Congress passes biggest tax bill since 1986

On December 20, the House passed the reconciled tax reform bill, H.R.1, commonly called the “Tax Cuts and Jobs Act of 2017” (TCJA), which the Senate had passed the previous day. This is the most sweeping tax legislation since the Tax Reform Act of 1986.

The bill significantly reduces the income tax rate for corporations, eliminates the corporate alternative minimum tax (AMT) and makes small reductions to income tax rates for most individual tax brackets. It also provides a new tax deduction for owners of pass-through entities and significantly increases individual AMT and estate tax exemptions. In addition, it makes major changes related to the taxation of foreign income.

It’s not all good news for taxpayers, however. The TCJA eliminates or limits many tax breaks, and much of the tax relief is only temporary.

Here is a summary of some of the key changes affecting business and individual taxpayers. Except where noted, these changes are effective for tax years beginning after December 31, 2017.

Key changes affecting businesses

  • Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
  • Repeal of the corporate AMT
  • New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
  • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
  • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phase-out threshold to $2.5 million
  • Other enhancements to depreciation-related deductions
  • New disallowance of deduction for net interest expense in excess of 30% of a business’s adjusted taxable income (exceptions apply)
  • New limits on net operating loss (NOL) deductions (NOLs generated in tax years after 2017 cannot be carried back, and the carried forward amount may only be used to offset 80% of taxable income)
  • Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for non-corporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
  • New rule limiting like-kind exchanges to real property that is not held primarily for sale (repeals like-kind exchanges for all other property)
  • New tax credit for employer-paid family and medical leave — through 2019
  • New limitations on excessive employee compensation (removes the performance-based compensation exception to $1 million limitation)
  • New limitations on deductions for employee fringe benefits and entertainment expenses
  • Repeal of partnership technical termination rule

Key changes affecting individuals

  • Establishment of seven tax rate brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37% — through 2025
  • Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately) — through 2025
  • Elimination of personal exemptions — through 2025
  • Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit — through 2025
  • Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018
  • Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018
  • New $10,000 limit ($5,000 for separate filers) on the deduction for state and local taxes — through 2025
  • Reduction to the mortgage debt limit for the home mortgage interest deduction, to $750,000 ($375,000 for separate filers), with certain exceptions — through 2025
  • Elimination of the deduction for interest on home equity debt — through 2025
  • Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters) — through 2025
  • Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses) — through 2025
  • Elimination of the AGI-based reduction of certain itemized deductions — through 2025
  • Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances) — through 2025
  • Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year
  • AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers — through 2025
  • Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing) — through 2025
  • Imposition of a three-year holding period requirement in order for gain attributable to certain partnership interests received in connection with the performance of services to be taxed as long-term capital gain rather than ordinary income

Key changes affecting international taxation

  • Establishes a participation exemption system for the taxation of corporations’ foreign income
  • Imposes a one‐time repatriation tax on unremitted foreign earnings and profits

Year-end planning opportunities still available

We’ve only briefly covered some of the most significant TCJA provisions here. There are additional rules and limits that apply, and the law includes many other provisions.

Contributed by Tyler Quinn at Weaver CPA’s