business
  • What are Specified Service Businesses?

Those providing services in the fields of Law, Accounting, Health, Actuarial
Science, Financial Services, Brokerage, Consulting and Athletics (excludes
Architectural and Engineering)

– Deduction applies at shareholder or partner level

Business Tax Changes – R&D Expenditures

  • Changes to Research & Development (R&D) Expenses
  • Must be capitalized and amortized over 5 years beginning in 2022,
    expensing for the next five years
  • 15 years for amortization for overseas R&D

Business Tax Changes – Continued

  • Changes to Orphan Drug Credit:
  • Reduced from 50% to 27.5%
  • More reporting requirements
  • Meals provided by employer – no longer deductible after 2025;
  • Most Federal tax credits remain unchanged (e.g. Worker Opportunity, New
    Markets; tax credits for solar and wind, plug-in electric vehicle etc.)

Repatriation Tax – International Tax

Prior rules: worldwide income is taxed, with tax credits for any foreign
tax paid.
New rules: territorial tax on domestic income – shift to participation
exemption doctrine;

One time transition tax:
– 8% tax on illiquid assets, payable over 8 years;
– 15.5% tax on cash and equivalents;

Tax Reform Bill – Individuals

Key Points:

  • Individual tax cuts and changes expire in 2025;
  • Senate bill removes ACA (Obamacare) mandate to have health insurance
    beginning in 2019; hence Americans will no longer be required by law to buy
    health insurance and there will be no tax penalty;
  • Reduced top individual rate to 37% (for income over 500k Single/600k MFJ);
    35% rate for incomes between $200 and $500k;

Tax Reform Bill – Key Provisions

  • Child Tax Credit increased to $2,000 from current $1,000 per child;
    more of it is now refundable
  • Families with dependents and income under $400k will see an
    increase in refunds or lower tax bill
  • Partnerships Interests for Personal Services – 3 year holding period
    introduced to qualify for Capital Gain treatment

Tax Reform Bill Compared to Current Tax Code

  • Tax Brackets – Individual Income Tax:
  • Current: seven income tax brackets – 10% to 39.5%
  • New: seven brackets – 10% to 37%

Current vs. New Tax Law Compared

  • New ‘animal’ – no current equivalent tax on overseas profits
  • House: 14% and 7% tax on liquid and tangible assets respectively
  • Senate: 10% and 7% tax rates on liquid and tangible assets respectively

Senate vs. House Plan – Compared: House vs. Senate Tax Plan – Estate Tax

  • Standard Deduction:
  • Current: $6,350 Single/$12,700 Married
  • New: Single $24,000/$24,000 Married

Tax Plan Final Version – State and Local Tax
Deduction (SALT):

  • Repeals SALT for income taxes but allows property tax deduction up
    to $10k
  • Planning opportunity for 2017:
  • Consider accelerating state income tax payments, real estate tax payments if
    itemized in 2016, likely to itemize deductions in 2017 and the total itemized
    deductions are projected at less than $24k (this opportunity has expired if you
    are reading this in 2018)

New Tax Ruled vs Current Law – Compared:
Business Expenses

Current tax law: multiple, complex regulations for business deductions

New: new equipment expensed over five years plus reduced
depreciation rules for real property

New Tax Law vs. Current Law– Compared:

  • Current: $1k per child; eliminated if income exceeds $110k
  • New: $2,000 credit per child, $500 for older dependents, eliminated
    over $500k for married taxpayers
  • Mortgage Interest Deduction Reduced: can only deduct interest on
    mortgage up to $750k (from current $1mm)

What is NOT Changing?

  • Retirement accounts – contribution limits remain the same (re 401k,
    IRA, Roth IRA)
  • Medical expenses
  • Student loan interest deduction
  • Tuition Waivers for Graduate Students

New Tax Plan vs Current Law – Estate Tax

  • Current Estate Tax (aka Death Tax): 40% tax on estates over $5.49m
  • New: double the exclusion to $10.98m
  • This means you can pass up to $22 million to your heirs tax free (assuming
    you are married)

Copyright – O’Brien Panchuk, LLP