By SEMA Washington, D.C., Staff
President Trump will sign a Republican-supported bill into law that overhauls the U.S. tax code and reduces taxes by $1.5 trillion over the next decade. The U.S. Congress passed the “Tax Cuts and Jobs Act” (H.R. 1), which provides the most sweeping changes to the federal tax code in decades.
The “Tax Cuts and Jobs Act” permanently reduces the corporate tax rate from 35% to 21% while scaling back deductions for corporate interest expenses, moves the U.S. to a territorial tax system where only income generated from within the U.S. is taxed, and implements a one-time tax on overseas profits brought back to the U.S.
For individual taxpayers, the new law reduces marginal tax rates, which will be in effect through 2025: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Prior to enactment of the new law, taxes rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. H.R. 1 eliminates the personal exemption and doubles the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly while eliminating many credits and deductions that complicate tax preparation.
Of particular note, the new law eliminates a provision in the Affordable Care Act (Obamacare) that requires individuals to either purchase health insurance or pay a fine, doubles the Child Tax Credit from $1,000 to $2,000, reduces the mortgage interest deduction from $1 million to $750,0000, caps write-offs for state and local property taxes at $10,000 and expands the medical expense deductions.
H.R. 1 provides “pass-through” businesses (sole proprietorships, partnerships and S corporations) that currently pay taxes at the individual rate of their owners with a 20% tax deduction that applies to the first $315,000 of joint income. This deduction ensures that these business owners pay a marginal tax rate of no more than 29.6%. The law allows businesses to write off the full cost of investments for the next five years, doubles the exemption from the estate tax, preserves the research and development credit and allows small businesses to continue to write off interest expenses on loans.
In order to expand the voice of SEMA members on Capitol Hill, the association has been a longstanding member of the Small Business Legislative Council (SBLC). It is a leading advocate on topics that impact small businesses, especially tax issues. The SBLC has prepared the following analysis of the “Tax Cuts and Jobs Act” (below).
For more information, contact Eric Snyder at erics@sema.org.
| Business Provisions | H.R. 1, The “Tax Cuts and Jobs Act” |
| C Corp Rates | 21% for C corps and personal service corps. This rate would be effective for tax years after 2017 and would be permanent. Would reduce the 80% dividends received deduction to 65% and the 70% dividends received deduction to 50%. |
| Bonus Depreciation | Companies would be able to immediately write off the full cost of investments in their businesses, starting with assets purchased and placed in service after September 27, 2017, and before January 1, 2023. Thereafter, the deduction will phase out by 20% each year through 2026. |
| Section 179 | Section 179 deduction would be increased from $500,000 to $1 million with an increased phase-out threshold at $2.5 million. These amounts will be indexed for inflation starting in 2019. The definition of qualified real property would also be expanded to include improvements made to nonresidential real property including roofs, heating and air-conditioning property. |
| Research and Development Credit | Retained in its current form. |
| Availability of Cash Method of Accounting | The average gross receipts threshold for using the cash method would be permanently increased from $5 million to $25 million. |
| Employer Credit for Paid FMLA | A new credit would be added for 2018 and 2019 for wages paid to employees on FMLA if certain conditions are met. |
| Deduction of Business Interest | Businesses would only be able to deduct net interest expenses up to 30% of their adjusted taxable income. For taxable years beginning after December 31, 2017, and before January 1, 2022, adjusted taxable income is computed without regard to deductions allowable for depreciation, amortization or depletion or the Section 199 deduction (domestic manufacturing deduction which is repealed in the bill). Businesses with annual gross receipts of $25 million or less would not be subject to the 30% limit. |
| Qualified Retirement Plans | Generally not impacted—though some concern that unless language is fixed in technical corrections, retirement plan contributions for pass-throughs may not be as advantageous because contribution would be against the qualified business income, which would have a lower tax rate than the personal income tax rate, but when taken out of the plan would be subject to the higher personal income tax rates. |
| Capital Gains and Dividends Rates | No change. |
| Non-qualified Deferred Compensation (409A) | No change. |
| Contributions to Capital | Added provision providing that capital contributions aren’t excludable from taxable income unless they are made by a shareholder, potential customer or government entity. Provision in House bill dealing with the inclusion in gross income of contributions to capital of a partnership in excess of fair market value of interest received is not included in final bill. |
| Technical Termination of Partnership | Technical termination rule would be repealed. Partnership would be treated as continuing even if more than 50% of the total capital and profit interests of partnership were sold or exchanged. |
| Pass Though Provisions | If the individual makes $157,500 or less (or $315,000 or less in the case of a joint return), indexed, the individual taxpayer would receive a 20% deduction on “qualified business income” from a partnership, S corporation or sole proprietorship. If the individual makes more than $157,500 (or more than $315,000 in the case of a joint return), then the deduction from “qualified business income” would be the greater of (i) the sum of 25% of the W-2 wages with respect to the trade or business, plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property” or (ii) 50% of the W-2 wages with respect to the trade or business. Once the $157,500 (or $315,000) threshold is hit, a “qualified trade or business” does not include service businesses. “Qualified business income” would not include reasonable compensation paid to the taxpayer by any qualified business for services rendered with respect to the business. “Qualified property” is defined as tangible property subject to depreciation, held by a qualified trade or business and used in the production of qualified business income. It is the first alternative for calculating the wage limit, which is seen as helping real-estate businesses with large capital investments but few employees to qualify under the pass-through provisions. There would be a phase-in of $50,000 for individuals or $100,000 for joint returns. A specified service means those performing services in the fields of health, law, consulting, athletics, financial services, brokerage services or where the reputation or skill of one or more of its employees or owners or dealing with investing and investment management trading or dealing in securities, partnership interests or commodities. Note that this definition excludes engineers and architects. The deduction would be allowed to nonitemizers as well as those that itemize. Trusts and estates would be eligible for the 20% deduction. These provisions would all sunset in 2025. |
| Estate and Generation Skipping Transfer (GST) Tax | From 2018 through the end of 2025 estate and GST exemptions would double. In 2026, the exemptions would revert back to their current levels, indexed for inflation. |
| Gift Tax | From 2018 through the end of 2025 the gift tax exemption would double. In 2026, the exemption would revert back to their current levels, indexed for inflation. |
| Step-Up in Basis | Retained in its current form. |
| Low Income Housing Credit | Retained in its current form. |
| ACA | Individual mandate repealed. |
| Mortgage Interest Deduction | Deduction limit reduced from $1 million to $750,000 and limited to debt incurred on the principal residence or a second home. Starting next year, no deduction will be allowed for interest on home equity loans. These changes would sunset in 2025. Taxpayers could continue to exclude sale proceeds from the sale of a principal residence as under current law. |
| Graduate and Undergraduate Tuition Waivers | No change. |
| Standard Deduction | Increased to $24,000 for joint, $18,000 for unmarried with at least one child and $12,000 for single filers. These increases would sunset at the end of 2025 and revert to current levels. |
| Personal Exemptions | Eliminated until 2025. |
| Child Tax Credit | Increased to $2,000 with an increased phase-out of up to $400,000 for married taxpayers. Increase the amount of the credit that is refundable from $1,000 to $1,400. These provisions would sunset at the end of 2025. |
| Non-Dependent Credit | Added $500 credit for dependents and other children until the end of 2025. |
| Family Flexibility Credit | No added provision. |
| Dependent Care Flexible Savings Accounts | No change. |
| Number of Tax Brackets | Seven |
| Top Rate | 37% |
| Provisions Covering Individuals and Businesses | |
| AMT – Alternative Minimum Tax | Corporate AMT repealed. Individual AMT retained with a higher AMT exemption (starting at $109,400 for joint and $70,300 for single) for the years 2018 through 2025. Phase-out of exemption amounts would be increased to $1 million for married taxpayers filing jointly and $500,000 for single taxpayers. This means that the exemption amount is not phased out until the alternative minimum taxable income exceeds these phase-out amounts. The increase in the individual AMT exemption sunsets in 2025. The repeal of the corporate AMT is permanent. |
| State and Local Tax (SALT) Deduction | Deduction for state and local income, sales and/or property taxes capped at $10,000. This provision sunsets in 2025. Cannot pre-pay income tax for 2018 in 2017. Not clear if property taxes can be prepaid in 2017 for 2018. State and local tax deduction maintained for corporations and pass throughs. |