Final Tax Bill

On December 20, 2017 the House and Senate passed a comprehensive tax reform bill. Both houses of the Congress has passed and the President will sign into law the “Tax Cuts and Jobs Act of 2017” (the Act). The legislation includes comprehensive individual and business tax reform. Following is a summary of the major provisions contained in the Act.Individual TaxesThe final bill achieves rate reduction, simplicity and fairness across households.

• Tax Brackets (effective January 1, 2018 and expiring on December 31, 2025)
• There are seven brackets, ranging from 10 to 37 percent, effective January 1, 2018.
• 10% applies to taxable income not over $9,525 for single filers ($19,050 for joint filers).
• 12% for taxable income not over $38,700 for single filers ($77,400 for joint filers).
• 22% for taxable income not over $82,500 for single filers ($165,000 for joint filers).
• 24% for taxable income not over $157,500 for single filers ($315,000 for joint filers).
• 32% for taxable income not over $200,000 for single filers ($400,000 for joint filers).
• 35% for taxable income not over $500,000 for single filers ($600,000 for joint filers).
• 37% for taxable income over $500,000 for single filers ($600,000 for joint filers).
• The standard deduction will be increased to $24,000 for joint filers and $12,000 for single filers. The personal exemption is repealed through 2025.
• The Child Tax Credit will be increased to $2,000, with $1,400 being refundable. The credit begins to phase out for joint filers with adjusted gross income exceeding $400,000 and single filers with adjusted gross income exceeding $200,000.
• The itemized deduction for home mortgage interest has been reduced to permit a deduction on acquisition indebtedness not exceeding $750,000. Taxpayers who enter into a written binding contract before December 15, 2017 to close on or before January 1, 2018, and who purchase such residence before April 1, 2018, are also eligible for the current higher deduction limits.
• The itemized deduction for state and local taxes(including real and personal property taxes) is now limited to $10,000.
• The adjusted gross income limitation for charitable contributions is increased from 50% to 60%.
• The limitation on miscellaneous itemized deductions subject to the two percent adjusted gross income floor has been repealed through 2025.
• This includes investment fees and expenses, tax preparation fees, and unreimbursed employee business expenses.
• The itemized deduction for medical expenses adjusted gross income floor has changed from 10 percent to 7 ½ percent.
• The overall limitation on itemized deductions has been repealed through 2025.
• The lifetime exemption for estate and gift taxes is increased to $10,000,000. The estate, gift, and generation-skipping transfer taxes are not repealed.
• For divorce or separation agreements(entered into after December 31, 2018) the deduction for alimony or separate maintenance payments has been repealed.
• The healthcare mandate established by the Affordable Care Act that requires most taxpayers to either carry health insurance or pay a penalty that is assessed with the filing of their tax return has been repealed beginning after December 31, 2018.
• The Alternative Minimum Tax for individuals has been retained. The exemption amounts have been increased to $109,400 for joint filers and $70,300 for single filers.

Corporate Tax

• The maximum corporate tax rate is 21 percent and will be effective for tax years beginning after December 31, 2017. This is a decrease from the current rate of 35 percent.
• The Section 199 domestic production deduction is repealed effective December 31, 2018.
• The net interest deduction limit is unchanged at 30 percent of adjusted taxable income and the carryforward period is indefinite. Small businesses with less than $25 million in annual gross receipts over a three year period are exempted from the interest limitation.
• The Alternative Minimum Tax (AMT) is repealed.
• Net operating losses are limited to 80 percent of taxable income and may be carried forward indefinitely (the carryback period has been repealed).
• The dividends received deduction has been reduced to 50 and 65 percent (previously at 70 and 80 percent).
• Like-kind exchanges under Section 1031 will be limited to real property.
• The exemption from the accrual basis of accounting for small businesses has been expanded. In the new bill, the cash basis method of accounting will be available for small businesses with three year average gross receipts less than $25,000,000.
• Section 179 business expensing is increased to $1 million, up from $500,000. Phase out begins at $2,500,000. It is also expanded to include certain qualified real property, such as roofs, HVAC property, fire protection and alarm systems, and security systems.
• Bonus depreciation will allow businesses to deduct 100 percent of the cost of eligible property in the year it is placed in service, through 2022. It is available for property placed in service after September 27, 2017, for a five-year period. There is a phase down of the full expensing by 20 percent per year for property placed in service after January 1, 2023. The final bill also removes the requirement that bonus depreciation is only available for new property.
• Taxpayers that meet the cash method $25 million gross receipts test will be exempted from the uniform capitalization rules of Section 263A. Provisions currently in the law for exemptions from the UNICAP rules that are not based on gross receipts are retained.Research and experimental expenditures, including software development, will be required to be capitalized and amortized over a five year period. This provision will apply to expenditures paid or incurred in tax years beginning after December 31, 2022.

Partnerships and Pass-through Entities

• Owners of pass-through entities (S corporations, partnerships and sole proprietors) will be entitled to a deduction of 20% of their “qualified combined business income.” Qualified business income is defined as taxpayer’s trade or business income, plus 20% of income from publicly traded partnerships and REIT dividends. For taxpayers in a service business (e.g. accounting), no deduction is permitted unless taxable income is less than $157,500 ($315,000 for joint filers).
• Like-kind exchanges under Section 1031 will be limited to real property exchange transactions that are not held primarily for sale. This is effective for exchanges completed after December 31, 2017.
• The final bill provides for a three year holding period in order to receive long-term capital gains treatment (Carried interest rules), except to the extent that section 751(a) applies.
• The technical termination rules under section 708(b)(1)(B) are repealed for tax years beginning after 2017. The rules for an actual termination under section 708(b)(1)(A) remain unchanged.

Accrual method taxpayers

• The bill will require accrual-method taxpayers subject to the all-events test to recognize gross income for tax purposes in the year in which the income is recognized on the taxpayer’s applicable financial statement (APS). An exception is provided for taxpayers without an APS.
• CreditsThe final bill repeals the 10 percent credit for 1936 buildings and retain the 20 percent credit for certified historic structures pursuant to the Section 47 Rehabilitation Credit.
• The Section 45C credit (Orphan Drug Credit) is reduced to 25% (from the current 50%).
• The final bill will allow a 12.5 percent credit on the amount of wages paid to qualifying employees during any period in which the employee is on family and medical leave if the rate of payment under the program is 50% of the wages normally paid to the employee. The credit is increased by 0.25 percentage points (but not above 25 percent) for each percentage point by which the rate of payment exceeds 50 percent. The maximum amount of family and medical leave that may be taken into account with respect to any employee for any tax year is 12 weeks. This credit is only available in 2018 and 2019.

International Tax

• The new rules include a dividend exemption system. Specifically there is a 100 percent dividend received deduction for foreign-sourced dividends received by a domestic C corporation. The deduction is to be from certain 10 percent foreign owned corporations in which the US corporation is a shareholder and when certain conditions are satisfied.
• For purposes of determining the amount of a loss on the sale of certain foreign stock by a U.S. shareholder, such shareholder’s basis in the foreign corporation stock is reduced by an amount equal to the portion of any dividend received with respect to the foreign stock that was not taxed in the U.S. as a result of the new 100 percent dividend received deduction described above.
• The final bill provides for deemed repatriation of previously deferred foreign income at a rate of 15.5 percent for liquid assets and 8.0 percent for illiquid assets. The U.S. tax on the deemed repatriation may be paid in installments over eight years.
• The bill provides for a territorial system with anti-abuse rules and a base erosion anti-abuse tax (BEAT) at a standard rate of 5 percent of modified taxable income in excess of the regular tax liability in year one, then 10 percent through 2025 and 12.5 percent thereafter.

We will continue to keep you up to date as more information becomes available. For additional information, or if you have specific questions or concerns, please contact Jeremy Harbor, Amelia Carnes or any of your trusted advisors at HHM, today.