On December 22, 2017, the U.S. enacted the largest overhaul of the federal tax code in more than three decades. This legislation introduces sweeping changes to the U.S. taxation of individuals and businesses. Significant provisions for businesses are highlighted below.
- Tax Rate Reduction. The act reduces the top corporate income tax rate from 35 percent to 21 percent.
- Bonus Depreciation. The act allows 100 percent expensing for qualified property placed in service after September 27, 2017, and before January 1, 2023. The deduction is available for both new and used property.
- Deductibility of Business Interest. The act generally limits the amount of deductible interest to the sum of (i) the taxpayer’s business interest income, (ii) 30 percent of the taxpayer’s adjusted taxable income, and (iii) floor plan financing interest.
- Net Operating Losses. The act repeals the ability to carry back NOLs, allows NOLs to be carried forward indefinitely, and limits the utilization of NOLs to 80 percent of a corporation’s taxable income.
- Deductibility of Executive Compensation. The act repeals the commission and performance-based compensation exception to the $1 million annual deduction limitation under Section 162(m) of the Internal Revenue Code. Additionally, once an employee qualifies as a covered employee, the deduction limitation applies to that person so long as the corporation pays remuneration to that person.
- Corporate AMT Repeal. The act repeals the corporate alternative minimum tax (AMT) and provides a refundable credit to corporations that were previously subject to the AMT until tax year 2022, subject to certain limitations.
- Repeal of Domestic Production Activities Provision. The act repeals the domestic production activities deduction for tax years beginning after December 31, 2017.
- Increased Section 179 Expensing. The act increases the amount that may be expensed under Section 179 of the Internal Revenue Code to $1 million and increases the phase-out threshold to $2.5 million.
Taxation of Pass-Through Entities
- Deduction for Qualified Pass-Through Business Income. The act provides a deduction – for tax years 2018 through 2025 – for qualified business income earned by a pass-through entity (e.g., partnerships and S corporations). “Qualified business income” is generally the lesser of (i) income from the pass-through business or (ii) 50 percent of W-2 wages paid by the pass-through entity.
- Carried Interest. The act lengthens the one-year holding period to three years in order for a carried interest to be eligible for long-term capital gains rates. Otherwise, gains allocated to carried interest are taxed at short-term capital gains rates (ordinary income rates) at a maximum top marginal rate of 37 percent.
- Territorial Regime. The act moves the U.S. toward a territorial tax system by giving U.S. corporations a 100 percent deduction for dividends received from foreign corporations in which the U.S. corporation holds a 10 percent or greater ownership interest. In addition, the act repeals the foreign tax credit for taxes paid or accrued with respect to dividends received from a foreign corporation. However, the foreign tax credit is still applicable to subpart F income.
- Deemed Repatriation Tax. The act imposes a one-time deemed repatriation tax on U.S. corporations for earnings of controlled foreign corporations, as well as foreign corporations in which a U.S. shareholder owns a 10 percent or greater voting interest, if the earnings have not been repatriated to the U.S. Accumulated foreign earnings held in cash or cash equivalents are subject to a 15.5 percent tax rate. Accumulated foreign earnings held in illiquid assets are subject to an 8 percent tax rate. The tax is payable over eight years.
We welcome the opportunity to discuss the impact of these changes on your organizations. For more information, please contact the attorneys on the left or your regular Parker Poe contact.