Home Archived Articles Clearing the Picture on Tax Cuts, Jobs Act

Clearing the Picture on Tax Cuts, Jobs Act

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The House and Senate conferees released their conference report after finalizing negotiations on the differences between the House and Senate versions of the Tax Cuts and Jobs Act. The conference report now goes to the House and Senate, which were expected to pass the legislation and present it to President Trump by press time.

In order to stay within the budgetary constraints, some of the provisions have sunset dates, in which the items will expire and revert back to the law in effect today. The key features of the act are the following.

• The lowering of the corporate tax rate and the conversion of the U.S. tax system to a territorial tax system, both in attempt to make the United States more competitive with other countries worldwide.

• The lowering of the individual tax rates, along with simplification of some of the individual provisions, which is projected to save a typical American family of four with amedian income of $73,000 an estimated tax savings of $2,059 along with the ability to file a simpler tax return.

Below are highlights of some of the provisions that are contained in the Tax Cuts and Jobs Act. There are many other provisions included within the act, along with many details and limitations to the provisions.

Individual Provisions

• Retains the current seven brackets, but reduces the overall top tax rate to 37%

• Increases the standard deduction to $24,000 for joint filers and $12,000 for individual filers, indexed for inflation.

• Elimination of the personal exemption deduction.

• Generally allows up to a 20% deduction on flow-through income.

• Increase of the child tax credit to $2,000, which is up from the current amount of $1,000.

• Allows the use of 529 plans for elementary or secondary private school tuition.

• Additional limitations on the amount of losses that an individual may deduct from pass-through entities.

• Itemized deductions

• Repeal of the 3% reduction of itemized deductions for higher income individuals.

• For new mortgages, interest on mortgage debt up $750,000 will be deductible. Existing mortgages will remain subject to the $1 million limitation.

• Eliminates the deductibility of interest on home equity loans.

• Limits the deduction for state and local income taxes and property taxes to a combined $10,000.

• The current 50% limitation for cash charitable contributions increased to 60% of adjusted gross income.

• Elimination of miscellaneous itemized deductions such as.tax preparation fees, brokerage fees, employee business expenses and investment expense

• For 2017 and 2018, medical expenses will be deductible to the extent they exceed 7.5% (down from 10%) of adjusted gross income.

• For divorces entered into after Dec. 31, 2018, alimony payments will not be deductible by the payor nor includible in income of the payee.

• No deduction for moving expenses allowed.

• With respect to net operating loss (NOL) deductions

• Limits the amount that may be deducted to 80% of income

• For NOLs incurred after 2017, the NOL can only be carried forward; NOLs cannot be carried back to previous taxable years.

• The conference report retains the alternative minimum tax for individuals, but increases the exemption amount to $109,400 for those taxpayers filing as married filing jointly, and $70,300 for taxpayers filing as single or head of household.

• Estate and Generation-Skipping transfer taxes: increases the basic exclusion from $5.6 million to $11.2 million (indexed for inflation) per individual.

• Repeals the tax on individuals that fail to have minimum essential health coverage

Business Provisions

• Replaces current graduated rate structure with a top rate of 35% with a flat rate of 21%.
• Generally allows for 100% expensing of qualified property placed in service after Sept. 27, 2017, and before Jan. 1, 2023. For tax years beginning after 2022, bonus depreciation will be allowed as follows.

2023: 80%
2024: 60%
2025: 40%
2026: 20%
2027: 0%

There is a phase down of bonus depreciation percentage with property placed in service during 2017 eligible for 50% bonus depreciation. This is for qualified property purchased prior to Sept. 28, 2017, but not placed in service until after Sept. 27, 2017.

Also, the provision expands the property eligible beyond original use property to used property that is used by the taxpayer for the first time.

• Increased Section 179 limits to allow up to $1 million of property to be immediately expensed with an increase phase out limits of $2.5 million. This would apply to tax years after 2017.

• Allows for accounting method simplification for entities with less than $25 million in gross receipts in the following areas.

• Cash method of accounting, including entities with inventory

• Exemption from the Section 263A UNICAP rules

• Exception to percentage-of-completion method

• Exemption from the new interest limitation provisions below

• Generally, limits the amount of interest deductible to 30% of the business’s adjusted taxable income, which is taxable income computed without regard to interest expense, interest income, net operating losses, depreciation, amortization and depletion.

• Repeals the ability to defer gains on sales of personal property by utilizing like-kind exchanges.

• Repeals Section 199 Domestic Production Activity Deduction.

• No deduction allowed for entertainment, amusement or recreation activities, facilities or membership dues relating to such activities or other social purposes. The current 50% limitation would still apply to food or beverages and to qualifying business meals, with no deduction allowed for other entertainment expenses.

• Will treat the gain or loss from the disposition of a self-created patent, invention, model or design (whether or not patented) or secret formula or process as an ordinary gain or loss.

• For taxable years beginning after Dec. 31, 2021, specified research or experimental expenditures must be capitalized and amortized over a five-year period.

• Changes to the following business credits.

• Repeal of the 10% rehabilitation credit for pre-1936 buildings

• Establishes a new employer credit for paid family and medical leave

• With respect to net operating loss (NOL) deductions.

• Limits the amount that may be deducted to 80% of income

• For NOLs incurred after 2017, the NOL can only be carried forward; NOLs cannot be carried back to previous taxable years.

• Key foreign provisions

• A 100% dividend received deduction will be allowable on dividends to a U.S. corporate shareholder that owns 10% or more of the foreign corporation.

• Taxation of pre-2018 offshore earnings of a foreign subsidiary of a U.S. shareholder that owns at least 10% of the foreign corporate subsidiary. The tax would be 15.5% of the earnings that are in cash or cash equivalents and 8% for earnings that have been re-invested in the foreign subsidiary’s other assets. The U.S. shareholder will have an election to pay the tax for a period of up to eight years. If the U.S. shareholder is an S corporation, the tax will not apply until the corporation ceases to be an S corporation, substantially all of the assets are sold or liquidated, the S corporation ceases to exist or conduct business, or stock for the S corporation is transferred.

• The conference agreement also imposes a new minimum tax on global low-taxed intangibles and other anti-base erosion measures.

Harold Mohn is managing partner with UHY LLP. He can be reached at hmohn@uhy-us.com.