Key Business Tax Provisions

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​On December 22, 2017, President Trump signed into law the 2017 Tax Cuts and Jobs Act. This is the most consequential tax change in over 30 years.

 

Below please find a very general overview of the main business tax provisions of the law.

 

​Proposal

​Prior Law

​New Law

​Corporate tax rates
  • ​35% rate
  • 20% rate for Alternative Minimum Tax
  • ​Flat rate of 21% effective in 2018
  • Alternative Minimum Tax is repealed beginning in 2018
  • The maximum corporate tax rate on capital gains is repealed as obsolete
​Pass-through entities tax rates
  • ​Income is passed through to the owners to be taxed at the individual rates
  • ​In lieu of changing the rate, the law permits individuals, estates and trusts a deduction of 20% of "qualified business income" from a partnership, S corporation or sole proprietorship, which generally does not include service businesses unless under certain income thresholds
  • The deduction is generally limited to 50% of W-2 wages paid by the qualified business or 25% of wages paid plus 2.5% of the cost of qualified property of the business. Any losses can be carried forward to the next tax year
  • Only domestic business income qualifies
​Cost recovery
  • ​Expense investment over the investment’s applicable life under MACRS or ADS with bonus depreciation of 50% phasing down to 30% in 2019
  • Luxury autos are limited to $8,000 bonus depreciation
  • Small business expense under Section 179 is subject to numerous restrictions
  • ​Full expensing of new and used equipment and other qualified property investments for property placed in service between 9/27/2017 and 1/1/2023
  • Retained
  • Section 179 annual deduction limit raised to $1 million with a dollar-for-dollar phase-out for total annual investment in excess of $2.5 million 
  • Computer and peripheral equipment is removed from the definition of listed property
​Interest expense
  • ​Generally deductible when paid or accrued, subject to numerous limitations
  • ​For businesses with average gross receipts of more than $25 million, business interest expense is generally limited to 30% of adjusted taxable income
  • Adjusted taxable income does not take into account depreciation, amortization or depletion
  • For partnerships, the limitation is applied at the partnership level
  • Disallowed interest expense is carried forward indefinitely
​Dividends
  • ​Dividends received are either 70%, 80% or 100% deductible
  • ​Dividends received are either 65%, 50% or 100% deductible, effectively preserving the current effective tax rate on dividends
​Net Operating Loss Deductions
  • ​NOLs can be carried back 2 years and carried forward 20 years; utilization of NOL can result in Alternative Minimum Tax liability
  • ​NOLs can only be deducted to the extent of 80% of taxable income before NOL deduction
  • All carrybacks are repealed (except for certain farming and insurance losses), but losses can be carried forward indefinitely
​Business Deductions
  • ​Deduction for domestic production activities (§199) available, subject to limitations
  • Research and development expenses are deductible when incurred unless an election is made to amortize the costs
  • Deductions for meals and entertainment are deductible, subject to certain limitations
  • ​Deduction for domestic production activities (§199) is repealed
  • R&D deductions are retained
  • Expenses for entertainment are generally not deductible except to the extent any benefits to an employee are treated as taxable compensation to the employee
  • The 50% limitation under current law would apply only to expenses for qualifying business meals, and this deduction is expanded to include food and beverages provided to employees through an eating facility that meets the de minimis fringe requirements
  • ​Qualified transportation expenses are deductible
  • ​Deductions for qualified transportation fringe benefits to employees are generally disallowed, except for those that ensure employee safety
​Like-Kind Exchanges
  • ​Like-kind exchange rules apply to a wide range of property
  • ​Only real property not held primarily for sale is eligible to receive like-kind exchange treatment
​​Partnership and Pass-Through Taxation
  • ​A partnership can be terminated for tax purposes when certain sales or exchanges of partnership interests occurs
  • ​Technical termination rule repealed
  • Rule limiting certain deductions to the extent of partner basis will now apply to charitable contributions and foreign taxes, which were previously exempted from the limitation.
  • “Substantial built-in loss” definition is expanded as it affects transfer of partnership interests
  • Gain or loss from the sale of a partnership interest is U.S. effectively-connected income as if the business sold all assets on the date of partnership transfer (effective after November 27, 2017)
  • Loss limitation rules allow excess business losses equal to the excess of aggregate deductions attributable to businesses of the taxpayer over the sum of aggregate gross income of the taxpayer plus a threshold amount. The limitation applies at the partner or S corporation shareholder level and includes limitation carryforwards.
​Credits and Incentives
  • ​Various credits and incentives are provided to businesses
  • ​Generally no significant changes to credits and incentives
​Accounting Methods for Small Businesses
  • ​Cash method of accounting limited to businesses with less than $5 million in gross receipts
  • Accrual method for inventory required for businesses with average gross receipts of more than $10 million
  • Certain expenses are required to be capitalized into inventory for most businesses (“UNICAP”)
  • Long-term contracts require percentage of completion method of accounting for businesses with average gross receipts of more than $10 million
  • For an accrual basis taxpayer, an amount is included in income when all the events have occurred that fix the right to receive that income and the amount of that income can be determined with reasonable accuracy, unless an exception permits deferral or exclusion
  • Taxpayers can elect to deduct currently the amount of certain reasonable research or experimentation (R&E) expenditures paid or incurred in connection with a trade or business
  • ​Cash method of accounting expanded to businesses with gross receipts of less than $25 million
  • Accrual method for inventory not required for businesses with average gross receipts of less than $25 million
  • UNICAP is not required for businesses with average gross receipts of less than $25 million. Exemptions not tied to gross receipts are retained
  • Long-term contracts require percentage of completion method of accounting for businesses with average gross receipts of more than $25 million
  • Taxpayers are now required to recognize income no later than the year in which the taxpayer recognized the income for financial statement purposes
  • Taxpayers’ domestic R&E expenditures must be amortized over a 5 year period and foreign expenditures over a 15 year period
​Dividend exemption system
  • ​Currently no provision
  • ​A dividend-exemption system is created that exempts 100% of foreign-source dividends paid to a U.S. shareholder that owns 10% or more of the foreign corporation, subject to a one-year holding period
  • Deduction is not available for “hybrid entities”
  • No foreign tax credit is allowed, including for withholding taxes
​Repatriation tax
  • ​Previously untaxed foreign earnings are taxed at 35% corporate rate when repatriated

​New Repatriation / Toll Tax

  • Accumulated foreign earnings of specified foreign corporations are deemed repatriated at the end of 2017 and are taxed at 15.5% (cash) or 8% (illiquid assets)
  • Specified foreign corporations are generally controlled foreign corporations or any foreign corporation in which a U.S. corporation owns 10% or more, directly or indirectly
  • Taxpayers can elect to pay the tax over an eight-year installment period
  • Statute of limitations on assessments of the tax is extended to six years
  • Repeals the active trade or business exception allowed for certain reorganizations

 

Further details regarding specific aspects of the law can be found here:

 

 

This information is based on the statutes and guidance available as of the date of publication (January 2018) and is subject to change. 

Contact

Elisa Fay

CPA

Partner-in-Charge Rödl National Tax

+1 404 525 2600

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German Speaking Contact

Matthias Amberg

StB, CPA

Partner, German Speaking

+1 312 857 1950

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