Tax Reform Has Wide Ranging Impact

President Trump’s campaign promise of major tax reform was fulfilled on Dec 22nd when he signed H.R. 1 that had been quickly pushed through Congress. This legislation is the most widespread change to our tax system since 1986. It will have a significant impact on individuals, business entities, choice of corporate structures and multi-national businesses. The implementation of some of the changes is subject to varying interpretations so we are anxiously awaiting further guidance from the IRS.

Some of the significant changes include:

Individuals
Reduction of tax rates
Elimination of personal exemptions
Modification of alternative minimum tax
Increased standard deduction and limitation on deductions for mortgage interest, state and local taxes and elimination of deductions for: moving expenses, alimony, unreimbursed employee business expenses, investment adviser fees and tax preparation fees
Modification of taxation of certain equity grants

Business Entities
Reduce corporate tax rate to 21% and repeal Alternative Minimum Tax
Reduce effective tax rate for owners of pass through entities
Allow more taxpayers to utilize the cash basis method to determine taxable income
Enhance 100% Bonus Depreciation and Section 179 First Year Expensing
Repeal of deduction for Domestic Production Activities
Limitation on interest expense deductions and elimination of deduction for entertainment activities

Multi-National Entities
Mandatory deemed repatriation of accumulated foreign earnings
A 100% dividends received deduction for dividends received from foreign corporations
Creation of new tax on “global intangible low taxed income”

Below is a summary of prior tax law and the changes made by the 2017 tax reform act as noted by Bloomberg BNA.





Corporate and Business

Topic Pre-Reform Law 2017 Reform Act

Corporate Alternative Minimum Tax

Taxpayers must compute their income for purposes of the regular income tax, then recompute their income for purposes of the alternative minimum tax (AMT). Corporations with average gross receipts equal to or in excess of $7.5 million over the preceding three tax years are subject to the AMT. A taxpayer’s tax liability is the greater of their regular tax liability or their AMT liability. Corporations receive a credit for AMT paid (the prior-year minimum tax credit), which they can carry forward and claim against regular tax liability in future tax years, to the extent such liability exceeds AMT in a particular year. Repeals the corporate AMT for tax years beginning after Dec. 31, 2017
Continues to allow the prior year minimum tax credit to offset the taxpayer’s regular tax liability for any tax year. For tax years beginning after 2017 and before 2022, the prior year minimum tax credit is refundable in an amount equal to 50% (100% for tax years beginning in 2021) of the excess of the credit for the tax year over the amount of the credit allowable for the year against regular tax liability.
No expiration.

Corporate Tax Rate

A corporation’s regular tax liability is determined by applying the following rates: 15% for $0-$50,000 of taxable income, 25% for $50,001-$75,000 of taxable income, 34% for $75,001-$10,000,000 of taxable income and 35% for excess of $10,000,000 of taxable income. The 15% and 25% rates are phased out for corporations with taxable income between $100,000 and $335,000 and the 34% rate is gradually phased out for corporations with taxable income between $15,000,000 and $18,333,333. Additionally, personal service corporations are not entitled to use the graduated corporate rates below the 35% rate.
Corporations which receive dividends from other taxable corporations are generally allowed a deduction equal to 70% of the dividends received. In the case of any dividend received from a 20%-owned corporation, the amount of the deduction is equal to 80% of the dividend received. The aggregate deduction for dividends received is limited to 70% of the corporation’s taxable income or 80% of the corporation’s taxable income in the case of any dividend received from a 20%-owned corporation.
For this purpose, certain preferred stock is not taken into account. If a dividend is received from a corporation that is a member of the same affiliated group, a corporation is generally allowed a deduction equal to 100% of the dividend received.
Reduces the corporate tax rate to a flat 21% for tax years beginning after Dec. 31, 2017.Repeals the maximum corporate tax rate on net capital gain as obsolete. Does not require a special rate for personal service corporations.
No expiration.
Reduces the 80% dividends received deduction to 65% and the 70% dividends received deduction to 50%. Also reduces the corresponding taxable income limitations.

Cash Method of
Accounting

Corporations and partnerships with corporate partners are prohibited from using the cash method of accounting unless they meet an average gross receipts of less than $5 million for the prior three taxable years, for all post 1985 years. Certain farming entities are prohibited from using the cash method if average gross receipts exceed $1 million. Family farm corporations are permitted to use the cash method if average gross receipts do not exceed $25 million. Qualified personal service corporations are generally permitted to use the cash method regardless of gross receipts. Effective for tax years beginning after Dec. 31, 2017, taxpayers with average gross receipts of less than $25 million (indexed for inflation) for the prior three taxable years are permitted to use the cash method of accounting, regardless of entity structure or industry. Repeals the requirement that corporations and partnerships with corporate partners satisfy the average gross receipts requirement for all prior years. Application of this provision is a change in method of accounting under §481.
Accounting for
Inventories
Businesses where the production, purchase, or sale of merchandise is a material income producing factor must account for inventories and must also use the accrual method as their overall method of accounting. Taxpayers with average gross receipts of less than $10 million for the prior three taxable years may account for inventory as materials and supplies that are not incidental if they are not otherwise prohibited from using the cash method as their overall method of accounting under §448. Certain industries are still required to account for inventories if their average gross receipts exceed $1 million. Effective for tax years beginning after Dec. 31, 2017, taxpayers with average gross receipts of less than $25 million (indexed for inflation) for the prior three taxable years are exempt from the requirement to account for inventories under §471, regardless of entity structure or industry. Such taxpayers may either treat inventories as materials and supplies that are not incidental or conform to the taxpayer’s financial accounting treatment. Application of this provision is a change in method of accounting under §481.
UNICAP Under the UNICAP rules, businesses must either include in inventory or capitalize certain direct and indirect costs related to real or tangible property, whether manufactured or acquired for resale. Businesses with less than $10 million in average gross receipts are exempt from this requirement with respect to personal property acquired for resale. There are also several industry or item specific exemptions from the UNICAP rules. Effective for tax years beginning after Dec. 31, 2017, taxpayers with average gross receipts of less than $25 million (indexed for inflation) for the prior three tax years are exempt from the UNICAP rules, regardless of entity structure or industry. Exemptions from the UNICAP rules that are not tied to a gross receipts test are retained. Application of this provision is a change in method of accounting under §481.
Accounting for Long-term Contracts Contractors with average gross receipts of less than $10 million for the three prior taxable years are classified as “small contractors” and are exempt from the requirement to use the percentage-of completion method of accounting for long-term construction contracts to be completed within two years, and may instead use the taxpayer favorable completed contract method or other applicable methods. Effective for contracts entered into after Dec. 31, 2017, the act amended §460 to allow taxpayers with average gross receipts of less than $25 million (indexed for inflation) for the prior three taxable years an exemption from the requirement to use the percentage-of completion accounting method for long-term construction contracts to be completed within two years, regardless of entity structure. Taxpayers that meet such exception would be permitted to use the completed-contract method (or any other permissible exempt contract method). Application of this provision applies on a cutoff basis and does not result in an adjustment under §481.
Certain Contributions by Governmental Entities Not Treated as Contributions to Capital The gross income of a corporation generally does not include contributions to its capital. Contributions to aid in construction and contributions as a customer or potential customer are not contributions to the capital of a corporation. An exception applies contributions to aid in the construction of a regulated public utility that provides water or sewage disposal services are tax-free contributions to the capital of a corporation. Provides that term “contributions to capital” does not include (1) any contribution in aid of construction or any other contribution as a customer or potential customer, and (2) any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such). Modifies, but preserves §118, which continues to only apply to corporations.
Effective for contributions made after Dec. 22, 2017, except for contributions made after Dec. 22, 2017, by a governmental entity pursuant to a master development plan that has been approved prior to such date by a governmental entity.

Temporary 100% Expensing for Certain Business Assets

Taxpayers receive an additional depreciation deduction in the year in which it places certain “qualified property” in service (bonus depreciation), effective for property placed in service through 2019 (2020 for certain qualified property with a longer production period). The amount of bonus depreciation is 50% of the cost of such property placed in service during 2017 and phases down to 40% in 2018 and 30% in 2019. Qualified property that is eligible for bonus depreciation is tangible personal property with a recovery period of 20 years or less under the modified accelerated cost recovery system (MACRS), certain off-the-shelf computer software, water utility property, and qualified improvement property.
Finally, to be eligible for bonus depreciation, the original use of the property must begin with the taxpayer.
Taxpayers may elect out of bonus depreciation. Taxpayers can elect to accelerate the use of their AMT credits in lieu of deducting bonus depreciation.
Taxpayers receive an additional depreciation deduction in the year in which it places certain “qualified property” in service (bonus depreciation), effective for property placed in service through 2019 (2020 for certain qualified property with a longer production period). The amount of bonus depreciation is 50% of the cost of such property placed in service during 2017 and phases down to 40% in 2018 and 30% in 2019. Qualified property that is eligible for bonus depreciation is tangible personal property with a recovery period of 20 years or less under the modified accelerated cost recovery system (MACRS), certain off-the-shelf computer software, water utility property, and qualified improvement property.
The Act initially allows full expensing for property placed in service after Sept. 27, 2017, reducing the percentage that may be expensed for property placed in service after Dec. 31, 2022, as follows:
Qualified Property
– For property placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (before Jan. 1, 2024 for longer production period property), 100% expensing.
– For property placed in service after Dec. 31, 2022, and before Jan. 1, 2024 (after Dec .31, 2023, and before Jan. 1, 2025 for longer production period property), 80% expensing.
– For property placed in service after Dec. 31, 2023, and before Jan. 1, 2025 (after Dec. 31, 2024, and before Jan. 1, 2026 for longer production period property), 60% expensing.
– For property placed in service after Dec. 31, 2024, and before Jan. 1, 2026 (after Dec. 31, 2025, and before Jan. 1, 2027 for longer production period property), 40% expensing.
– For property placed in service after Dec. 31, 2025, and before Jan. 1, 2027 (after Dec. 31, 2026, and before Jan. 1, 2028 for longer production period property), 20% expensing.
Taxpayers may elect 50% in lieu of 100% expensing for qualified property placed in service during the first tax year ending after Sept. 27, 2017.
The amendments apply to property that is both acquired after Sept. 27, 2017 and placed in service after Sept. 27, 2017; and to fruit and nut-bearing plants planted or grafted after Sept. 27, 2017.
Depreciation Limitation for Luxury Automobiles and Personal Use Property The annual cost recovery deduction for certain passenger automobiles is limited. For passenger automobiles placed in service in 2017 for which the additional first-year depreciation deduction under §168(k) is not claimed, a taxpayer may depreciate a maximum amount of $3,160 for the year in which the vehicle is placed in service, $5,100 for the second year, $3,050 for the third year, and $1,875 for the fourth and later years in the recovery period. This limit is indexed for inflation and applies to the aggregate deduction for depreciation and §179 expensing.
Passenger automobiles eligible for the additional first-year depreciation allowance in 2017 may depreciate an additional $8,000 in the first year the vehicle is placed in service.
Special rules apply to listed property. Listed property generally includes passenger automobiles, other property used as a means of transportation, property generally used for entertainment, recreation, or amusement, any computer or peripheral equipment, and any other property of a type specified in Treasury regulations.
The Act increases the depreciation limitations under §280F for passenger automobiles placed in service after Dec. 31, 2017, to $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years. These amounts will be indexed for inflation for automobiles placed in service after 2018.
Also effective for property placed in service after Dec. 31, 2017, the Act removes computer or peripheral equipment from the definition of listed property.
Depreciation Deductions for Nonresidential Real Property and Residential Rental Property The MACRS recovery periods applicable to most tangible personal property range from three to 20 years and generally use the 200% and 150% declining balance methods in calculating depreciation – switching to the straight line method where it yields a larger depreciation balance in the first year There is an alternative depreciation system (ADS), the use of which is required for tangible property used predominantly outside the United States, certain tax-exempt property, tax-exempt bond financed property, and certain imported property covered by an Executive order. A taxpayer can also elect to use ADS for any class of property for any tax year. Under ADS, all property is depreciated using the straight line method over recovery periods which are generally equal to the class life of the property. Exceptions apply. The Act:
– provides a 15-year recovery period for qualified improvement property;
– eliminates the separate definitions of “qualified leasehold improvement property”, “qualified restaurant property”, and “qualified retail improvement property”;
– provides a 20-year ADS recovery period for all qualified improvement property;
– requires a real property trade or business electing out of the interest expense deduction limitation to use ADS to depreciate its nonresidential real property, residential rental property, and qualified improvement property; and
– lowers the ADS recovery period to 30 years for residential rental property.
Applies to property placed in service after Dec. 31, 2017.

Limitation on Business Interest Expense Deduction

Business interest is generally allowed as a deduction in the tax year in which the interest is paid or accrued, subject to a number of limitations. The Act limits the deduction for net interest expenses incurred by a business to the sum of business interest income, 30% of the business’s adjusted taxable income, and floor plan financing interest.
Businesses with average annual gross receipts of $25 million or less are exempt from the limit. Disallowed interest could be carried forward indefinitely.
The Act allows real property trades or business that use the ADS and farming businesses to elect not to be subject to the business interest deduction limitation. Electing farming businesses must use ADS to depreciate property with a recovery period of 10 years or more.
The interest deduction limit does not apply to certain regulated public utilities or to certain electric cooperatives.
Applies to tax years beginning after Dec. 31, 2017.

Deductions for Income Attributable to Domestic Production Activities

Taxpayers may claim a deduction equal to 9% of the lesser of the taxpayer’s qualified production activities income, which is derived from property that was manufactured, produced, grown, or extracted within the United States, or the taxpayer’s taxable income for the tax year. Deduction repealed for all taxpayers for tax years beginning after Dec. 31, 2017. Deduction not extended for Puerto Rico activities.

Section 179 Expensing

Businesses may immediately expense up to $500,000 (adjusted for inflation – $510,000 for 2017) of the cost of any §179 property placed in service each tax year. If the business places in service more than $2 million (adjusted for inflation – $2,030,000 for 2017) of §179 property in a tax year, then the amount available for immediate expensing is reduced by the amount by which the cost of such property exceeds $2 million (as adjusted). Further limitations on the ability to immediately expense this amount may apply based on the business’s taxable income for the year. Increases the amount that a taxpayer may expense under §179 to $1,000,000. The Act also increases the phase-out threshold to $2,500,000. These amounts are indexed for inflation for tax years beginning after 2018. The $25,000 cost limitation for SUVs is also indexed for inflation for tax years beginning after 2018. The Act also expands the definition of qualified real property to include all qualified improvement property and certain improvements (roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems) made to nonresidential real property.
NOL Deduction A net operating loss is the amount by which a taxpayer’s current-year business deductions exceed its current-year gross income. Net operating losses may not be deducted in the year generated, but may be carried back two years and carried forward 20 years. The Act limits the NOL deduction to 80% of taxable income and provide that amounts carried to other years be adjusted to account for the limitation for losses arising in tax years beginning after Dec. 31, 2017.
NOLs of property and casualty insurance companies may be carried back two years and carried forward 20 years to offset 100% of taxable income in such years.
The Act eliminates carrybacks (except for farming NOLs, which would be permitted a two-year carryback) and allows unused NOLs to be carried forward indefinitely.
Like-Kind Exchanges of Real Property No gain or loss is recognized to the extent that property held for productive use in the taxpayer’s trade or business, or property held for investment purposes, is exchanged for property of a like-kind that also is held for productive use in a trade or business or for investment. Limits the nonrecognition of gain for like-kind exchanges to real property that is not held primarily for sale. The Act applies to exchanges completed after Dec. 31, 2017. However, an exception is provided for any exchange if either the property being exchanged or the property received is exchanged or received on or before Dec. 31, 2017.

Entertainment, etc. Expenses

Employers can only deduct expenses associated with entertainment, amusement, or recreational activities if they establish that the activity was directly related to the active conduct of the employer’s trade or business or a facility used in connection with such activity. If an employer is entitled to deduct entertainment expenses, there generally is a 50% cap of the amount otherwise deductible. No deduction is allowed for membership dues with respect to any club organized for entertainment purposes. Gross income generally includes the value of employer provided fringe benefits, except as discussed below. In general, a service provider includes in gross income the amount by which the fair market value of a fringe benefit exceeds the sum of the amount paid by the service provider and the amount that is specifically excluded from gross income. Certain employer-provided fringe benefits are excluded from a service provider’s gross income. These include de minimis fringes, qualified transportation fringes, and meals that are provided for the convenience of the employer. Qualified transportation fringes include qualified parking, transit passes, vanpool benefits, and qualified bicycle commuting reimbursements. No deduction is allowed for entertainment, amusement, or recreation; membership dues for a club organized for business, pleasure, recreation, or other social purposes; or a facility used in connection with any of the above.
The Act repeals the exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business (and the related rule applying a 50% limit).
Deduction for 50% of food and beverage expenses associated with operating a trade or business generally is retained. Expands the 50% limit to include employer expenses associated with providing food and beverages to employees through an eating facility meeting de minimis fringe requirements.
The Act disallows deductions for expenses associated with providing any qualified transportation fringe to employees, and except for ensuring employee safety, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment. The Act also disallows employer deductions for expenses associated with meals provided for the employer’s convenience on, or near, the employer’s business premises through an employer-operated facility that meets certain requirements.
Applies to amounts paid or incurred after Dec. 31, 2017, but eliminates deduction for meals provided at convenience of employer to amounts paid or incurred after Dec. 31, 2025.
Amortization of Research and Experimental Expenditures Taxpayers may elect either to deduct current research or experimental expenditures paid or incurred in connection with a present or future trade or business or to treat such expenditures as deferred expenses and amortize these costs over a period of not less than 60 months. Specified research or experimental expenditures, including software development expenditures, are capitalized and amortized ratably over a five-year period (15 years if attributable to research conducted outside of the United States). Land acquisition and improvement costs, mine (including oil and gas) exploration costs are not subject to this rule. Upon retirement, abandonment, or disposition of property, any remaining basis continues to be amortized over the remaining amortization period.
Applies on a cutoff basis to expenditures paid or incurred in tax years beginning after Dec. 31, 2021.
Denial of Deduction for Settlements Subject to a Nondisclosure Agreement Paid in Connection with Sexual Harassment or Sexual Abuse Taxpayers generally may deduct ordinary and necessary expenses paid or incurred in carrying on any trade or business, but several exceptions apply. The Act disallows a deduction for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if the payments are subject to a nondisclosure agreement. Effective for amounts paid or incurred after Dec. 22, 2017.
Employer Credit for Paid Family and Medical Leave Taxpayers generally may deduct ordinary and necessary expenses paid or incurred in carrying on any trade or business, but several exceptions apply. The Act permits eligible employers (employers that allow all qualifying full-time employees at least two weeks annual paid family and medical leave and allow part-time employees a commensurate amount of leave on a pro rata basis) to claim a business credit for 12.5% of the wages paid to qualifying employees during any period in which such employees are on family and medical leave if the payment rate under the program is 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%.
Effective for wages paid in tax years beginning after Dec. 31, 2017. Not applicable to wages paid in tax years beginning after Dec. 31, 2019.

 


Individual

Topic Pre-Reform Law 2017 Reform Act

Tax Rates

Individual Income Tax Rates
For tax year 2017, there are seven regular individual income tax brackets of 10%, 15%, 25%, 28%, 33%,
35%, and 39.6%, and five categories of filing status. The income levels for each bracket threshold are
indexed annually based on increases in the Consumer Price Index (CPI).

Married Filing Jointly and Surviving Spouses:
10% (Taxable income not over $18,650)
15% (Over $18,650 but not over $75,900)
25% (Over $75,900 but not over $153,100)
28% (Over $153,100 but not over $233,350)
33% (Over $233,350 but not over $416,700)
35% (Over $416,700 but not over 470,700)
39.6% (over $470,700)

Married Filing Separately:
10% (Taxable income not over $9,325)
15% (Over $9,325 but not over $37,950)
25% (Over $37,950 but not over $76,550)
28% (Over $76,550 but not over $116,675)
33% (Over $116,675 but not over $208,350)
35% (Over $208,350 but not over $235,350)
39.6% (over $235,350)

Head of Household:
10% (Taxable income not over $13,350)
15% (Over $13,350 but not over $50,800)
25% (Over $50,800 but not over $131,200)
28% (Over $131,200 but not over $212,500)
33% (Over $212,500 but not over $416,700)
35% (Over $416,700 but not over $444,550)
39.6% (over $444,550)

Single Individuals:
10% (Taxable income not over $9,325)
15% (Over $9,325 but not over $37,950)
25% (Over $37,950 but not over $91,900)
28% (Over $91,900 but not over $191,650)
33% (Over $191,650 but not over $416,700)
35% (Over $416,700 but not over $418,400)
39.6% (Over $418,400)

Capital Gains Tax Rates
Short-term capital gains are taxed as ordinary
income.

For tax year 2017, taxpayers in the 10% and 15% tax brackets pay no tax on long-term gains on most assets; taxpayers in the 25%, 28%, 33%, or 35% income tax brackets face a 15% rate on long-term capital gains. For those in the top 39.6% bracket for ordinary income, the rate is 20%.

Individual Income Tax Rates
The Act has seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These brackets apply to tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026

Married Filing Jointly and Surviving Spouses:
10% (Taxable income not over $19,050)
12% (Over $19,050 but not over $77,400)
22% (Over $77,400 but not over $165,000)
24% (Over $165,000 but not over $315,000)
32% (Over $315,000 but not over $400,000)
35% (Over $400,000 but not over 600,000)
37% (over $600,000)

Married Filing Separately:
10% (Taxable income not over $9,525)
12% (Over $9,525 but not over $38,700)
22% (Over $38,700 but not over $82,500)
24% (Over $82,500 but not over $157,500)
32% (Over $157,500 but not over $200,000)
35% (Over $200,000 but not over $300,000)
37% (Over $300,000)
Head of Household:
10% (Taxable income not over $13,600)
12% (Over $13,600 but not over $51,800)
22% (Over $51,800 but not over $82,500)
24% (Over $82,500 but not over $157,500)
32% (Over $157,500 but not over $200,000)
35% (Over $200,000 but not over $500,000)
37% (Over $500,000)
Single Individuals:
10% (Taxable income not over $9,525)
12% (Over $9,525 but not over $38,700)
22% (Over $38,700 but not over $82,500)
24% (Over $82,500 but not over $157,500)
32% (Over $157,500 but not over $200,000)
35% (Over $200,000 but not over $500,000)
37% (Over $500,000)

The income threshold amounts for each rate bracket will be indexed for inflation using C-CPI-U in tax years beginning after Dec. 31, 2018. The requirement to index the amounts for inflation using the C-CPI-U would not expire. The bill would simplify the “kiddie tax”.

Capital Gains Tax Rates
Under the Act, the breakpoints between the 0% and 15% rates and between the 15% and 20% rates are the same as the under present law. For tax years beginning in 2018, the rate thresholds are as follows:

Married Filing Jointly (and Surviving Spouses):
15% Rate Threshold – $77,200
20% Rate Threshold – $479,000

Married Filing Separately:
15% Rate Threshold – $38,600
20% Rate Threshold – $239,500
Head of Household:
15% Rate Threshold – $51,700
20% Rate Threshold – $452,400

Other Individuals:
15% Rate Threshold – $38,600
20% Rate Threshold – $425,800
The above 15% and 20% threshold amounts apply to tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026. These amounts will be indexed for inflation using C-CPI-U in tax years beginning after Dec. 31, 2018. The requirement to index amounts for inflation using C-CPI-U will not expire.

Standard Deduction

An individual reduces adjusted gross income (AGI) by personal exemption deductions and either (i) the applicable standard deduction or (ii) itemized deductions, to determine taxable income.
The basic standard deduction varies depending upon a taxpayer’s filing status. For 2017, the standard deduction is $6,350 for single individuals and married individuals filing separate returns, $9,350 for heads of households, and $12,700 for married individuals filing a joint return. The amounts of the basic and additional standard deductions are indexed annually for inflation (CPI). Taxpayers may elect to claim itemized deductions in lieu of taking the applicable standard deductions. Taxpayers blind or 65 or older are eligible for an increased standard deduction.
The Act increases the standard deduction to the following amounts:
$24,000 (joint return or a surviving spouse) $18,000 (unmarried individual with at least one qualifying child) $12,000 (for single filers)
The Act retains the enhanced standard deduction for the blind and elderly that is available under current law.
The amount of the standard deduction will be indexed for inflation using C-CPI-U in tax years beginning after 2018. Increased standard deduction amounts will expire after Dec. 31, 2025.
Effective for tax years beginning after Dec. 31, 2017.

Personal Exemptions

A taxpayer generally may claim personal exemptions for the taxpayer, the taxpayer’s spouse, and any dependents. For 2017, taxpayers may deduct $4,050 for each personal exemption. The exemption amount is indexed annually for inflation (CPI). Additionally, a personal exemption phase-out (PEP) reduces a taxpayer’s personal exemptions by 2% for each $2,500 ($1,250 for married filing separately) by which the taxpayer’s AGI exceeds $261,500 (single), $287,650 (head-of-household), $313,800 (married filing jointly), and $150,000 (married filing separately). These threshold amounts apply to tax year 2017 (and also are indexed for inflation). The Act suspends the deduction for personal exemptions for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.

Individual Alternative Minimum Tax

Taxpayers must compute their income for purposes of the regular income tax, then recompute their income for purposes of the alternative minimum tax (AMT). A taxpayer’s tax liability is the greater of their regular tax liability or their AMT liability.
For individuals, estates and trusts, the AMT has a 26% bracket and a 28% bracket. In computing the AMT, only alternative minimum taxable income (AMTI) above an AMT exemption amount is taken into account, but AMTI represents a broader base of income than regular taxable income because many deductions and tax preferences are disallowed for AMT purposes.
For tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, the Act increases the AMT exemption amounts for individuals in §55(d)(1) as follows:

– $109,400 for married taxpayers filing jointly or for surviving spouses;
– $70,300 for single taxpayers; and
– $54,700 for married taxpayers filing separately.

Also, for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, the Act increases the phase-out of exemption amounts in §55(d)(3) as follows:

– $1,000,000 for married taxpayers filing jointly or for surviving spouses;
– $500,000 for single taxpayers and married taxpayers filing separately.

For any tax year beginning in a calendar year after 2018, the Act also indexes all the above amounts for inflation.

Miscellaneous Itemized Deductions – 2 Percent Floor

A taxpayer may deduct certain expenses as miscellaneous itemized deductions. The deduction claimed is the portion of the sum of the expenses that exceeds 2% of the taxpayer’s adjusted gross income (AGI). The expenses which qualify generally fall into the categories of unreimbursed employee expense; tax preparation fees; and other expenses paid to produce or collect income that is included in the taxpayer’s gross income or expenses to manage, conserve, or maintain property held for producing income, or expenses to determine, contest, pay, or claim a refund of any tax.
Eligible educators (kindergarten through grade 12) can deduct up to $250 of qualified expenses, independently of the 2% miscellaneous itemized deductions.

The Act suspends all miscellaneous itemized deductions that are subject to the 2% floor under present law for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.
Limitation on Itemized Deductions The total amount of otherwise allowable itemized deductions (other than medical expenses, investment interest, and casualty, theft, or wagering losses) is limited for certain upper-income taxpayers (sometimes referred to as the “Pease” limitation). This limitation applies on top of any other limitations applicable to such deductions. Under the Pease limitation, the otherwise allowable total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds a threshold amount, according to filing status. The Pease limitation does not reduce itemized deductions by more than 80%. The Act suspends the overall limitation on itemized deductions for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.

Mortgage Interest Deduction

Taxpayers may claim itemized deductions for mortgage interest paid with respect to a principal residence and one other residence of the taxpayer. Taxpayers who itemize their deductions may deduct interest payments on up to $1 million in acquisition indebtedness (for acquiring, constructing, or substantially improving a residence), and up to $100,000 in home equity indebtedness. Under the alternative minimum tax (AMT), however, the deduction for home equity indebtedness is disallowed. The Act reduces the mortgage interest deduction to interest on $750,000 of acquisition indebtedness interest for debt incurred after Dec. 15, 2017. The $1 million limitation remains for older debt. The deduction is not limited to interest on a taxpayer’s principal residence. For tax years beginning after Dec. 31, 2025, the limitation reverts back to $1,000,000 regardless of when the debt was incurred. The Act suspends the mortgage interest deduction for interest on home equity indebtedness for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.

State and Local Tax Deduction

Individuals may claim itemized deductions for state and local government income and property taxes paid. In lieu of the itemized deduction for state and local income taxes, individuals may claim an itemized deduction for state and local government sales taxes. The Act provides that individual taxpayers may elect to deduct state and local sales, income, or property taxes up to $10,000 ($5,000 for a married taxpayer filing a separate return) for tax years beginning after Dec. 31, 2017, and beginning before Jan. 1, 2026.
For amounts paid in a tax year beginning before Jan. 1, 2018, with respect to State or local income taxes, beginning after Dec. 31, 2017, the payment is treated as if paid on the last day of the tax year for which such tax is imposed for purposes of applying the limitation of the deduction.
The Act also provides that individuals may deduct State, local, and foreign property taxes and State and local sales taxes when paid or accrued in carrying on a trade or business and generally disallows a deduction for individual State and local income, war profits, and excess profits taxes.
Charitable Contributions For tax years beginning before 2018 and after 2025, the limitation on the deduction for cash contributions made to public charities, private operating foundations, and private distributing foundations is 50% of AGI. The deduction for cash contributions to private nonoperating foundations is limited generally to 30% of AGI.
For contributions made in tax years beginning before 2018, a taxpayer who receives the right to purchase tickets to an educational institution’s athletic events in exchange for a contribution to the educational institution is permitted to deduct 80% of the amount contributed.
For contributions made in tax years beginning before Jan. 1, 2017, a taxpayer is not required to substantiate a charitable contribution with a contemporaneous written acknowledgement from the charity if the donee organization files a return reporting required information on the donation.
The Act increases the AGI limitation on cash contributions from 50% to 60%, effective for contributions made in tax years beginning after 2017 and before 2026.
The Act repeals the current 80% deduction for contributions made for university athletic seating rights, effective for contributions made in tax years beginning after 2017.
The Act also repeals the exception to the contemporaneous written acknowledgement requirement for contributions of $250 or more when the donee organization files the required return, effective for contributions made in tax years beginning after Dec. 31, 2016.
Personal Casualty Losses Deduction Individuals may claim itemized deductions for personal casualty losses (i.e., losses not connected with a trade or business or entered into for profit), including property losses arising from fire, storm, shipwreck, or other casualty, or from theft.
Certain tax legislation, including the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (Pub. L. No. 115-63), provided for a special above-the-line deduction for personal casualty losses arising from specified natural disasters.
The Act limits the personal casualty loss itemized deduction for property losses (not used in connection with a trade or business or transaction entered into for profit) to apply only to losses incurred as a result of federally-declared disasters. This limitation on deductibility applies to losses arising in tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.
Limitation on Wagering Losses Deduction Taxpayers may claim itemized deductions for losses from gambling, but only to the extent of gambling winnings. However, taxpayers may claim other deductions connected to gambling that are deductible regardless of gambling winnings. The Act amends the definition of losses from wagering transactions to include any otherwise allowable deduction incurred in carrying on wagering transactions (e.g., traveling to and from a casino), applicable to tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.
Medical Expense Deduction Taxpayers may claim itemized deductions for out-of-pocket medical, dental and related expenses of the taxpayer, a spouse, or a dependent not compensated for by insurance. This deduction is allowed only to the extent the expenses exceed 10% of the taxpayer’s adjusted gross income. A special rule applicable to taxpayers (or their spouses) who have attained the age of 65 before the close of tax years beginning after Dec. 31, 2012 and ending before Jan. 1, 2017, reduced the floor to 7.5%. This rule is disregarded, however, for the purposes of computing the alternative minimum tax. For tax years beginning after Dec. 31, 2016, and ending before Jan. 1, 2019, the Act reduces the medical expense deduction floor to 7.5% of adjusted gross income and eliminate the minimum tax preference.

Alimony Payments Deduction

Alimony payments generally are allowed as above-the line deductions for the payor, and are included in the income of the payee. However, alimony payments are neither deductible by the payor, nor includible in the income of the payee, if designated as such by the divorce decree or separation agreement. The Act eliminates the current above-the-line deduction for alimony payments. The Act does not require the payee receiving alimony payments to include alimony payments into income. This provision is effective for divorce decrees, separation agreements, and certain modifications entered into after 2018.

Moving Expenses Deduction

Taxpayers may claim deductions for moving expenses incurred in connection with starting a new job, regardless of whether or not the taxpayer itemizes his deductions. To qualify, the new workplace generally must be at least 50 miles farther from the former residence than the former place of work or, if the taxpayer had no former workplace, at least 50 miles from the former residence. The Act generally suspends the deduction for moving expenses for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026. However, the deduction generally is still available for active duty members of the Armed Forces who move pursuant to a military order and incident to a permanent change of station.

Expenses Attributable to the Trade or Business of Being an Employee

Taxpayers generally may claim deductions for trade and business expenses, regardless of whether the taxpayer itemizes deductions or takes the standard deduction. Taxpayers generally may claim expenses relating to the trade or business of being an employee only if they itemize deductions. Certain expenses attributable to the trade or business of being an employee, however, are allowed as above-the-line deductions, including reimbursed expenses included in the employee’s income, certain expenses of performing artists, certain expenses of state and local government officials, certain expenses of elementary and secondary school teachers, and certain expenses of members of reserve components of the U.S. military.
Eligible educators above-the-line deduction is for any ordinary and necessary expenses incurred (1) for professional development courses, or (2) for materials (books, supplies, computers, and other supplementary materials) used in the classroom. The deduction may not exceed $250 (for 2017). This amount is indexed for inflation.
Gross income does not include any qualified fringe benefit, including working condition fringe benefits.
The Act suspends all miscellaneous itemized deductions that are subject to the 2% floor under present law, including expenses attributable to the trade or business of performing services as an employee, for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.
The Act increases the limit for the above-the line deduction for certain teacher expenses to $500 for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.
Exclusion for Qualified Moving Expense Reimbursements Qualified moving expense reimbursements provided by an employer to an employee are excluded from the employee’s income. The Act suspends the exclusion from gross income for qualified moving expense reimbursements for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026. The exclusion is available for active duty members of the Armed Forces who move pursuant to a military order and incident to a permanent change of station.
Recharacterization of Certain IRA and Roth IRA Contributions An individual may recharacterize a contribution to a traditional IRA as a contribution to a Roth IRA, and vice versa. An individual also may recharacterize a conversion of a traditional IRA to a Roth IRA. The deadline for recharacterization generally is Oct. 15 of the year following the conversion. When a recharacterization occurs, the individual is treated for tax purposes as not having made the conversion. The recharacterization must include any net earnings related to the conversion. Provides that the special rule that allows a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth conversion. However, recharacterization is still permitted with respect to other contributions.
These changes are effective for plan years beginning after Dec. 31, 2017.

Qualified Equity Grants

No provision. New §83(i) provides tax benefits to employees of certain start-up companies. Generally, an employee may make a special election with respect to qualified stock transferred to them, so that no amount is included in income for the first tax year in which the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. Income taxation can be deferred by the employee until the earlier of (a) five years, or (b) the occurrence of a specified event, such as the stock of the company being readily tradable on an established securities market, or a revocation of the election. A written plan must provide that at least 80% of the employees of the company are granted stock options or restricted stock units (RSUs) with the same rights and privileges. The 80% eligibility requirement is met only if affected employees (new hires or existing employees) are either granted stock options or RSUs for that year, and not a combination of both. Certain notice requirements apply.
Where an inclusion deferral election is made with respect to an incentive stock option (including one under an employee stock purchase plan), the option is treated as a nonqualified stock option for FICA purposes. Excluded employees who are not considered qualified individuals able to make a special election include individuals who first become a 1% owner or one of the four highest compensated officers in a tax year, or who fell into such a classification in any of the 10 preceding tax years. Receipt of qualified stock under §83(i) is not treated as a nonqualified deferred compensation plan for purposes of §409A.
Section 83(b) elections may not be made with respect to RSUs. This prevents recipients from accelerating the taxable event to the time of the transfer itself in order to attempt to limit the amount of ordinary income that is not recognized in acquiring and later selling the restricted stock units.
The provisions governing qualified stock apply to stock attributable to options exercised or RSUs settled after Dec. 31, 2017. Under a transition rule, until the IRS issues regulations or other guidance implementing the 80% rule and employer notice requirements under the provision, a corporation is treated as complying with these requirements if it uses a reasonable good faith interpretation in applying the rules. The penalty for a failure to provide the required notice applies to failures after Dec. 31, 2017.

Education Savings Rules

Qualified education expenses that may paid under qualified tuition programs include qualified higher education but not elementary and secondary school expenses. The Act provides that elementary and secondary school expenses of up to $10,000 per year are qualified expenses for qualified tuition programs. The provision applies to distributions made after Dec. 31, 2017.

 


Pass-Through Entities

Topic Pre-Reform Law 2017 Reform Act

Pass-Through Tax Treatment

Businesses organized as sole proprietorships, partnerships, limited liability companies and S corporations are generally treated as pass-through entities subject to tax at the individual owner or shareholder level rather than the entity level. Net income earned by owners of these entities is reported on their individual income tax returns and is subject to ordinary income tax rates, up to the top individual marginal rate of 39.6%. For tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, taxpayers who have domestic “qualified business income” (QBI) from a partnership, S corporation, or sole proprietorship are entitled to deduction of the lesser of such QBI or 20% of taxable income. The deduction reduces taxable income, not adjusted gross income, and eligible taxpayers are entitled to the deduction whether or not they itemize.
The 20% deduction is also allowed for a taxpayer’s qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income. Specified agricultural and horticultural cooperatives would also qualify for the 20% deduction, special rules apply. Trusts and estates are eligible for the 20% deduction. Rules similar to the rules under §199 (as in effect on Dec. 1, 2017) apply for apportioning between fiduciaries and beneficiaries any W-2 wages and unadjusted basis of qualified property under the limitation based on W-2 wages and capital.
Taxpayers with pass-through income from specified service businesses in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services are not eligible for the deduction.
QBI is all domestic business income other than investment income (e.g., dividends (other than qualified REIT dividends and cooperative dividends)), investment interest income, short-term capital gains, long-term capital gains, commodities gains, foreign currency gains, etc.
The deduction is generally limited to the greater of either: (a) 50% of the W-2 wages paid with respect to the qualified trade or business, or (b) the sum of 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property.
“W-2 wages” of a partnership, S corporation, or sole proprietorship would be the sum of wages subject to wage withholding, elective deferrals, and deferred compensation paid by the business during the calendar year ending during the tax year. Thus, if the partnership, S corporation, or sole proprietorship does not pay “W-2 wages,” and the second limitation does not apply, the owner or taxpayer’s deduction would be zero.
For this purpose, qualified property is generally defined as tangible property subject to depreciation under §167, held by a qualified trade or business, and used in the production of qualified business income.
[Editor’s Note: The second alternative for calculating the wage limit was added by the Conference Committee and would permit real estate businesses with large capital investments but few employees to qualify for a deduction under this provision.]
Neither “W-2 wage” limit nor the prohibition on specified services businesses applies to a taxpayer with taxable income not exceeding $157,500 ($315,000 in the case of a joint return). These limitations are fully phased in for a taxpayer with taxable income in excess of the threshold amount plus $50,000 ($100,000 in the case of a joint return).
The deduction expires after Dec. 31, 2025.
Limitation on Losses for Taxpayers Other than Corporations The passive loss rules, which apply to individuals, estates and trusts, and closely held corporations, limit the deduction of losses from passive trade or business activities of a taxpayer. In addition, the excess farm loss rules, which apply to taxpayers other than C corporations, limit the deduction of excess farm losses of a taxpayer in certain circumstances. An excess farm loss for a tax year is the excess of the aggregate deductions attributable to farming businesses over the sum of (i) the aggregate gross income or gain attributable to farming businesses, and (ii) a threshold amount. Effective for tax years beginning after Dec. 31, 2017, disallows an excess business loss of a taxpayer other than a C corporation. However, an excess business loss is treated as part of the taxpayer’s net operating loss carryover to the following year. An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount ($500,000 for married taxpayers filing jointly; $250,000 for all other taxpayers (indexed for inflation)). The limitation applies at the partner or S corporation shareholder level. The limitation expires after Dec. 31, 2025.
[Editor’s Note: The carryforward in subsequent tax years is determined under the NOL rules provided under the Act.]
Technical Termination of Partnership A partnership may experience a technical termination if 50% or more of the total interests in partnership capital and profits is sold or exchanged within a 12-month period. The partnership’s existence does not necessarily end upon a technical termination. Generally, however, the partnership’s tax year closes, partnership-level elections cease to apply, and partnership depreciation recovery periods restart. Repeals the technical termination rule for partnerships with tax years beginning after Dec. 31, 2017. Thus, a partnership is treated as continuing even if more than 50% of the total capital and profit interest of partnership were sold or exchanged, and new elections are not required or permitted.

 


Estates, Gifts & Trusts

Topic Pre-Reform Law 2017 Reform Act
Estate and Gift Taxes For decedents dying and gifts made before 2018 and after 2025, the federal estate and gift tax unified credit basic exclusion amount is set at $5 million, adjusted for inflation from a base year of 2010 ($5.49 million for decedents dying and gifts made in 2017). The Act increases the federal estate and gift tax unified credit basic exclusion amount to $10 million (adjusted for inflation from the same 2010 base year), effective for decedents dying and gifts made after 2017 and before 2026.
Generation-Skipping Transfer Tax For transfers made before 2018 and after 2025, the federal GST exemption amount is equal to $5 million, adjusted for inflation from a base year of 2010 ($5.49 million for transfers made in 2017). The Act increases the federal GST exemption amount to $10 million (adjusted for inflation from the same 2010 base year), effective for generation-skipping transfers made after 2017 and before 2026.

 


International

Topic Pre-Reform Law 2017 Reform Act

100% Deduction for Foreign-Source Portion of Dividends & Repatriation

U.S. citizens, resident individuals, and U.S. corporations are subject to U.S. tax on worldwide income. U.S. shareholders of foreign corporations are generally not taxed on the income earned by the foreign corporation until the income is distributed as a dividend to the U.S. shareholders.
Taxpayers are allowed a foreign tax credit or a deduction for foreign income taxes paid on the income out of which the dividend is paid, but generally only when the foreign earnings are distributed to the U.S. parent or otherwise subject to U.S. taxation. The foreign tax credit generally is available to offset, in whole or in part, the U.S. tax owed on foreign-source income. Section 367(a) provides that if a U.S. person transfers property to a foreign corporation in connection with certain nonrecognition transactions, the foreign corporation will not be treated as a corporation for purposes of determining gain recognition.
Section 367(a)(3) provides exceptions to the general rule for transfers of property used in the active conduct of a trade or business; however, the exception does not apply to gain realized on the transfer of assets of a foreign branch of a U.S. person to foreign corporation to the extent that the foreign branch has previously deducted losses. §367(a)(3)(C).
The Act provides a 100% deduction for foreign-source portion of dividends received from “specified 10-percent owned foreign corporations” by U.S. corporate shareholders, subject to a one-year holding period. No foreign tax credit (or deduction for foreign taxes paid with respect to qualifying dividends) would be permitted for foreign taxes paid or accrued with respect to a qualifying dividend. Deduction would be unavailable for “hybrid dividends.”
The Act repeals the active trade or business exception under §367, which generally disallows nonrecognition treatment for transfers of property to a foreign corporation.
The Act imposes a mandatory tax on post-86 accumulated foreign earnings held in cash or cash equivalents of 15.5% and on post-86 accumulated foreign earnings held in illiquid assets of 8%. Taxpayers would be able to elect to pay any resulting liability over an eight-year period. Limitations period for assessment of tax on these mandatory inclusions are extended to six years. Recapture rule imposing 35% tax rate on mandatory inclusions of a U.S. shareholder that becomes an expatriated entity within 10 years of Dec. 22, 2017; U.S. shareholders acquired by a surrogate corporation are within the scope of the provision only if the surrogate corporation inverted after Dec. 22, 2017. Accumulated deferred foreign income would be excluded from REIT gross income tests. REITs would also be permitted to pay resulting liability over eight-year period. Election to preserve NOLs and coordinate NOL, ODL, and foreign tax credit carryforward rules upon transition to participation exemption system. Special rules for S corporation shareholders.
Foreign Tax Credit Foreign-source income earned by a foreign subsidiary of a U.S. corporation generally is not subject to U.S. tax until the income is distributed as a dividend to the U.S. parent corporation. Taxpayers are allowed a foreign tax credit or a deduction for foreign income taxes paid on the income out of which the dividend is paid, but generally only when the foreign earnings are distributed to the U.S. parent or otherwise subject to U.S. taxation. The foreign tax credit generally is available to offset, in whole or in part, the U.S. tax owed on foreign-source income.
Generally, a U.S. shareholder is subject to U.S. tax on the subpart F income of its CFCs, even if the income is not repatriated. A separate foreign tax credit is available to U.S. shareholders for foreign taxes paid on the subpart F income.
If an overall domestic loss (ODL) offsets foreign-source income, then in later years, a portion of the taxpayer’s U.S.-source taxable income is treated as foreign-source income. The portion of the taxpayer’s U.S.-source income for years succeeding the ODL is the lesser of the amount of the loss (to the extent not used in prior tax years) or 50% of the taxpayer’s U.S.-source income.
Income from the sale or exchange of inventory property is sourced on the basis of sales and production activities, as provided by regulation.
U.S. owners of foreign branches are subject to U.S. tax on income earned by the foreign branch, and may receive a foreign tax credit for taxes paid to a foreign country on income earned by that branch. However, U.S. owners are not required to include income earned by the foreign branch in a separate category, i.e., a foreign tax credit limitation basket, for purposes of calculating the foreign tax credit.
The Act repeals the indirect foreign tax credit under §902. A foreign tax credit is permitted, for subpart F income included in the gross income of a domestic corporation that is a U.S. shareholder of a CFC, without regard to pools of foreign earnings kept abroad.
The Act provides an election to increase the percentage of domestic taxable income offset by overall domestic loss treated as foreign source income.
Income from the sale of inventory is sourced based solely on the basis of production activities.
Adds a separate foreign tax credit limitation basket for foreign branch income.
Subpart F Section 951(b) defines a U.S. shareholder as a U.S. person who owns, or is considered as owning by applying the rules of ownership of §958(b), 10% or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation.
Foreign shipping income earned between 1976 and 1986 was not subject to current U.S. tax under subpart F if the income was reinvested in certain qualified shipping investments. However, net decreases in qualified shipping investments were subject to inclusion in subpart F income.
A U.S. shareholder of a CFC is subject to U.S. tax under subpart F on foreign base company oil related income regardless of whether the CFC distributes such income to the U.S. shareholder.
Section 958(b)(4) prevents the attribution of stock ownership from a foreign person to a U.S. person.
Section 951(a)(1) requires that foreign corporation be a controlled foreign corporation (CFC) for an uninterrupted period of 30 days or more before it is classified as a CFC for tax purposes.
The Act expands the definition of U.S. shareholder to include U.S. persons who own 10% or more of the total value of shares of all classes of stock of such foreign corporation. The Act repeals current taxation of previously excluded qualified investments under §955.
The Act repeals foreign base company oil related income as subpart F income under §954.
Stock attribution rules for determining CFC status are modified to treat a U.S. corporation as constructively owning stock held by its foreign shareholder. The Act eliminates the 30-day rule in §951(a)(1).

Base Erosion

Under the Code, U.S. corporations that completed outbound transfers of goodwill, going concern value, or workforce in place received favorable tax treatment.
Corporations generally may deduct all of their interest expense. If a corporation capitalizes a foreign subsidiary with debt, the earnings from that debt generally will not be subject to U.S. tax until distributed as a dividend by the foreign subsidiary. Therefore, U.S. corporations can achieve a net U.S. tax benefit by deducting the interest expense currently while deferring U.S. tax on the earnings. Additionally, irrespective of the use of the proceeds of the debt, if the debt is issued by a foreign affiliate rather than by the U.S. entity, the corresponding interest income generally is subject to a statutory 30% withholding tax, which can be reduced under an applicable treaty.
The Act expands the definition of intangible property to include goodwill, going concern value, workforce in place, or any other item the value of which is not attributable to tangible property or the services of an individual.
In the case of transfers of multiple intangible properties in one or more related transactions, valuation of the intangible property on an aggregate basis is explicitly permitted if the Commissioner determines that an aggregate basis achieves a more reliable result than an asset-by-asset approach.
The Act denies deductions for certain relatedparty amounts paid or accrued in hybrid transactions or with hybrid entities.
Dividends received by an individual shareholder of a surrogate foreign corporation are not eligible for reduced rate on dividends in §1(h).
The Act imposes tax on “global intangible low-taxed income” (GILTI) of U.S. shareholders of CFCs, with a deduction of 37.5% for foreign-derived intangible income (FDII) plus 50% of the GILTI, and the amount treated as a dividend under section 78. Deductions are reduced for tax years beginning after Dec. 31, 2025.
The Act imposes a minimum base erosion anti-abuse tax (BEAT) for certain taxpayers. The calculation of the tax is based on the excess of 10% of the modified taxable income over the amount of regular tax liability, which is reduced by certain credits. The 10% rate is 5% for tax years beginning in calendar year 2018, and 12.5% for tax years beginning after Dec. 31, 2025. Certain banks and securities dealers are subject to increased rates.

PFICs U.S. shareholders of a passive foreign investment company (PFIC) are taxed on the PFIC’s earnings. A PFIC is defined as any foreign corporation (1) 75% or more of the gross income of which is passive, or (2) at least 50% of the assets of which produce passive income. Among other exceptions, passive income does not include any income that is derived in the active conduct of an insurance business if the corporation is predominantly engaged in an insurance business and would be taxed as an insurance company were it a U.S. corporation. The PFIC insurance exception is restricted to foreign corporations that would be taxed as an insurance company if they were U.S. corporations and if loss and loss adjustment expenses, unearned premiums, and certain reserves exceed 25% (or 10% in certain circumstances) of the foreign corporation’s total assets.

 


Tax-Exempt Organizations

Topic Pre-Reform Law 2017 Reform Act
Unrelated Business Taxable Income For amounts paid or incurred before 2018, those amounts used to provide certain fringe benefits (transportation benefits, qualified parking benefits, and access to on-site athletic facilities) to an exempt organization employee are not treated as unrelated business taxable income.
For tax years beginning before 2018, an exempt organization that carries on more than one unrelated trade or business calculates its unrelated business taxable income on an aggregate basis, which allows the organization to use a deduction generated by one trade or business to offset income earned by another.
The Act requires exempt organizations to include in unrelated business taxable income the amount of certain fringe benefit expenses for which a deduction is disallowed, effective for amounts paid or incurred after 2017.
The Act also requires that organizations that carry on more than one unrelated trade or business separately calculate unrelated business taxable income for each trade or business, effectively prohibiting using deductions relating to one trade or business to offset income from a separate trade or business. The change would apply to tax years beginning after 2017.
Excise Tax on Tax Exempt Organization Executive Compensation For tax years beginning before 2018, an exempt organization is generally not subject to the limitations on the deductibility of compensation paid to organization executives applicable to non-exempt employers, and is not subject to tax on amounts paid to such employees. The Act would impose an excise tax equal to corporate tax rate (set at 21% by the Act) on compensation in excess of $1 million paid to an applicable tax-exempt organization’s five highest paid employees for a tax year (or any person who was such an employee in any tax year beginning after 2016). The excise tax would also apply to parachute payments exceeding the portion of the base amount (defined as the average annual compensation of the employee for the five tax years before the employee’s separation from employment) that is allocated to the payment. The tax on excess parachute payments applies only to payments made to employees who are highly compensated (within the meaning of §414(q). The Act treats compensation as paid when rights to remuneration are no subject to a substantial risk of forfeiture (as defined in §457(f)(3)(B)).
The Act exempts from the definition of “compensation” for purposes of the tax, remuneration paid to licensed medical professionals in exchange for medical services performed.
The tax applies to tax years beginning after 2017.

Source: Bloomberg Tax, “Roadmap to House and Senate Tax Reform Plans”

If you would like to discuss the impact of these changes, please don’t hesitate to contact us at 408.377.8700 or info@aslcpa.com.