Sweeping Federal Tax Bill Enacted Into Law

SEMA News—March 2018

From The Hill

By Eric Snyder

Sweeping Federal Tax Bill Enacted Into Law

Your Guide to the Corporate and Personal Tax Overhaul

  From The Hill
President Trump and Republican lawmakers celebrate passage of tax reform law.
   

President Trump signed 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) just before Christmas. It provides the most sweeping changes to the federal tax code in decades while reducing tax bills for businesses and workers alike.

H.R. 1 permanently reduces the corporate tax rate from 35% to 21% and transitions the U.S. to a territorial tax system where only income generated from within the U.S. is taxed. This provision ensures that companies headquartered in America are not taxed by two countries on future profits made abroad. U.S. corporations are encouraged to bring previous profits made overseas back to America under a reduced tax rate of 8% on physical assets and 15.5% on liquid assets.

For individual taxpayers, the new law reduces marginal income tax rates, which will be in effect for tax years 2018 through 2025, to 10%, 12%, 22%, 24%, 32%, 35%, 37% vs. 2017 tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. H.R. 1 should simplify the process of preparing taxes by eliminating the personal exemption and doubling the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly, while capping or eliminating many credits and deductions. Champions of the legislation maintain that the vast majority of households will now be able to file their taxes on a single page, since most taxpayers will benefit from a higher standard deduction rather than having to calculate Schedule A credits and deductions.

The new law eliminates a provision in the Affordable Care Act (ACA), more commonly referred to as Obamacare, that requires individuals to either purchase health insurance or pay a fine. That change is particularly contentious with congressional Democrats, who maintain that it will result in more than 13 million Americans losing their health insurance, while Republican leaders and the White House note that the federal government will no longer penalize individuals who choose not to purchase health insurance.

One of the law’s most popular provisions across the partisan spectrum is a doubling of the Child Tax Credit from $1,000 to $2,000. Many more families can take advantage of the incentive, since the income cap was raised from $110,000 to $400,000 per year (for a married couple). The new law also expands the medical-expense deduction while protecting those saving for higher education and retirement.

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 those business owners pay a marginal tax rate of no more than 29.6%.

The law also allows businesses to write off the full cost of investments for the next five years, doubles the exemption from the estate tax to $11 million for individuals and $22 million for couples through 2025, preserves the research-and-development credit, and allows small businesses (defined as companies with less than $25 million in gross receipts) to continue to write off 100% of their interest expenses.

The new law is expected to have a positive impact on the economy, providing $5.5 trillion in tax cuts over the next 10 years. That reduction in revenue to the federal government is partially offset by eliminating $4 trillion of tax incentives and loopholes.

Some of the higher-profile changes include eliminating a corporate loophole used to deduct compensation for executives earning more than $1 million a year, a new 20% excise tax on stock compensation when companies move overseas to avoid U.S. taxes, and capping interest deductibility for business at 30% (applies to companies with gross receipts of more than $25 million). The new law also reduces the mortgage interest deduction from $1 million to $750,000 and caps write-offs for state and local property taxes at $10,000. 

Business
Provisions

   

H.R. 1—The Tax Cuts and Jobs Act

C Corp Rates

   

21% for C corporations and personal service corporations. This rate would is effective for tax years after 2017 and is permanent. Reduces the 80% dividends-received deduction to 65% and the 70% dividends-received deduction to 50%.

Bonus Depreciation

   

Companies can 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 is increased from $500,000 to $1 million, with an increased phase-out threshold at $2.5 million. Those amounts will be indexed for inflation starting in 2019. The definition of qualified real property is also 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 is permanently increased from $5 million to $25 million.

Employer Credit for
Paid Family Medical
Leave (FMLA)

   

A new credit is added for 2018 and 2019 for wages paid to employees on FMLA if certain conditions are met.

Deduction of Business Interest

   

Businesses will 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 there is some concern that unless language is fixed in technical corrections, retirement-plan contributions for pass-throughs may not be as advantageous because the contribution will be against the qualified business income, which has 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

   

Capital contributions won’t be excludable from taxable income unless they are made by a shareholder, potential customer or government entity.

Technical Termination
of Partnership

   

Technical termination rule would be repealed. Partnership is 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 an individual makes $157,500 or less (or $315,000 or less in the case of a joint return) indexed for inflation, the individual taxpayer will 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” is 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” does 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. Trusts and estates would be eligible for the 20% deduction. These provisions would all sunset in 2025.

Estate and Generation Skipping Transfer (GST) Tax

   

Estate and GST exemptions will double to $11 million for individuals and $22 million for couples from 2018 through 2025. In 2026, the exemptions revert back to their current levels, indexed for inflation.

Gift Tax

   

The gift tax exemption will double from 2018 through 2025. In 2026, the exemption reverts back to its current levels, indexed for inflation.

Business
Provisions

   

H.R. 1—The Tax Cuts and Jobs Act (continued)

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 in 2018, no deduction will be allowed for interest on home equity loans. Those 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 $12,000 for single filers, $18,000 for unmarried with at least one child, and $24,000 for joint filers. Those increases are scheduled to 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. The amount of the credit that is refundable is increased from $1,000 to $1,400. Those provisions are scheduled to 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.

Provisions Covering
Individuals and Businesses

   

H.R. 1—The Tax Cuts and Jobs Act

Alternative Minimum Tax (AMT)

   

Corporate AMT permanently repealed. Individual AMT retained with a higher AMT exemption (starting at $70,300 for single and $109,400 for joint) for the years 2018 through 2025. Phase-out of exemption amounts are increased to $500,000 for single taxpayers and $1 million for married taxpayers filing jointly. This means that the exemption amount is not phased out until the alternative minimum taxable income exceeds those phase-out amounts. The increase in the individual AMT exemption sunsets in 2025.

State and Local Tax (SALT) Deduction

   

Deduction for state and local income, sales and/or property taxes capped at $10,000. That provision sunsets in 2025. State and local tax deduction maintained for corporations and pass-throughs.

*Summary of H.R. 1 provisions was prepared by the Small Business Legislative Council (SBLC), of which SEMA is a member.

Personal Income Tax Rates in 2017 (Prior to Passage of H.R. 1) vs. Lower Rates in 2018

Filing Status

   

Tax Rate for 2017

   

Income Range
for 2017

   

Tax Rate in 2018

   

Income Range
in 2018

Single

   

10%

   

$0–$9,325

   

10%

   

$0–$9,525

Single

   

15%

   

$9,326–$37,950

   

12%

   

$9,526–$38,700

Single

   

25%

   

$37,951–$91,900

   

22%

   

$38,701–$82,500

Single

   

28%

   

$91,901–$191,650

   

24%

   

$82,501–$157,500

Single

   

33%

   

$191,651–$416,700

   

32%

   

$157,501–$200,000

Single

   

35%

   

$416,701–$418,400

   

35%

   

$200,001–$500,000

Single

   

39.6%

   

$418,401+

   

37%

   

$500,001+

Married Filing Jointly

   

10%

   

$0–$18,650

   

10%

   

$0–$19,050

Married Filing Jointly

   

15%

   

$18,651–$75,900

   

12%

   

$19,051–$77,400

Married Filing Jointly

   

25%

   

$75,901–$153,100

   

22%

   

$77,401–$165,000

Married Filing Jointly

   

28%

   

$153,101–$233,350

   

24%

   

$165,001–$315,000

Married Filing Jointly

   

33%

   

$233,351–$416,700

   

32%

   

$315,001–$400,000

Married Filing Jointly

   

35%

   

$416,701–$470,700

   

35%

   

$400,001–$600,000

Married Filing Jointly

   

39.60%

   

$470,701+

   

37%

   

$600,001+

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