Congress recently passed sweeping tax reform legislation in the Tax Cuts and Jobs Act, and the President signed it into law on December 22, 2017. In addition to many other changes, some of which (such as the lower corporate tax rates) have been discussed at length in the media, the legislation makes significant changes to Internal Revenue Code that either increases or decreases tax. While the new tax law is quite complex, we have been working hard to learn it, and more importantly help you benefit from the new rules and ultimately lower your tax and keep more of your hard-earned money.
BUSINESS TAX IMPLICATIONS
For tax years beginning after Dec. 31, 2017, and beginning before Jan. 1, 2026, the Tax Reform and Jobs Act include the following changes that impact businesses.
Alternative Minimum Tax (AMT): Eliminated for corporations.
Income from Pass-Through Entities: The Act dramatically changes how individuals are taxed on income from partnerships, S corporations, and other pass-through entities.
- Increases deductions to 20% of “qualified business income” from a partnership, S corporation, or sole proprietorship
- “qualified business income” means the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer
- Items must be conducted trade or business within the United States. They do not include specified investment-related income, deductions, or losses.
- “Qualified business income” do not include an S corporation shareholder’s reasonable compensation, guaranteed payments, or—to the extent provided in regulations—payments to a partner who is acting in a capacity other than his or her capacity as a partner.
- “Specified service trades or businesses” include any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services, or any business where the principal asset of the business is the reputation or skill of one or more of its employees.
- The exclusion from the definition of a qualified business for specified service trades or businesses phases in for a taxpayer with taxable income:
- Singles – $157,500
- Married filing jointly – $315,000
- Allowed deductions of 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. (Special rules apply to specified agricultural or horticultural cooperatives.)
- Limitation on deduction based on W-2 wages above a threshold amount of taxable income, generally limited to 50%.
- Deduction disallows for specified service trades or businesses with income above a threshold.
- For each qualified trade or business, can deduct 20% of the qualified business income with respect to such trade or business.
- Capital-intensive businesses may yield a higher benefit under a rule that takes into consideration 25% of wages paid plus a portion of the business’s basis in its tangible assets.
Corporate Income Tax Rate Reduction: The Act reduces the corporate income tax rate and expands property definitions.
- Reduces tax rate beginning in 2018 to 21 percent from 35 percent.
- Allows 100 percent expensing for business property placed in service after September 27, 2017 to encourage more capital investing in corporations
- Expands eligible property definition for 100 percent expensing, to include used property that was not previously used by the taxpayer. Expire in 2023 or 2024 for certain property.
International Tax Reform: The Act makes significant changes to the U.S. international tax code.
- Entirely replaces the current foreign subsidiaries system with a dividend exemption system. U.S. corporations are exempt from U.S. income tax for foreign-source dividends from certain foreign subsidiaries are exempt from U.S. income tax.
- Requires foreign subsidiaries to pay a repatriation tax on their foreign subsidiaries’ post-1986 earnings and profits.
tax is 14.5 percent on foreign earnings held in cash and cash equivalents
7.5 percent on foreign earnings held in illiquid assets.
- Imposes current U.S. income tax on 50 percent of foreign controlled corporation. Under the system, multinationals are taxed on foreign earned income.
Carried Interest: The Act addresses the tax of “carried interest,” directed at private equity fund managers, hedge fund managers, and some other investment professionals to pay long-term capital gains rates on their share of the profits from an investment partnership.
- Beginning 2019 long-term capital gains attributable to an “applicable partnership interest” are characterized as short-term capital gain (taxable at ordinary income rates) to the extent applicable to an investment held less than three years.
- An applicable partnership interest generally means a partnership interest transferred about the performance of substantial services. In effect, the provision does not allow fund managers to benefit from the lower tax rate applicable to long-term capital gains unless the investment that generated the gain was held for at least three years.
Liquor Tax: The Act cuts taxes on beer, wine, and liquor.
We will continue to bring you more guidance on the impact of the passage of the tax reform legislation. Still, one thing is clear: The tax reform plan will mean different things to different people, depending on how much they make, where they live, and their family size and makeup. See your tax professional for the best tax implementation plan for you, your family, and your business. The implications could have both negative and positive effects, so get the facts for your circumstances.
Next week we’ll cover the implications on individual taxes.