Highlights of the Tax Cuts and Jobs Act.
New income tax rates & brackets.
For tax years beginning after Dec. 31. 2017 and before Jan. 1,
2026, seven tax rates apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and
37%. The Tax Cuts and Jobs Act also provides four tax rates for estates and
trusts: 10%, 24%, 35%, and 37%.
Standard deduction increased.
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, the standard deduction is increased to $24,000 for married individuals
filing a joint return, $18,000 for head-of-household filers, and $12,000 for
all other taxpayers, adjusted for inflation in tax years beginning after 2018.
No changes are made to the current-law additional standard deduction for the
elderly and blind.
Personal exemptions suspended.
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, the deduction for personal exemptions is effectively suspended by
reducing the exemption amount to zero. A number of corresponding changes are
made throughout the Code where specific provisions contain references to the
personal exemption amount in (Code Sec. 151(d)), and in each of these instances, the dollar amount to
be used is $4,150, as adjusted by inflation. These include (Code Sec. 642(b)(2)(C)) (exemption
deduction for qualified disability trusts), (Code
Sec. 3402) (wage withholding exception
below for 2018), and (Code Sec. 6334(d)) (property exempt from levy).
New measure of inflation provided.
For tax years beginning after Dec. 31, 2017 (Dec. 31, 2018 for
figures that are newly provided under the Act for 2018 and thus won't be reset
until after that year, e.g., the tax brackets), dollar amounts that were
previously indexed using CPI-U will instead be indexed using chained CPI-U
(C-CPI-U). This change, unlike many provisions in the Act, is permanent.
Kiddie tax modified.
For tax years beginning after Dec. 31, 2017, the taxable income
of a child attributable to earned income is taxed under the rates for single
individuals, and taxable income of a child attributable to net unearned income
is taxed according to the brackets applicable to trusts and estates. This rule
applies to the child's ordinary income and his or her income taxed at
preferential rates.
Capital gains provisions conformed.
The Act generally retains present-law maximum rates on net
capital gains and qualified dividends. It retains the breakpoints that exist
under pre-Act law, but indexes them for inflation using C-CPI-U in tax years
after Dec. 31, 2017. For 2018, the 15% breakpoint is: $77,200 for joint returns
and surviving spouses (half this amount for married taxpayers filing
separately), $51,700 for heads of household, $2,600 for trusts and estates, and
$38,600 for other unmarried individuals. The 20% breakpoint is $479,000 for
joint returns and surviving spouses (half this amount for married taxpayers
filing separately), $452,400 for heads of household, $12,700 for estates and
trusts, and $425,800 for other unmarried individuals.
Carried interest—new holding period requirement
Effective for tax years beginning after Dec. 31, 2017, the Act
effectively imposes a 3-year holding period requirement in order for certain
partnership interests received in connection with the performance of services
to be taxed as long-term capital gain. If the 3-year holding period is not met
with respect to an applicable partnership interest held by the taxpayer, the
taxpayer's gain will be treated as short-term gain taxed at ordinary income
rates.
New limitations on “excess business loss”
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, the Act provides that the excess farm loss limitation doesn't apply, and
instead a noncorporate taxpayer's “excess business loss” is disallowed. Under
the new rule, excess business losses are not allowed for the tax year but are
instead carried forward and treated as part of the taxpayer's net operating
loss (NOL) carryforward in subsequent tax years. This limitation applies after the
application of the passive loss rules described above, see ¶ 326.
Deduction for personal casualty & theft losses suspended
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, the personal casualty and theft loss deduction is suspended, except for
personal casualty losses incurred in a Federally-declared disaster. However,
where a taxpayer has personal casualty gains, the loss suspension doesn't apply
to the extent that such loss doesn't exceed the gain.
Gambling loss limitation modified
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, the limitation on wagering losses under (Code
Sec. 165(d)) is modified to provide
that all deductions for expenses incurred in carrying out
wagering transactions, and not just gambling losses, are limited to the extent
of gambling winnings.
Child tax credit increased
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, the child tax credit is increased to $2,000, and other changes are made
to phase-outs and refundability during this same period. The income levels at
which the credit phases out are increased to $400,000 for married taxpayers
filing jointly ($200,000 for all other taxpayers) (not indexed for inflation).
In addition, a $500 nonrefundable credit is provided for certain non-child
dependents. The amount of the credit that is refundable is increased to $1,400
per qualifying child, and this amount is indexed for inflation, up to the base
$2,000 base credit amount. The earned income threshold for the refundable
portion of the credit is decreased from $3,000 to $2,500. No credit will be
allowed to a taxpayer with respect to any qualifying child unless the taxpayer
provides the child's SSN.
State and local tax deduction limited
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, subject to the exception described below, state, local, and foreign
property taxes, and state and local sales taxes, are deductible only when paid
or accrued in carrying on a trade or business or an activity described in (Code Sec. 212) (generally,
for the production of income). State and local income, war profits, and excess
profits are not allowable as a deduction.
However, a taxpayer may claim an itemized deduction of up to
$10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of
(i) state and local property taxes not paid or accrued in
carrying on a trade or business or activity described in (Code Sec. 212); and
(ii) state and local income, war profits, and excess profits taxes (or sales
taxes in lieu of income, etc. taxes) paid or accrued in the tax year. Foreign
real property taxes may not be deducted.
For tax years beginning after Dec. 31, 2016, in the case of an
amount paid in a tax year beginning before Jan. 1, 2018 with respect to a state
or local income tax imposed for a tax year beginning after Dec. 31, 2017, the
payment will be treated as paid on the last day of the tax year for which such
tax is so imposed for purposes of applying the above limits. In order words, a
taxpayer who, in 2017, pays an income tax that is imposed for a tax year after
2017, can't claim an itemized deduction in 2017 for that prepaid income tax.
Mortgage & home equity indebtedness interest deduction limited
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, the deduction for interest on home equity indebtedness is suspended, and
the deduction for mortgage interest is limited to underlying indebtedness of up
to $750,000 ($375,000 for married taxpayers filing separately). For tax years
after Dec. 31, 2025, the prior $1 million/$500,000 limitations are restored,
and a taxpayer may treat up to these amounts as acquisition indebtedness
regardless of when the indebtedness was incurred. The suspension for home
equity indebtedness also ends for tax years beginning after Dec. 31, 2025.
The new lower limit doesn't apply to any acquisition
indebtedness incurred before Dec. 15, 2017.
A taxpayer who has entered into a binding written contract
before Dec. 15, 2017 to close on the purchase of a principal residence before
Jan. 1, 2018, and who purchases such residence before Apr. 1, 2018, shall be
considered to incur acquisition indebtedness prior to Dec. 15, 2017.
The $1 million/$500,000 limitations continue to apply to
taxpayers who refinance existing qualified residence indebtedness that was
incurred before Dec. 15, 2017, so long as the indebtedness resulting from the
refinancing doesn't exceed the amount of the refinanced indebtedness.
Medical expense deduction threshold temporarily reduced
For tax years beginning after Dec. 31, 2016 and ending before
Jan. 1, 2019, the threshhold on medical expense deductions is reduced to 7.5%
for all taxpayers. In addition, the rule limiting the medical expense deduction
for AMT purposes to 10% of AGI doesn't apply to tax years beginning after Dec.
31, 2016 and ending before Jan. 1, 2019.
Charitable contribution deduction limitation increased
For contributions made in tax years beginning after Dec. 31,
2017 and before Jan. 1, 2026, the 50% limitation under (Code Sec. 170(b)) for
cash contributions to public charities and certain private foundations is
increased to 60%. Contributions exceeding the 60% limitation are generally
allowed to be carried forward and deducted for up to five years, subject to the
later year's ceiling.
And, for contributions made in tax years beginning after Dec.
31, 2016, the (Code Sec. 170(f)(8)(D)) provision—i.e., the donee-reporting exemption
from the contemporaneous written acknowledgment requirement—is repealed.
No deduction for amounts paid for college athletic seating
rights
For contributions made in tax years beginning after Dec. 31,
2017, no charitable deduction is allowed for any payment to an institution of
higher education in exchange for which the payor receives the right to purchase
tickets or seating at an athletic event.
Alimony deduction by payor/inclusion by payee suspended
For any divorce or separation agreement executed after Dec. 31,
2018, or executed before that date but modified after it (if the modification
expressly provides that the new amendments apply), alimony and separate
maintenance payments are not deductible by the payor spouse and are not
included in the income of the payee spouse. Rather, income used for alimony is
taxed at the rates applicable to the payor spouse.
Miscellaneous itemized deductions suspended
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, the deduction for miscellaneous itemized deductions that are subject to
the 2% floor is suspended.
Overall limitation (“Pease” limitation) on itemized deductions
suspended
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, the “Pease limitation” on itemized deductions is suspended.
Qualified bicycle commuting exclusion suspended
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, the exclusion from gross income and wages for qualified bicycle commuting
reimbursements is suspended.
Exclusion for moving expense reimbursements suspended
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, the exclusion for qualified moving expense reimbursements is suspended,
except for members of the Armed Forces on active duty (and their spouses and
dependents) who move pursuant to a military order and incident to a permanent
change of station.
Moving expenses deduction suspended
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, the deduction for moving expenses is suspended, except for members of the
Armed Forces on active duty who move pursuant to a military order and incident
to a permanent change of station.
Deduction for living expenses of members of Congress eliminated
For tax years beginning after the enactment date, members of
Congress cannot deduct living expenses when they are away from home.
Combat zone treatment extended to Egypt's Sinai Peninsula
For purposes of various Code provisions that provide tax
benefits to members of the Armed Forces serving in a combat zone, the Act
provides that a “qualified hazardous duty area” (which the Act defines as the
Sinai Peninsula of Egypt) is treated in the same manner as a combat zone. Thus,
under the Act, for services provided on or after June 9, 2015, combat zone tax
benefits are, except as provided below, granted for the Sinai Peninsula of
Egypt, if, as of the enactment date, any member of the U.S. Armed Forces is
entitled to special pay under section 310 of title 37, United States Code
(relating to special pay; duty subject to hostile fire or imminent danger), for
services performed in such location. This benefit lasts only during the period
such entitlement is in effect.
However, the combat zone benefit under (Code Sec. 3401(a)(1)) relating
to the withholding exemption for combat pay applies to remuneration paid after
the date of enactment.
Repeal of Obamacare individual mandate
Under pre-Act law, the Affordable Care Act (also called the ACA
or Obamacare) required that individuals who were not covered by a health plan
that provided at least minimum essential coverage were required to pay a
“shared responsibility payment” (also referred to as a penalty) with their
federal tax return. Unless an exception applied, the tax was imposed for any
month that an individual did not have minimum essential coverage.
For months beginning after Dec. 31, 2018, under the Tax Cuts and
Jobs Act, the amount of the individual shared responsibility payment is reduced
to zero. This repeal is permanent.
AMT retained, with higher exemption amounts
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, the Act increases the AMT exemption amounts for individuals as follows:
·
...For joint returns
and surviving spouses, $109,400;
·
...For single
taxpayers, $70,300;
·
...For marrieds filing
separately, $54,700.
Under the Act, the above exemption amounts are reduced (not
below zero) to an amount equal to 25% of the amount by which the alternative
taxable income of the taxpayer exceeds the phase-out amounts, increased as
follows:
·
...For joint returns
and surviving spouses, $1 million.
·
...For all other
taxpayers (other than estates and trusts), $500,000.
For trusts and estates, the base figure of $22,500 and phase-out
amount of $75,000 remain unchanged. All of these amounts will be adjusted for
inflation after 2018 under the new C-CPI-U inflation measure (see above).
ABLE account changes
Effective for tax years beginning after the enactment date and
before Jan. 1, 2026, the contribution limitation to ABLE accounts with respect
to contributions made by the designated beneficiary is increased, and other
changes are in effect as described below. After the overall limitation on
contributions is reached (i.e., the annual gift tax exemption amount; for 2018,
$15,000), an ABLE account's designated beneficiary can contribute an additional
amount, up to the lesser of (a) the Federal poverty line for a one-person household;
or (b) the individual's compensation for the tax year. Saver's credit
eligible. Additionally, the designated beneficiary of an ABLE account
can claim the saver's credit under (Code Sec.
25B) for contributions made to his or her
ABLE account.
Recordkeeping requirements. The Act also requires that a designated beneficiary (or
person acting on the beneficiary's behalf) maintain adequate records for
ensuring compliance with the above limitations. For analysis of the above
changes, see ¶ 717, ¶ 718.
For distributions after the date of enactment, amounts from
qualified tuition programs (QTPs, also known as 529 accounts; see below) are
allowed to be rolled over to an ABLE account without penalty, provided that the
ABLE account is owned by the designated beneficiary of that 529 account, or a
member of such designated beneficiary's family. Such rolled-over amounts are
counted towards the overall limitation on amounts that can be contributed to an
ABLE account within a tax year, and any amount rolled over in excess of this
limitation is includible in the gross income of the distribute.
Student loan discharged on death or disability
For discharges of indebtedness after Dec. 31, 2017 and before
Jan. 1, 2026, certain student loans that are discharged on account of death or
total and permanent disability of the student are also excluded from gross
income.
Certain self-created property not treated as capital asset
Effective for dispositions after Dec. 31, 2017, the Act
amends (Code Sec. 1221(a)(3)), resulting in the exclusion of patents, inventions,
models or designs (whether or not patented), and secret formulas or processes,
which are held either by the taxpayer who created the property or by a taxpayer
with a substituted or transferred basis from the taxpayer who created the
property (or for whom the property was created), from the definition of a
“capital asset.”
Estate and gift tax retained, with increased exemption amount
For estates of decedents dying and gifts made after Dec. 31,
2017 and before Jan. 1, 2026, the Act doubles the base estate and gift tax
exemption amount from $5 million to $10 million. The $10 million amount is
indexed for inflation occurring after 2011 and is expected to be approximately
$11.2 million in 2018 ($22.4 per married couple).
Time to contest IRS levy extended
For levies made after the date of enactment; and for levies made
on or before the date of enactment if the 9-month period has not expired as of
the date of enactment, the 9-month period during which IRS may return the
monetary proceeds from the sale of property that has been wrongfully levied
upon is extended to two years. The period for bringing a civil action for wrongful
levy is similarly extended from nine months to two years.
Due diligence requirements for claiming head of household
Effective for tax years beginning after Dec. 31, 2017, the Act
expands the due diligence requirements for paid preparers to cover determining
eligibility for a taxpayer to file as head of household. A penalty of $500
(adjusted for inflation) is imposed for each failure to meet these
requirements.
Business Tax Changes
Corporate tax rates reduced
For tax years beginning after Dec. 31, 2017, the corporate tax
rate is a flat 21% rate
Dividends-received deduction percentages reduced
For tax years beginning after Dec. 31, 2017, the 80% dividends
received deduction is reduced to 65%, and the 70% dividends received deduction
is reduced to 50%.
Alternative minimum tax repealed
For tax years beginning after Dec. 31, 2017, the corporate AMT
is repealed. For tax years beginning after 2017 and before 2022, the AMT credit
is refundable and can offset regular tax liability in an amount equal to 50%
(100% for tax years beginning in 2021) of the excess of the minimum tax credit
for the tax year over the amount of the credit allowable for the year against
regular tax liability. Accordingly, the full amount of the minimum tax credit
will be allowed in tax years beginning before 2022.
Increased Code Section 179 expensing
For property placed in service in tax years beginning after Dec.
31, 2017, the maximum amount a taxpayer may expense under (Code Sec. 179) is
increased to $1 million, and the phase-out threshold amount is increased to
$2.5 million. For tax years beginning after 2018, these amounts (as well as the
$25,000 sport utility vehicle limitation) are indexed for inflation. Property
is not treated as acquired after the date on which a written binding contract
is entered into for such acquisition.
“Qualified real property.” The definition of (Code
Sec. 179) property is expanded to include
certain depreciable tangible personal property used predominantly to furnish
lodging or in connection with furnishing lodging. The definition of qualified
real property eligible for (Code Sec. 179) expensing is also expanded to include the
following improvements to nonresidential real property after the date such
property was first placed in service: roofs; heating, ventilation, and
air-conditioning property; fire protection and alarm systems; and security
systems.
Temporary 100% cost recovery of qualifying business assets
A 100% first-year deduction for the adjusted basis is allowed
for qualified property acquired and placed in service after Sept. 27, 2017, and
before Jan. 1, 2023 (after Sept. 27, 2017, and before Jan. 1, 2024, for certain
property with longer production periods). Thus, the phase-down of the 50%
allowance for property placed in service after Dec. 31, 2017, and for specified
plants planted or grafted after that date, is repealed. The additional
first-year depreciation deduction is allowed for new and used property. (The
pre-Act law phase-down of bonus depreciation applies to property acquired
before Sept. 28, 2017, and placed in service after Sept. 27, 2017.)
Luxury automobile depreciation limits increased
For passenger automobiles placed in service after Dec. 31, 2017,
in tax years ending after that date, for which the additional first-year
depreciation deduction under (Code Sec. 168(k)) is not claimed, the maximum amount of allowable
depreciation is increased to: $10,000 for the year in which the vehicle is
placed in service, $16,000 for the second year, $9,600 for the third year, and
$5,760 for the fourth and later years in the recovery period. For passenger
automobiles placed in service after 2018, these dollar limits are indexed for
inflation. For passengers autos eligible for bonus first-year depreciation, the
maximum first-year depreciation allowance remains at $8,000.
In addition, computer or peripheral equipment is removed from
the definition of listed property, and so isn't subject to the heightened
substantiation requirements that apply to listed property.
For passenger automobiles acquired before Sept. 28, 2017, and
placed in service after Sept. 27, 2017, the pre-Act phase-down of the (Code Sec. 280F) increase
amount in the limitation on the depreciation deductions applies.
New farming equipment and machinery is 5-year property
For property placed in service after Dec. 31, 2017, in tax years
ending after that date, the cost recovery period is shortened from seven to
five years for any machinery or equipment (other than any grain bin, cotton
ginning asset, fence, or other land improvement) used in a farming business,
the original use of which commences with the taxpayer.
In addition, the required use of the 150% declining balance
depreciation method for property used in a farming business (i.e., for 3-, 5-,
7-, and 10-year property) is repealed. The 150% declining balance method
continues to apply to any 15-year or 20-year property used in the farming
business to which the straight-line method does not apply, and to property for
which the taxpayer elects the use of the 150% declining balance method.
Recovery period for real property shortened
For property placed in service after Dec. 31, 2017, the separate
definitions of qualified leasehold improvement, qualified restaurant, and
qualified retail improvement property are eliminated, a general 15-year
recovery period and straight-line depreciation are provided for qualified
improvement property, and a 20-year ADS recovery period is provided for such
property.
Thus, qualified improvement property placed in service after
Dec. 31, 2017, is generally depreciable over 15 years using the straight-line
method and half-year convention, without regard to whether the improvements are
property subject to a lease, placed in service more than three years after the
date the building was first placed in service, or made to a restaurant
building. Restaurant building property placed in service after Dec. 31, 2017,
that does not meet the definition of qualified improvement property, is
depreciable as nonresidential real property, using the straight-line method and
the mid-month convention.
For property placed in service after Dec. 31, 2017, the ADS
recovery period for residential rental property is shortened from 40 years to
30 years.
For tax years beginning after Dec. 31, 2017, an electing farming
business—i.e., a farming business electing out of the limitation on the
deduction for interest—must use ADS to depreciate any property with a recovery
period of 10 years or more (e.g., a single purpose agricultural or
horticultural structures, trees or vines bearing fruit or nuts, farm buildings,
and certain land improvements).
Costs of replanting citrus plants lost due to casualty
For replanting costs paid or incurred after the enactment date,
but no later than a date which is ten years after the date of enactment, for
citrus plants lost or damaged due to casualty, the costs may also be deducted
by a person other than the taxpayer if (1) the taxpayer has an equity interest
of not less than 50% in the replanted citrus plants at all times during the tax
year in which the replanting costs are paid or incurred and such other person
holds any part of the remaining equity interest, or (2) such other person
acquires all of the taxpayer's equity interest in the land on which the lost or
damaged citrus plants were located at the time of such loss or damage, and the
replanting is on such land.
Limits on deduction of business interest
For tax years beginning after Dec. 31, 2017, every business,
regardless of its form, is generally subject to a disallowance of a deduction
for net interest expense in excess of 30% of the business's adjusted taxable
income. The net interest expense disallowance is determined at the tax filer
level. However, a special rule applies to pass-through entitles, which requires
the determination to be made at the entity level, for example, at the
partnership level instead of the partner level.
For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2022, adjusted taxable income is computed without regard to deductions allowable
for depreciation, amortization, or depletion and without the former Code Sec.
199 deduction (which is repealed effective Dec. 31, 2017).
An exemption from these rules applies for taxpayers (other than
tax shelters) with average annual gross receipts for the three-tax year period
ending with the prior taxable year that do not exceed $25 million. The
business-interest-limit provision does not apply to certain regulated public
utilities and electric cooperatives. Real property trades or businesses can elect
out of the provision if they use ADS to depreciate applicable real property
used in a trade or business. Farming businesses can also elect out if they use
ADS to depreciate any property used in the farming business with a recovery
period of ten years or more. An exception from the limitation on the business
interest deduction is also provided for floor plan financing (i.e., financing
for the acquisition of motor vehicles, boats or farm machinery for sale or
lease and secured by such inventory).
Modification of net operating loss deduction
For NOLs arising in tax years ending after Dec. 31, 2017, the
two-year carryback and the special carryback provisions are repealed, but a
two-year carryback applies in the case of certain losses incurred in the trade
or business of farming.
For losses arising in tax years beginning after Dec. 31, 2017,
the NOL deduction is limited to 80% of taxable income (determined without
regard to the deduction). Carryovers to other years are adjusted to take
account of this limitation, and, except as provided below, NOLs can be carried
forward indefinitely.
However, NOLs of property and casualty insurance companies can
be carried back two years and carried over 20 years to offset 100% of taxable
income in such years.
Domestic production
activities deduction repealed
For tax years beginning after Dec. 31, 2017, the DPAD is
repealed for non-corporate taxpayers. For tax years beginning after Dec. 31,
2018, the DPAD is repealed for C corporations.
Like-kind exchange treatment limited
Generally effective for transfers after Dec. 31, 2017, the rule
allowing the deferral of gain on like-kind exchanges is modified to allow for
like-kind exchanges only with respect to real property that is not held
primarily for sale. However, under a transition rule, the pre-Act like-kind
exchange rules apply to exchanges of personal property if the taxpayer has
either disposed of the relinquished property or acquired the replacement
property on or before Dec. 31, 2017.
Five-year writeoff of specified reach or experimentation
expenses
For amounts paid or incurred in tax years beginning after Dec.
31, 2021, “specified R&E expenses” must be capitalized and amortized
ratably over a 5-year period (15 years if conducted outside of the U.S.),
beginning with the midpoint of the tax year in which the specified R&E
expenses were paid or incurred.
Specified R&E expenses subject to capitalization include
expenses for software development, but not expenses for land or for depreciable
or depletable property used in connection with the research or experimentation
(but do include the depreciation and depletion allowances of such property).
Also excluded are exploration expenses incurred for ore or other minerals
(including oil and gas). In the case of retired, abandoned, or disposed
property with respect to which specified R&E expenses are paid or incurred,
any remaining basis may not be recovered in the year of retirement,
abandonment, or disposal, but instead must continue to be amortized over the remaining
amortization period.
Use of this provision is treated as a change in the taxpayer's
accounting method under (Code Sec. 481), initiated by the taxpayer, and made with IRS's
consent. For R&E expenditures paid or incurred in tax years beginning after
Dec. 31, 2025, the provision is applied on a cutoff basis (so there is no
adjustment under (Code Sec. 481(a)) for R&E paid or incurred in tax years
beginning before Jan. 1, 2026).
Employer's deduction for fringe benefit expenses limited
For amounts incurred or paid after Dec. 31, 2017, deductions for
entertainment expenses are disallowed, eliminating the subjective determination
of whether such expenses are sufficiently business related; the current 50%
limit on the deductibility of business meals is expanded to meals provided
through an in-house cafeteria or otherwise on the premises of the employer; and
deductions for employee transportation fringe benefits (e.g., parking and mass
transit) are denied, but the exclusion from income for such benefits received
by an employee is retained. In addition, no deduction is allowed for
transportation expenses that are the equivalent of commuting for employees
(e.g., between the employee's home and the workplace), except as provided for
the safety of the employee.
For tax years beginning after Dec. 31, 2025, the Act will
disallow an employer's deduction for expenses associated with meals provided
for the convenience of the employer on the employer's business premises, or
provided on or near the employer's business premises through an
employer-operated facility that meets certain requirements.
Nondeductible penalties and fines
For amounts generally paid or incurred on or after the date of
enactment (see below), no deduction is allowed for any otherwise deductible
amount paid or incurred (whether by suit, agreement, or otherwise) to, or at
the direction of, a government or specified nongovernmental entity in relation
to the violation of any law or the investigation or inquiry by such government
or entity into the potential violation of any law. An exception applies to
payments that the taxpayer establishes are either restitution (including
remediation of property) or amounts required to come into compliance with any
law that was violated or involved in the investigation or inquiry, that are
identified in the court order or settlement agreement as restitution,
remediation, or required to come into compliance. IRS remains free to challenge
the characterization of an amount so identified; however, no deduction is
allowed unless the identification is made.
An exception also applies to any amount paid or incurred as
taxes due.
Restitution for failure to pay any tax, that is assessed as
restitution under the Code is deductible only to the extent it would have been
allowed as a deduction if it had been timely paid. ((Code
Sec. 162(f)), as amended by Act Sec. 13306)
Government agencies (or entities treated as such) must report to
IRS and to the taxpayer the amount of each settlement agreement or order
entered into where the aggregate amount required to be paid or incurred to or
at the direction of the government is at least $600 (or such other amount as
may be specified by IRS). The report must separately identify any amounts that
are for restitution or remediation of property, or correction of noncompliance.
The report must be made at the time the agreement is entered into, as
determined by IRS.
The provisions don't apply to amounts paid or incurred under any
binding order or agreement entered into before the date of enactment. But this
exception would not apply to an order or agreement requiring court approval
unless the approval was obtained before the enactment date.
No deduction for amounts paid for sexual harassment subject to
nondisclosure agreement
Under the Act, effective for amounts paid or incurred after the
enactment date, no deduction is allowed for any settlement, payout, or attorney
fees related to sexual harassment or sexual abuse if such payments are subject
to a nondisclosure agreement.
Employee achievement awards
For amounts paid or incurred after Dec. 31, 2017, a definition
of “tangible personal property” is provided. Tangible personal property does
not include cash, cash equivalents, gifts cards, gift coupons, gift
certificates (other than where from the employer pre-selected or pre-approved a
limited selection) vacations, meals, lodging, tickets for theatre or sporting
events, stock, bonds or similar items. and other non-tangible personal
property. No inference is intended that this is a change from present law and
guidance.
Limitation on excessive employee compensation
For tax years beginning after Dec. 31, 2017, the exceptions to
the $1 million deduction limitation for commissions and performance-based compensation
are repealed. The definition of “covered employee” is revised to include the
principal executive officer, the principal financial officer, and the three
other highest paid officers. If an individual is a covered employee with
respect to a corporation for a tax year beginning after Dec. 31, 2016, the
individual remains a covered employee for all future years.
Under a transition rule, the changes do not apply to any
remuneration under a written binding contract which was in effect on Nov. 2,
2017 and which was not modified in any material respect after that date.
Compensation paid pursuant to a plan qualifies for this exception if the right
to participate in the plan is part of a written binding contract with the
covered employee in effect on Nov. 2, 2017. The fact that a plan was in
existence on Nov. 2, 2017 isn't by itself sufficient to qualify the plan for
the exception. The exception ceases to apply to amounts paid after there has
been a material modification to the terms of the contract. The exception does
not apply to new contracts entered into or renewed after Nov. 2, 2017. A
contract that is terminable or cancelable unconditionally at will by either
party to the contract without the consent of the other, or by both parties to
the contract, is treated as a new contract entered into on the date any such
termination or cancellation, if made, would be effective. However, a contract
is not treated as so terminable or cancellable if it can be terminated or
cancelled only by terminating the employment relationship of the covered
employee.
Deduction for local lobbying expenses eliminated
For amounts paid or incurred on or after the date of enactment,
the (Code Sec. 162(e)) deduction for lobbying expenses with respect
to legislation before local government bodies (including Indian tribal
governments) is eliminated.
Orphan drug credit modified
For amounts paid or incurred after Dec. 31, 2017, the (Code Sec. 45C) orphan
drug credit is limited to 25% (instead of current law's 50%) of so much of
qualified clinical testing expenses for the tax year. Taxpayers can elect a
reduced credit in lieu of reducing otherwise allowable deductions in a manner
similar to the research credit under (Code
Sec. 280C).
Rehabilitation credit limited
For amounts paid or incurred after Dec. 31, 2017, the 10% credit
for qualified rehabilitation expenditures with respect to a pre-'36 building is
repealed and a 20% credit is provided for qualified rehabilitation expenditures
with respect to a certified historic structure which can be claimed ratably
over a 5-year period beginning in the tax year in which a qualified
rehabilitated structure is placed in service.
A transition rule provides that for qualified rehabilitation
expenditures (for either a certified historic structure or a pre-'36 building),
for any building owned or leased (as provided under pre-Act law) by the
taxpayer at all times on and after Jan. 1, 2018, the 24-month period selected
by the taxpayer (under (Code Sec.
47(c)(1)(C)(i))), or the 60-month period
selected by the taxpayer under the rule for phased rehabilitation ((Code Sec. 47(c)(1)(C)(ii))), is to begin no later than the end of the 180-day
period beginning on the date of the enactment, and apply to such expenditures
paid or incurred after the end of the tax year in which such 24- or 60-month
period ends.
New credit for
employer-paid family and medical leave
For wages paid in tax years beginning after Dec. 31, 2017, but
not beginning after Dec. 31, 2019, the Act allows businesses to claim a general
business credit equal to 12.5% of the amount of wages paid to qualifying
employees during any period in which such employees are on family and medical
leave (FMLA) if the rate of payment is 50% of the wages normally paid to an
employee. The credit is increased by 0.25 percentage points (but not above 25%)
for each percentage point by which the rate of payment exceeds 50%. All
qualifying full-time employees have to be given at least two weeks of annual
paid family and medical leave (all less-than-full-time qualifying employees
have to be given a commensurate amount of leave on a pro rata basis).
Accounting method changes
Taxable year of inclusion
Generally for tax years beginning after Dec. 31, 2017, a
taxpayer is required to recognize income no later than the tax year in which
such income is taken into account as income on an applicable financial
statement (AFS) or another financial statement under rules specified by IRS
(subject to an exception for long-term contract income under (Code Sec. 460)).
The Act also codifies the current deferral method of accounting
for advance payments for goods and services provided by Rev Proc 2004-34 to
allow taxpayers to defer the inclusion of income associated with certain
advance payments to the end of the tax year following the tax year of receipt
if such income also is deferred for financial statement purposes. In addition,
it directs taxpayers to apply the revenue recognition rules under (Code Sec. 452) before
applying the original issue discount (OID) rules under (Code Sec. 1272).
In the case of any taxpayer t required by this provision to
change its accounting method for its first tax year beginning after Dec. 31,
2017, such change will be treated as initiated by the taxpayer and made with
IRS's consent.
Under a special effective date provision, the AFS conformity
rule applies for OID for tax years beginning after Dec. 31, 2018, and the
adjustment period is six years.
Cash method of accounting
For tax years beginning after Dec. 31, the cash method may be
used by taxpayers (other than tax shelters) that satisfy a $25 million gross
receipts test, regardless of whether the purchase, production, or sale of
merchandise is an income-producing factor. Under the gross receipts test,
taxpayers with annual average gross receipts that do not exceed $25 million
(indexed for inflation for tax years beginning after Dec. 31, 2018) for the
three prior tax years are allowed to use the cash method.
The exceptions from the required use of the accrual method for
qualified personal service corporations and taxpayers other than C corporations
are retained. Accordingly, qualified personal service corporations,
partnerships without C corporation partners, S corporations, and other
pass-through entities are allowed to use the cash method without regard to
whether they meet the $25 million gross receipts test, so long as the use of
the method clearly reflects income.
Use of this provisions results is a change in the taxpayer's
accounting method for purposes of (Code Sec.
481).
Accounting for inventories
For tax years beginning after Dec. 31, 2017, taxpayers that meet
the $25 million gross receipts test are not required to account for inventories
under (Code Sec. 471), but rather may use an accounting method for
inventories that either (1) treats inventories as non-incidental materials and
supplies, or (2) conforms to the taxpayer's financial accounting treatment of
inventories.
Use of this provisions results is a change in the taxpayer's
accounting method for purposes of (Code Sec.
481).
Capitalization and inclusion of certain expenses in inventory
costs
For tax years beginning after Dec. 31, 2017, any producer or
re-seller that meets the $25 million gross receipts test is exempted from the
application of (Code Sec. 263A). The exemptions from the UNICAP rules that are not
based on a taxpayer's gross receipts are retained.
Use of this provision results is a change in the taxpayer's
accounting method for purposes of (Code Sec.
481).
Accounting for long-term contracts
For contracts entered into after Dec. 31, 2017 in tax years
ending after that date, the exception for small construction contracts from the
requirement to use the PCM is expanded to apply to contracts for the
construction or improvement of real property if the contract: (1) is expected
(at the time such contract is entered into) to be completed within two years of
commencement of the contract and (2) is performed by a taxpayer that (for the
tax year in which the contract was entered into) meets the $25 million gross
receipts test.
Use of this PCM exception for small construction contracts is
applied on a cutoff basis for all similarly classified contracts (so there is
no adjustment under (Code Sec. 481(a)) for contracts entered into before Jan. 1,
2018).
Exclusions from contributions to capital
Effective for contributions made after the date of enactment
(except as otherwise provided below), the Act provides that the term
“contributions to capital” does not include:
·
(1) any
contribution in aid of construction or any other contribution as a customer or
potential customer, and (2) any contribution by any governmental entity or
civic group (other than a contribution made by a shareholder as such).
·
(2) Exception—prior
approvals. The new provision does not apply to any contribution made
after the date of enactment by a governmental entity pursuant to a master
development plan that had been approved prior to such date by a governmental
entity.
Repeal of rollover of publicly traded securities gain into
specialized small business investment companies
For sales after Dec. 31, 2017, this election is repealed. For
analysis, see ¶ 327.
Tax incentives for investment in Qualified Opportunity Zones
Effective on the enactment date, the Act provides temporary
deferral of inclusion in gross income for capital gains reinvested in a
qualified opportunity fund and the permanent exclusion of capital gains from
the sale or exchange of an investment in the qualified opportunity fund.
The Act allows for the designation of certain low-income
community population census tracts as qualified opportunity zones. The
designation of a population census tract as a qualified opportunity zone
remains in effect for the period beginning on the date of the designation and
ending at the close of the tenth calendar year beginning on or after the date
of designation.
Temporary deferral applies for capital gains that are reinvested
in a qualified opportunity fund—an investment vehicle organized as a
corporation or a partnership for the purpose of investing in qualified
opportunity zone property (other than another qualified opportunity fund) that
holds at least 90% of its assets in qualified opportunity zone property.
Qualified opportunity zone property includes: any qualified opportunity zone
stock, any qualified opportunity zone partnership interest, and any qualified
opportunity zone business property. The maximum amount of the deferred gain
equals the amount invested in a qualified opportunity fund by the taxpayer
during the 180-day period beginning on the date of sale of the asset to which
the deferral pertains. For amounts of the capital gains that exceed the maximum
deferral amount, the capital gains are recognized and included in gross income.
Post-acquisition capital gains apply for a sale or exchange of
an investment in opportunity zone funds that are held for at least 10 years. At
the election of the taxpayer, the basis of such investment in the hands of the
taxpayer is the fair market value of the investment at the date of such sale or
exchange. Taxpayers continue to be allowed to recognize losses associated with
investments in qualified opportunity zone funds.
Pass-Throughs
New deduction for pass-through income
Generally for tax years beginning after Dec. 31, 2017 and before
Jan. 1, 2026, the Act adds a new section, (Code
Sec. 199A), “Qualified Business Income,”
under which a non-corporate taxpayer, including a trust or estate, who has
qualified business income (QBI) from a partnership, S corporation, or sole
proprietorship is allowed to deduct:
·
(1) the lesser of:
(a) the “combined qualified business income amount” of the taxpayer, or (b) 20%
of the excess, if any, of the taxable income of the taxpayer for the tax year
over the sum of net capital gain and the aggregate amount of the qualified
cooperative dividends of the taxpayer for the tax year; plus
·
(2) the lesser of:
(i) 20% of the aggregate amount of the qualified cooperative dividends of the
taxpayer for the tax year, or (ii) taxable income (reduced by the net capital
gain) of the taxpayer for the tax year. ((Code Sec.
199A(a)), as added by Act Sec. 11011)
The “combined qualified business income amount” means, for any
tax year, an amount equal to: (i) the deductible amount for each qualified
trade or business of the taxpayer (defined as 20% of the taxpayer's QBI subject
to the W-2 wage limitation; see below); plus (ii) 20% of the
aggregate amount of qualified real estate investment trust (REIT) dividends and
qualified publicly traded partnership income of the taxpayer for the tax year.
QBI is generally defined as the net amount of “qualified items
of income, gain, deduction, and loss” relating to any qualified trade or
business of the taxpayer. ((Code Sec. 199A(c)(1)), as added by Act Sec. 11011) For this purpose,
qualified items of income, gain, deduction, and loss are items of income, gain,
deduction, and loss to the extent these items are effectively connected with
the conduct of a trade or business within the U.S. under (Code Sec. 864(c)) and
included or allowed in determining taxable income for the year. If the net
amount of qualified income, gain, deduction, and loss relating to qualified
trade or businesses of the taxpayer for any tax year is less than zero, the
amount is treated as a loss from a qualified trade or business in the
succeeding tax year. ((Code Sec. 199A(c)(2)), as added by Act Sec. 11011) QBI does not include:
certain investment items; reasonable compensation paid to the taxpayer by any qualified
trade or business for services rendered with respect to the trade or business;
any guaranteed payment to a partner for services to the business under (Code Sec. 707(c));
or a payment under (Code Sec. 707(a)) to a partner for services rendered with
respect to the trade or business.
The 20% deduction is not allowed in computing adjusted gross
income (AGI), but rather is allowed as a deduction reducing taxable income.
Limitations. For
pass-through entities, other than sole proprietorships, the deduction cannot
exceed the greater of:
·
(1) 50% of the
W-2 wages with respect to the qualified trade or business (“W-2 wage limit”),
or
·
(2) the sum of
25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5%
of the unadjusted basis, immediately after acquisition, of all “qualified
property.” Qualified property is defined in (Code
Sec. 199A(b)(6)) as meaning tangible,
depreciable property which is held by and available for use in the qualified
trade or business at the close of the tax year, which is used at any point
during the tax year in the production of qualified business income, and the
depreciable period for which has not ended before the close of the tax year.
Partnership provisions
Repeal of partnership technical termination
For partnership tax years beginning after Dec. 31, 2017,
the (Code Sec. 708(b)(1)(B)) rule providing for the technical termination
of a partnership is repealed. The repeal doesn't change the pre-Act law rule
of (Code Sec. 708(b)(1)(A)) that a partnership is considered as terminated
if no part of any business, financial operation, or venture of the partnership
continues to be carried on by any of its partners in a partnership.
Look-through rule applied to gain on sale of partnership
interest
For sales and exchanges on or after Nov. 27, 2017, gain or loss
from the sale or exchange of a partnership interest is effectively connected
with a U.S. trade or business to the extent that the transferor would have had
effectively connected gain or loss had the partnership sold all of its assets
at fair market value as of the date of the sale or exchange. Any gain or loss
from the hypothetical asset sale by the partnership must be allocated to
interests in the partnership in the same manner as non-separately stated income
and loss.
For sales, exchanges, and dispositions after Dec. 31, 2017, the
transferee of a partnership interest must withhold 10% of the amount realized
on the sale or exchange of a partnership interest unless the transferor
certifies that the transferor is not a nonresident alien individual or foreign
corporation.
Partnership “substantial built-in loss” modified
For transfers of partnership interests after Dec. 31, 2017, the
definition of a substantial built-in loss is modified for purposes of (Code Sec. 743(d)),
affecting transfers of partnership interests. In addition to the present-law
definition, a substantial built-in loss also exists if the transferee would be
allocated a net loss in excess of $250,000 upon a hypothetical disposition by
the partnership of all partnership's assets in a fully taxable transaction for
cash equal to the assets' fair market value, immediately after the transfer of
the partnership interest.
Charitable contributions and foreign taxes in partner's share of
loss
For partnership tax years beginning after Dec. 31, 2017, in
determining the amount of a partner's loss, the partner's distributive shares
under (Code Sec. 702(a)) of partnership charitable contributions and
taxes paid or accrued to foreign countries or U.S. possessions are taken into
account. However, in the case of a charitable contribution of property with a
fair market value that exceeds its adjusted basis, the partner's distributive
share of the excess is not taken into account.
S corporations
Treatment of S corporation converted to C corporation
For distributions after the date of enactment, distributions
from an “eligible terminated S corporation” are treated as paid from its
accumulated adjustments account and from its earnings and profits on a pro rata
basis. Resulting adjustments are taken into account ratably over a 6-year
period. An eligible terminated S corporation is any C corporation which (i) was
an S corporation on the date before the enactment date, (ii) revoked its S
corporation election during the 2-year period beginning on the enactment date,
and (iii) had the same owners on the enactment date and on the revocation date
(in the same proportion).
Tax-exempt organizations
Excise tax on excess tax-exempt organization executive
compensation
For tax years beginning after Dec. 31, 2017, a tax-exempt
organization is subject to a tax at the corporate tax rate (21% under the Act)
on the sum of: (1) the remuneration (other than an excess parachute payment) in
excess of $1 million paid to a covered employee by an applicable tax-exempt
organization for a tax year; and (2) any excess parachute payment (as newly
defined) paid by the applicable tax-exempt organization to a covered employee.
A covered employee is an employee (including any former employee) of an
applicable tax-exempt organization if the employee is one of the five highest
compensated employees of the organization for the tax year or was a covered
employee of the organization (or a predecessor) for any preceding tax year
beginning after Dec. 31, 2016. Remuneration is treated as paid when there is no
substantial risk of forfeiture of the rights to such remuneration.
UBTI separately computed for each trade or business activity
For tax years beginning after Dec. 31, 2017 (subject to an
exception for net operating losses (NOLs) arising in a tax year beginning
before Jan. 1, 2018, that are carried forward), losses from one unrelated trade
or business may not be used to offset income derived from another unrelated
trade or business. Gains and losses have to be calculated and applied
separately.
Electing small business trust provisions
Qualifying beneficiaries of an ESBT
Effective on Jan. 1, 2018, the Act allows a nonresident alien
individual to be a potential current beneficiary of an ESBT.
Charitable contribution deduction for ESBTs
For tax years beginning after Dec. 31, 2017, the Act provides
that the charitable contribution deduction of an ESBT is not determined by the
rules generally applicable to trusts but rather by the rules applicable to
individuals. Thus, the percentage limitations and carryforward provisions
applicable to individuals apply to charitable contributions made by the portion
of an ESBT holding S corporation stock.
Retirement plan provisions
Repeal of the rule allowing recharacterization of IRA
contributions
For tax years beginning after Dec. 31, 2017, the rule that
allows a contribution to one type of IRA to be recharacterized as a
contribution to the other type of IRA does not apply to a conversion
contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a
Roth conversion.
Length of service award programs for public safety volunteers
For tax years beginning after Dec. 31, 2017, the Act increases
the aggregate amount of length of service awards that may accrue for a bona
fide volunteer with respect to any year of service, from $3,000 to $6,000, and
adjusts that amount to reflect changes in cost-of-living for years after the
first year the proposal is effective. Also, if the plan is a defined benefit
plan, the limit applies to the actuarial present value of the aggregate amount
of length of service awards accruing with respect to any year of service.
Actuarial present value is calculated using reasonable actuarial assumptions
and methods, assuming payment will be made under the most valuable form of
payment under the plan, with payment commencing at the later of the earliest
age at which unreduced benefits are payable under the plan or the participant's
age at the time of the calculation.
Extended rollover period for rollover of plan loan offset
amounts
For plan loan offset amounts which are treated as distributed in
tax years beginning after Dec. 31, 2017, the Act provides that the period
during which a qualified plan loan offset amount may be contributed to an
eligible retirement plan as a rollover contribution would be extended from 60
days after the date of the offset to the due date (including extensions) for
filing the Federal income tax return for the tax year in which the plan loan
offset occurs—that is, the tax year in which the amount is treated as
distributed from the plan. A qualified plan loan offset amount is a plan loan
offset amount that is treated as distributed from a qualified retirement plan,
a (Code Sec. 403(b)) plan, or a governmental (Code Sec. 457(b)) plan
solely by reason of the termination of the plan or the failure to meet the
repayment terms of the loan because of the employee's separation from service,
whether due to layoff, cessation of business, termination of employment, or
otherwise. A loan offset amount under the Act (as before) is the amount by
which an employee's account balance under the plan is reduced to repay a loan
from the plan.
Bond provisions
Repeal of advance refunding bonds
For advance refunding bonds issued after Dec. 31, 2017, the
exclusion from gross income for interest on a bond issued to advance refund
another bond is repealed.
Credit bonds repealed
For bonds issued after Dec. 31, 2017, the authority to issue
tax-credit bonds and direct-pay bonds is prospectively repealed.
Foreign provisions
Deduction for foreign-source portion of dividends
For tax years of foreign corporations that begin after Dec. 31,
2017, and for tax years of U.S. shareholders in which or with which such tax
years of foreign corporations end, the current-law system of taxing U.S.
corporations on the foreign earnings of their foreign subsidiaries when these
earnings are distributed is replaced. The Act provides for an exemption
(referred to here as a deduction for dividends received, or DRD) for certain
foreign income. This exemption is provided for by means of a 100% deduction for
the “foreign-source portion” of dividends received from specified 10% owned
foreign corporations (generally, any foreign corporation other than a passive
foreign investment company that is not also a controlled foreign corporation
(CFC), with respect to which any domestic corporation is a U.S. shareholder) by
domestic corporations that are U.S. shareholders of those foreign corporations
within the meaning of (Code Sec. 951(b)). The foreign-source portion of a dividend from a
specified 10%-owned foreign corporation is that amount which bears the ratio to
the dividend as the undistributed foreign earnings of the specified 10%-owned
foreign corporation bears to the total undistributed earnings of such foreign
corporation.
No foreign tax credit or deduction is allowed for any taxes paid
or accrued with respect to a dividend that qualifies for the DRD. There is also
a provision in the Act that disallows the DRD if the domestic corporation did
not hold the stock in the foreign corporation for a long enough period of time.
The provision eliminates the “lock-out” effect under pre-Act
law, which encourages U.S. companies to avoid bringing their foreign earnings
back into the U.S.
The DRD is available only to C corporations that are not
regulated investment companies (RICs) or real estate investment trusts (REITs).
Sales or transfers
involving specified 10%-owned foreign corporations
In the case of the sale or exchange after Dec. 31, 2017, by a
domestic corporation of stock in a foreign corporation held for one year or
more, any amount received by the domestic corporation which is treated as a
dividend for purposes of (Code Sec. 1248), is treated as a dividend for purposes of
applying (Code Sec. 245A) (i.e., the provision described at “Deduction
for foreign-source portion of dividends,” above).
For dividends received in tax years that begin after Dec. 31
2017, a domestic corporate shareholder's adjusted basis in the stock of a
“specified 10-percent owned foreign corporation” is reduced by an amount equal
to the portion of any dividend received with respect to such stock from such
foreign corporation that was not taxed by reason of a dividends received
deduction allowable under (Code Sec. 245A) in any tax year of such domestic corporation,
but only for the purpose of determining losses on sales and exchanges of the
foreign corporation's stock.
If, after Dec. 31 2017, a U.S. corporation transfers
substantially all of the assets of a foreign branch to a foreign subsidiary
corporation, the “transferred loss” amount (i.e., the losses incurred by the
foreign branch over certain taxable income earned by the foreign branch) must
generally be included in the U.S. corporation's gross income.
Treatment of deferred foreign income upon transition to new
participation exemption system—deemed repatriation
Under the Act, U.S. shareholders owning at least 10% of a
foreign subsidiary generally must include in income, for the subsidiary's last
tax year beginning before 2018, the shareholder's pro rata share of the net
post-'86 historical E&P of the foreign subsidiary to the extent such
E&P has not been previously subject to U.S. tax.
The portion of the E&P comprising cash or cash equivalents
is taxed at a reduced rate of 15.5%, while any remaining E&P is taxed at a
reduced rate of 8%.
At the election of the U.S. shareholder, the tax liability is
payable over a period of up to eight years The payments for each of the first
five years equals 8% of the net tax liability. The amount of the sixth
installment is 15% of the net tax liability, increasing to 20% for the seventh
installment and the remaining balance of 25% in the eighth year.
The Act provides a special rule for S corporations. Their
shareholders are allowed to elect to maintain deferral on such foreign income
until the S corporation changes its status, sells substantially all its assets,
ceases to conduct business, or the electing shareholder transfers its S
corporation stock.
The Act excludes the post-'86 historical E&P from the REIT
gross income tests. In addition, REITs are permitted to elect to meet their
distribution requirement to REIT shareholders with respect to the accumulated
deferred foreign income over an 8-year period under the same installment percentages
as apply to U.S. shareholders who elect to pay the net tax liability resulting
from the mandatory inclusion of pre-effective-date undistributed CFC earnings
in eight installments
Current inclusion of global intangible low-taxed income
For tax years of foreign corporations that begin after Dec. 31,
2017, and for tax years of U.S. shareholders in which or with which such tax
years of foreign corporations end, a U.S. shareholder of any CFC has to include
in gross income for a tax year its global intangible low-taxed income (GILTI)
in a manner generally similar to inclusions of subpart F income. GILTI means,
with respect to any U.S. shareholder for the shareholder's tax year, the excess
(if any) of the shareholder's net CFC tested income over the shareholder's net
deemed tangible income return. The shareholder's net deemed tangible income
return is an amount equal to 10% of the aggregate of the shareholder's pro rata
share of the qualified business asset investment of each CFC with respect to
which it is a U.S. shareholder.
GILTI does not include effectively connected income, subpart F
income, foreign oil and gas income, or certain related party payments. GILTI is
taxed at a rate of 10%.
Foreign tax credits are allowed for foreign income taxes paid
with respect to GILTI but are limited to 80% of the foreign income taxes paid
and are not allowed to be carried back or forward to other tax years.
Deduction for foreign-derived intangible income and GILTI
For tax years that begin after Dec. 31, 2017 and before Jan. 1,
2026, in the case of a domestic corporation, a deduction is allowed in an
amount equal to the sum of: (i) 37.5% of the foreign-derived intangible income
(FDII) of the domestic corporation for the tax year, plus (ii) 50% of the GILTI
amount (if any) which is included in the gross income of the domestic
corporation under (Code Sec. 951A) for the tax year. FDII of a domestic
corporation is the amount which bears the same ratio to the corporation's
deemed intangible income as its foreign-derived deduction eligible income bears
to its deduction eligible income.
For tax years that begin after Dec. 31, 2025, the allowed
deduction will decrease to (i) 21.875% of the FDII of the domestic corporation
for the tax year, and (ii) 37.5% of the GILTI amount included in the gross
income of the domestic corporation for the tax year.
Repeal of foreign base company oil-related income rule
For tax years of foreign corporations that begin after Dec. 31,
2017 and for tax years of U.S. shareholders in which or with which such tax
years of foreign subsidiaries end, the Act eliminates foreign base company oil
related income as a category of FBCI.
Repeal of rule taxing income when CFC decreases investment
For tax years of foreign corporations that begin after Dec. 31,
2017, and for tax years of U.S. shareholders within which or with which such
tax years of foreign corporations end, the Act repeals (Code Sec. 955). As
a result, a U.S. shareholder in a CFC that invested its previously excluded
subpart F income in qualified foreign base company shipping operations is no
longer required to include in income a pro rata share of the previously
excluded subpart F income when the CFC decreases such investments.
Modification of CFC status attribution rules
For the last tax year of a foreign corporation that begins
before Jan. 1, 2018, for all subsequent tax years of a foreign corporation, and
for the tax years of a U.S. shareholder with or with which such tax years end,
the Act amends the constructive ownership rules so that certain stock of a
foreign corporation owned by a foreign person is attributed to a related U.S.
person for purposes of determining whether the related U.S. person is a U.S.
shareholder of the foreign corporation and, therefore, whether the foreign
corporation is a CFC.
Expansion of definition of “U.S. Shareholder”
For the last tax year of foreign corporations beginning before
Jan. 1, 2018, and for tax years of U.S. shareholders with or within which such
tax years of foreign corporations end, the Act expands the definition of “U.S.
shareholder” to also include any U.S. person who owns 10% or more of the total
value of shares of all classes of stock of a foreign corporation.
Elimination of 30-day minimum holding period for CFC
For tax years of foreign corporations that begin after Dec. 31,
2017, and for tax years of U.S. shareholders in which or with which such tax
years of foreign subsidiaries end, a U.S. parent is subject to current U.S. tax
on the CFC's subpart F income even if the U.S. parent does not own stock in the
CFC for an uninterrupted period of 30 days or more during the year.
Prevention of base erosion
Base erosion and anti-abuse tax
With respect to base erosion payments (as defined below) paid or
accrued in tax years that begin after Dec. 31, 2017, certain corporations with
average annual gross receipts of at least $500 million are required to pay a
tax, the “base erosion anti-abuse tax” (BEAT), equal to the “base erosion
minimum tax amount” for the tax year. Except as provided at “Members of
affiliated...,” below, the base erosion minimum tax amount means, with respect
to an applicable taxpayer for any tax year beginning before Jan. 1, 2026, the
excess of 10% of the modified taxable income of the taxpayer for the tax year
over an amount equal to the regular tax liability reduced (but not below zero)
by the excess (if any) of credits allowed under Chapter 1 over an amount that
includes the credit allowed under (Code Sec.
38) (general business credit) for the
tax year allocable to the research credit under (Code
Sec. 41(a)).
Except as provided at “Members of affiliated...,” below, the tax
is 12.5% of the modified taxable income of the taxpayer for the tax year over
an amount equal to the regular tax liability of the taxpayer for the tax year,
for tax years beginning after Dec. 31, 2025. That is, the regular tax liability
is reduced by an amount equal to all credits allowed under Chapter 1 (including
the general business credit), for tax years that begin after Dec. 31, 2025.
Members of affiliated groups that include a bank or securities
dealer will pay the BEAT tax at an 11% rate, increasing to 13.5% after 2025.
Modified taxable income means the taxable income of the taxpayer
computed under Chapter 1 for the tax year, determined without regard to any
base erosion tax benefit with respect to any base erosion payment, or the base
erosion percentage of any net operating loss deduction allowed under (Code Sec. 172) for
the tax year. A base erosion payment generally means any amount paid or accrued
by a taxpayer to a foreign person that is a related party of the taxpayer and
with respect to which a deduction is allowable, including any amount paid or
accrued by the taxpayer to the related party in connection with the acquisition
by the taxpayer from the related party of property of a character subject to
the allowance of depreciation (or amortization in lieu of depreciation).
The Act excludes an amount paid or incurred for services if
those services meet the requirements for the services cost method under (Code Sec. 482) (excluding
the requirement that the services not contribute significantly to fundamental
risks of business success or failure) and if such amount is the total services
cost with no markup, for tax years that begin after Dec. 31, 2017.
There is also an exception for certain derivative payments made
in the ordinary course of a trade or business.
Limitations on income shifting through intangible property
transfers
For transfers in tax years that begin after Dec. 31, 2017, the
Act addresses recurring definitional and methodological issues that have arisen
in controversies in transfers of intangible property for purposes of (Code Sec. 367(d)) and (Code Sec. 482),
both of which use the statutory definition of “intangible property” in (Code Sec. 936(h)(3)(B)).
The Act revises that definition and confirms IRS's authority to
require certain valuation methods. It does not modify the basic approach of the
existing transfer pricing rules with regard to income from intangible property.
Under the Act, workforce in place, goodwill (both foreign and domestic), and
going concern value are intangible property within the meaning of (Code Sec. 936(h)(3)(B)),
as is the residual category of “any similar item” the value of which is not
attributable to tangible property or the services of an individual.
Denial of deduction for certain related party payments
For tax years that begin after Dec. 31, 2017, the Act denies a
deduction for any disqualified related party amount paid or accrued pursuant to
a hybrid transaction or by, or to, a hybrid entity. A disqualified related
party amount is any interest or royalty paid or accrued to a related party to
the extent that: (1) there is no corresponding inclusion to the related party
under the tax law of the country of which such related party is a resident for
tax purposes, or (2) such related party is allowed a deduction with respect to
such amount under the tax law of such country. In general, a hybrid transaction
is one that involves payment of interest or royalties that are not treated as
such by the country of residence of the foreign recipient. And, in general, a
hybrid entity is an entity that is treated as fiscally transparent for federal
income purposes but not so treated for purposes of the tax law of the foreign
country, or vice versa.
Surrogate foreign corporation dividends aren't qualified
For dividends paid in tax years that begin after Dec. 31, 2017,
any dividend received by an individual shareholder from a corporation which is
a surrogate foreign corporation as defined in (Code
Sec. 7874(a)(2)(B)) (other than a
foreign corporation which is treated as a domestic corporation under (Code Sec. 7874(b))),
and which first became a foreign surrogate corporation after date of enactment,
is not entitled to the lower rates on qualified dividends provided for in (Code Sec. 1(h)).
Repeal of indirect foreign tax credits; change to CFC
shareholder deemed-paid credit
For tax years of foreign corporations that begin after Dec. 31,
2017 and for tax years of U.S. shareholders in which or with which such tax
years of foreign subsidiaries end, no foreign tax credit or deduction is
allowed for any taxes (including withholding taxes) paid or accrued with
respect to any dividend to which the deduction for foreign-source portion of
dividends described at “Deduction for foreign-source portion of dividends,”
above, applies.
A foreign tax credit is allowed for any subpart F income that is
included in the income of the U.S. shareholder on a current year basis.
Separate foreign tax credit limitation basket for foreign branch
income
For tax years that begin after Dec. 31, 2017, foreign branch
income must be allocated to a specific foreign tax credit basket. Foreign
branch income is the business profits of a U.S. person which are attributable
to one or more qualified business units in one or more foreign countries.
Change in rule for sourcing income from sales of inventory
For tax years that begin after Dec. 31, 2017, gains, profits,
and income from the sale or exchange of inventory property produced partly in,
and partly outside, the U.S. must be allocated and apportioned on the basis of
the location of production with respect to the property. For example, income derived
from the sale of inventory property to a foreign jurisdiction is sourced wholly
within the U.S. if the property was produced entirely in the U.S., even if
title passage occurred elsewhere. Likewise, income derived from inventory
property sold in the U.S., but produced entirely in another country, is sourced
in that country even if title passage occurs in the U.S. If the inventory
property is produced partly in, and partly outside, the U.S., the income
derived from its sale is sourced partly in the U.S
Election with respect to foreign tax credit limitation
Under pre-Act law, for purposes of the limitation on the foreign
tax credit, if a taxpayer sustains an overall domestic loss for any tax year,
then, for each succeeding year, an amount of U.S. source taxable income equal
to the lesser of:
...the full amount of the loss to the extent not carried back to
prior tax years; or
...50% of the taxpayer's U.S. source taxable income for that
succeeding tax year,
is recharacterized as foreign source income.
For any tax year of the taxpayer that begins after Dec. 31, 2017
and before Jan. 1, 2028, the taxpayer may, with respect to pre-2018 unused
overall domestic losses, elect to substitute, for the above 50% amount, a
percentage greater than 50% but not greater than 100%.
Other international reforms
Restriction on insurance business exception to PFIC rules
For tax years that begin after Dec. 31, 2017, the Act replaces
the test based on whether a corporation is predominantly engaged in an
insurance business with a test based on the corporation's insurance
liabilities. Under the provision, passive income for purposes of the PFIC rules
does not include income derived in the active conduct of an insurance business
by a corporation (1) that would be subject to tax under subchapter L if it were
a domestic corporation; and (2) the applicable insurance liabilities of which
constitute more than 25% of its total assets as reported on the company's
applicable financial statement for the last year ending with or within the
taxable year.
Repeal of fair market value of interest expense apportionment
For tax years that begin after Dec. 31, 2017, for purposes of
such determinations, members of a U.S. affiliated group are not able to
allocate interest expense on the basis of the fair market value of assets for
purposes of (Code Sec. 864(e)). Instead, the members have to allocate interest
expense based on the adjusted tax basis of assets
Stock compensation of insiders in expatriated corporations
For corporations first becoming expatriated corporations after
the date of enactment of the Act, the excise tax on stock compensation in an
inversion is increased from 15% to 20%.
Please call if you need
help understanding which deductions and tax credits you are entitled to or you
have questions regarding your small business accounting, ABA Tax Accounting is
always here. Call us for a free consultation at 651-300-4777.
