The United States House of Representatives and the United States Senate have passed the “Tax Cuts and Jobs Act (H.R. 1)”. President Trump is expected to sign it into law as early as this week. The “Tax Cuts and Jobs Act” is the most significant federal tax legislation enacted since 1986. The new tax law makes major changes to the Internal Revenue Code that will impact both individual and business taxpayers. An overview of some of the key individual and business tax provisions follows. The new provisions are effective for tax years after 2017 unless otherwise noted.
The new law makes several significant changes to the U.S. individual income tax including lowering individual income tax rates and modifying and eliminating many existing deductions. Some of the key individual income tax provisions in the new law are:
Individual Tax Rates: Joint Filers
$19,051 to $77,400
$77,401 to $165,000
$165,001 to $315,000
$315,001 to $400,000
$400,001 to $600,000
$600,001 and above
Individual Tax Rates: Single Filers
$9,526 to $38,700
$38,701 to $82,500
$82,501 to $157,500
$157,501 to $200,000
$200,001 to $500,000
$500,001 and above
Capital gains and qualified dividends will continue to be taxed at the current rates of 0%, 15%, and 20% and the 3.8% net investment income tax will remain in effect.
Other Individual Provisions:
The standard deduction will be increased to $12,000 and $24,000 for single and joint filers, respectively. Personal exemptions will be repealed.
The child tax credit will be increased from $1,000 to $2,000 with increased phase-out limitations. Up to $1,400 of the child tax credit will be refundable and a nonrefundable credit of $500 will be available for other dependents.
The individual Alternative Minimum Tax (AMT) will be retained with increased exemption and phase-out amounts.
The estate, gift, and generation skipping taxes will be retained with the exclusion amount doubled to $10 million (indexed for inflation).
The deduction for qualifying home mortgage interest will continue to apply, but the principal balance limitation for new mortgages will be reduced from $1 million to $750,000.
The deduction for state and local taxes will be repealed except for taxes on trade or business income and a deduction for property, income, or sales taxes that will be limited to a total of $10,000.
The 50% Adjusted Gross Income (AGI) limitation for charitable contributions will be increased to 60%.
The new law eliminates an individual taxpayer’s ability to deduct many expenses including miscellaneous itemized deductions, tax preparation fees, moving expenses and alimony payments for agreements executed or modified after 2018. The new law retains the deduction for medical expenses and lowers the phase-out from 10% to 7.5% of AGI for 2017 and 2018.
The new law eliminates the individual mandate penalty of the Affordable Care Act.
Business Tax Provisions
The new tax law also makes significant changes to U.S. business income taxes including lowering the corporation tax rate, increasing fixed asset expensing provisions, significantly modifying the taxation of earnings from foreign corporations, and modifying the rules for taxation of pass-through entities. Some of the key business provisions in the new act include:
Effective January 1, 2018, the U.S corporate income tax rate will be lowered to 21%.
The corporate Alternative Minimum Tax (AMT) is repealed for tax years beginning after 2017. A corporate taxpayer with an existing AMT credit can use the credit to offset its regular tax liability. To the extent the AMT credits exceed regular tax for a year, a corporate taxpayer will be able to claim of refund of 50% of the remaining credits in tax years beginning before 2022 and 100% for tax years beginning in 2021.
The dividends received deduction (DRD) for dividends received by a corporate taxpayer from a domestic corporation of which it owns less than 20% will be reduced from 70% to 50%. The DRD for dividends received from 20% or more owned corporations will be reduced from 80% to 65%.
For “qualified property” placed in service after September 27, 2017 and before 2023, the bonus depreciation deduction will be increased from 50% to 100%. Beginning in 2023, the bonus deprecation percentage will be decreased by 20 percentage points for each of the next five tax years.
The Internal Revenue Code (IRC) Section 179 expensing election for tangible property used in a trade or business will be increased to $1 million. The IRC Section 179 deduction will be subject to a phase-out that starts once $2.5 million of qualified property is placed in service. The new law expands the definition of “qualified property” to included personal property used in furnishing lodging and nonresidential real property improvements.
The new law increases the depreciation limitation for listed property and removes computer equipment from the definition of listed property.
The new law adds a provision limiting the deduction of net interest expense allocated to a trade or business activity. Under this provision, the deduction for net interest expense will be limited to the extent that it exceeds 30% of “adjusted taxable income”. Small businesses meeting a $25 million gross receipts test would not be subject to the limitation.
For losses attributable to tax years beginning after 2017, the deduction for Net Operating Losses (NOL) would be limited to 80% of taxable income. Except for certain farming and property and casualty company losses, the existing 2-year carryback for NOLs is repealed and the carryforward period for NOLs will be indefinite.
The IRC Section 199 domestic production deduction is eliminated for tax years after 2017.
Research and experimental (R&E) expenses will be required to be capitalized and amortized over a 5-year recovery period. R&E expenses for activities conducted outside the United States will be amortized over a 15-year period. The research and development credit is retained in the current law without any significant changes.
The new law exempts 100% of the foreign-source portion of dividends received by a domestic corporation from a foreign corporation of which it owns at least 10%.
A one-time mandatory tax will be assessed on a U.S. shareholder’s share of post-1986 earnings and profits of a foreign corporation of which it owns at least 10%. The tax rate is 15.5% for earnings held in cash, cash equivalents, or certain short term assets. The tax rate is 8% for earnings held in non-liquid assets.
The new law adds a deduction for individual taxpayers for 20% of domestic “qualified business income” from a partnership, Subchapter S corporation, or sole proprietorship. The deduction does not apply to “specified service businesses” including service providers in the fields of health care, law, accounting, financial services, brokerage services, investment management, trading, dealers in securities, actuarial services, performing arts, consulting, athletics, and any other trade or business in which the principal asset is the skill or reputation of its owners or employees. This exception will not apply to taxpayers with taxable income below certain thresholds. This provision will be effective for tax years beginning after December 31, 2017 and before January 1, 2026.
Excess business losses of a taxpayer other than a Subchapter C corporation will be disallowed currently and carried forward to future tax years. An “excess business loss” is the excess of trade or business deductions over the gross income or gain from that trade or business. Gross income will be increased by a base threshold amount of $500,000 for joint filers and $250,000 for other individuals. The limitation for partnership and Subchapter S corporation losses will apply at the partner or shareholder level. The limitation will be effective for tax years beginning after December 31, 2017 and before January 1, 2026.
Carried interests received from a partnership for the performance of certain services will be required to be held for a three-year holding period in order to receive long-term capital gain treatment on the sale of those interests.
Whitley Penn Updates
Whitley Penn will be issuing more detailed tax alerts in the future covering some of the key provisions in the new tax law. In the interim, if you have any questions or require any additional information regarding the law, please do not hesitate to contact your Whitley Penn tax advisor.