As the Senior Manager at SOAProjects, Inc., Mayank Gupta is an accounting expert who loves to share his financial knowledge and expertise with those seeking advice. With the new U.S. tax reform being implemented recently, Mayank Gupta sees a great opportunity to help educate others on its implications.
The Tax Cuts and Jobs Act was recently signed by President Donald Trump and it is significantly changing U.S. corporate income tax laws. Mayank Gupta wants to delve deeper into these changes and highlight some of the key takeaways from this new U.S. tax reform
The reform lowers most business and individual tax rates and is intended to modernize U.S. international tax rules. It is considered to be the most sweeping tax reform in the U.S. in more than three decades.
The key aspects of the tax reform can be broken up into three main parts: individual tax provisions, corporate tax provisions, and international tax provisions. Here are some of the details for each category:
- While the final tax reform retains the current graduated tax rate and seven tax brackets, it temporarily lowers the maximum tax rate from 39.6 percent to 37 percent until 2026. This is for individuals who make an excess of $500,000 if they’re single or $600,000 if they’re married.
- The amount of state and local tax deductions has been reduced to a maximum of $10,000 for individual singles and $5,000 for married individuals filing a separate return. The old law had no limitation.
- For individuals who incurred a mortgage after Dec. 31, 2017, but before Jan. 1, 20126, they may deduct interest on up to $750,000 of principal owed. The old law’s limit was $1 million. In 2026, the limit is scheduled to go back up to $1 million.
- The individual alternative minimum tax will be preserved in the new tax reform. The AMT imposes an alternative tax system under which individuals pay the greater of their regular tax and their AMT. In 2018 through 2025, the new tax reform calls for an increase in the “exemption amount” and significantly increases the amounts at which the exemption phases out.
- The new tax reform eliminated capital gain treatment for the sale of a “self-created” patent. The sale of these assets will now generate ordinary income according to the new tax bill.
- Individuals will no longer be able to deduct certain miscellaneous items under the new tax reform. The deduction floor under the previous tax bill was 2 percent of an individual’s adjusted gross income.
- The new tax bill doubles the exclusion amount for estate tax. The new bill retains the 40 percent tax rate and does not provide a scheduled appeal for the estate tax.
- The new tax reform repealed the “like-kind exchange” rules, which previously exempted the tax exchange or certain business or investment property for a similar property. A limited exception remains for noninventory real estate.
- The old tax law had a graduated tax rate structure for corporations, but starting in 2018, corporations are now subject to a flat tax rate of 21 percent.
- The new tax reform repeals corporate AMT. Corporations that were previously subject to AMT are now eligible for a refundable credit against their regular tax liability.
- Also starting in 2018, the deduction corporations can make for net operating losses is limited to 80 percent of a corporation’s income.
- Now 100 percent of the cost of certain business assets can be immediately expensed.
- The new tax reform limits corporations’ deductions for net interest expense to 30 percent of adjusted taxable income. Companies that have an average gross receipt of $25 million or less during a 3-year period are exempt.
- The new tax bill reduces the credit corporations get for the costs of testing “orphan drugs.” The 50 percent business tax credit for clinical testing expenses in relation to “orphan drugs” has been reduced to 25 percent.
- The new tax bill reduces the dividends received deduction for corporations from 70 percent to 50 percent, and from 80 percent to 65 percent in some cases.
- The domestic production activities deduction for corporations has been repealed with the new tax reform.
- Most corporations are considered to be accrual method taxpayers and the new tax bill codifies the permit that allows them to receive a payment in one year but report it the next year.
- Corporations that meet certain criteria will be subject to a new base erosion tax that is equal to their “base erosion minimum tax amount.”
- Beginning in 2018, a 100 percent dividends received deduction applies to the foreign-source portion of the dividends paid by certain foreign corporations to U.S. shareholders who own at least 10 percent of that foreign corporation.
- A transitional rule in the new tax reform imposes a one-time tax on U.S. shareholders of certain foreign corporations. Earnings in the form of cash will be taxed at a rate of 15.5 percent and all other earnings will be taxed 8 percent. The tax can be made in installments over eight years.
- The new tax reform allows for minimum tax on passive or mobile undistributed income of controlled foreign corporations (CFCs). U.S shareholders of these CFCs will be taxed currently on their shares of “global intangible low-taxed income.”
- The new tax bill has made modifications to U.S. shareholder rules for CFCs. The definition of a U.S. shareholder of a CFC is now a person who owns 10 percent or more of the total value of shares of all classes of stock of a CFC.