Tax Cuts and Jobs Act: Impact on Taxpayers

The most sweeping tax reform proposal in over 30 years was signed into law on December 22, 2017, by President Donald Trump after the House and Senate passed the bill. The Tax Cuts and Jobs Act (the Act) became a reality for US taxpayers beginning with tax years after December 31, 2017. The extensive tax reform of Public Law 115-97 drastically changes the tax arena for individual taxpayers and businesses. 

Many of the provisions affecting individual taxpayers are only applicable to tax years 2018 through 2025, while corporate provisions of the Act are indefinite and not limited to these years. We will focus on a select number of provisions of the Act here. The following highlights a number of the major changes:

Summary of Major Changes

Individuals:

• New income tax rates and brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%)
• Four tax rates for estates and trusts (10%, 24%, 35%, 37%)
• Increased standard deduction ($24,000 for married filing jointly; $18,000 for head of household filers; $12,000 for all others)
• Increased child tax credit (to $2,000)
• Limited state and local tax deduction (only deductible when carrying on a trade or business)
• Suspended personal exemption deductions (reduced to zero)
• Limited mortgage interest deduction (up to $750,000) and suspended home equity deduction
• Temporarily reduced medical expense limit (7.5% AGI) for specific tax years 2018 and 2019
• Suspended miscellaneous itemized deductions
• Increased charitable contribution deduction (60% instead of 50% limitation)
• New deduction for non-corporate taxpayers with qualified business income derived from pass-throughs

Businesses:

• Permanently reduced corporate tax rate to 21% (down from 35%)
• Numerous changes regarding expensing and depreciation
• Repealed AMT (Alternative Minimum Tax)
• New limits on business interest deductions
• Changes to tax treatment of foreign income and taxpayers

Significant Provisions

Likely one of the most popular and beneficial provisions of the Act is the slashing of the corporate income tax rate from 35% to 21%.

For a more focused review of further changes resulting from the Act, we will summarize specific common areas of interest to businesses below such as the following:  Section 179, expensing, real property, citrus, computers, net operating loss, domestic production, accrual method, settlements, Family Medical Leave Act, like kind exchanges, reach and experimentation.

Section 179

The Act results in increased Code Section 179 expensing.  For tax years 2018 and beyond, property placed in service may be expensed under Code Section 179 up to the maximum amount of $1 million with the phase-out threshold increased to $2.5 million.

Additionally, the definition of qualified real property under Code Section 179 is expanded.

100% Expensing

Specific benefits to corporate taxpayers include the ability for businesses to immediately expense (100%) qualified property obtained and placed in service between September 27, 2017, and December 31, 2022. Deemed a pro-taxpayer provision, mid to large size businesses can immediately expense such qualified property for this period.  After the tax year 2022, current expensing is phased out for property as follows:

          80% if placed in service December 31, 2022 – December 31, 2023

          60% if placed in service December 31, 2023 – December 31, 2024

          40% if placed in service December 31, 2024 – December 31, 2025

          20% if placed in service December 31, 2025 – December 31, 2026

Certain aircraft and property with long production periods will follow the above phase out except that these are increased by one year.

The new current expensing rules are applicable to such qualified property (both new and used) as that subject to bonus depreciation. This is also applicable to qualified film, television, and live theatrical performances. Such a production is considered placed in service at the time of initial release, broadcast, or performance. Trees and vines bearing nuts or fruit and other specified plants grafted or planted after September 27, 2017, and before January 1, 2027, are subject to the 100% first-year deduction and phase out rules listed above.

An option to elect 50% (instead of 100%) bonus first-year depreciation can be claimed for the first tax year ending after September 27, 2017. First-year bonus depreciation will sunset after 2026.

Real Property

The recovery period for specific real property improvements is lessened. For property placed in service after December 31, 2017, the prior separate definitions of qualified leasehold improvement, qualified, restaurant, and qualified retail improvement property are no longer existing. A general 15-year recovery period and the use of straight-line depreciation and half-year convention are now provided for qualified improvement property. The effect of this is fewer restrictions on the use of the category than the three categories it replaced. For residential rental property placed in service during this same period the ADS (Alternative Depreciation System) recovery period is reduced from 40 to 30 years. 

Citrus

For citrus plants lost or damaged due to a casualty, replanting costs incurred after the enactment date (and no later than 10 years after) may also be deducted by a person other than the taxpayer if:

1. taxpayer has equity interest of 50% or more in the replanted citrus plants at all times during the tax year in which the costs were incurred and holds any part of the remaining equity interest or
2. such person acquires all of the taxpayer’s equity interest in the land on which the loss occurred at the time of such lass and the replanting occurs on such land.

Computers

Removed from the definition of listed property are computers or peripheral equipment.  Effectively, computer equipment will not be subject to the elevated substantiation requirements and potential slower cost recovery as that which typically applies to listed property.

Net Operating Loss (NOL)

The two-year NOL carryback and special carryback provisions are eliminated (except for farming losses and insurance companies) for those arising in tax years ending December 31, 2017, while carryforwards are held to 80% of taxable income but can be carried forward indefinitely. This is applicable for tax years beginning 2018.

Domestic Production Activities Deduction (DPAD)

On the flip side, notable changes that may not be deemed pro-taxpayer include the repeal of the domestic production activities deduction (Code Section 199) for tax years beginning after December 31, 2017, for non-corporate taxpayers. For tax years beginning after December 31, 2018, DPAD is repealed for C corporations.

Accrual Method

Accrual method taxpayers subject to the all events test will now be required to recognize income in the taxable year (and no later than that) in which the income is included as revenue on the applicable financial statement.

Settlements

The Act denies a deduction for settlements subject to nondisclosure agreements paid related to sexual harassment or sexual abuse effective for amounts paid after the enactment date.

Family and Medical Leave Act (FMLA)

The Act brings a new credit in the form of 12.5% of the amount of wages paid to qualifying employees during any period in which the employee is on Family and Medical Leave (FMLA) if the payment rate is 50% of the wages normally paid to the employee.  This is effective for wages paid in tax years beginning after December 31, 2017 through 2018.  The credit is escalated by 0.25% not to exceed 25% for each percentage point by which the payment rate exceeds 50%. Additional rules apply for this credit.

Like Kind Exchanges

In general, like kind exchanges or transfers after December 31, 2017, are eliminated (other than real property that is not held primarily for sale) from the rule allowing deferral of gain.  There is, however, a transition rule that applies to exchange of personal property if the taxpayer has either disposed of the property or acquired the replacement property on or before December 31, 2017.

Reach or Experimental (R&E)

Expensing is repealed and replaced with 5-year amortization for most research and experimental outlays paid or incurred in tax years beginning after December 31, 2021. Specified R&E expenses are required to be capitalized and amortized over a 5-year period (15 years if outside the US) starting with the midpoint of the tax year in which such expenses were incurred.

Examples of specified R&E subject to capitalization include expenses for software development. Excluded are expenses for land or depreciable or depletable property used in conjunction with the experimentation, exploration expenses incurred for ore or other minerals (e.g., oil and gas).

Impact on Foreign Activity and Labor

Foreign Activity Impact

The Act changes the taxation of both foreign and US controlled multi-national corporations, which in turn limits erosion of the corporate income tax base.  Under prior law, base erosion occurs due to firms being able to attribute their profits to low-tax countries and their costs to the US all without changing the situs of their economic activity.  According to the Joint Committee on Taxation (JCX 69-17), Macroeconomic Analysis of the Conference Agreement for H.R. 1, the “Tax Cuts and Jobs Act”:

“The proposals affecting the taxation of foreign activity are expected to reduce the incentives for this “profit-shifting” activity, thus resulting in an increase in the U.S. tax base. The conventional revenue estimates for these provisions include the effects of reducing profit shifting. The effects of these types of provisions on incentives to locate economic activity in the United States are included in the macroeconomic analysis and feedback estimate. The macroeconomic estimate projects an increase in investment in the United States, both as a result of the proposals directly affecting taxation of foreign source income of U.S. multinational corporations and from the reduction in the after-tax cost of capital in the United States due to more general reductions in taxes on business income.”

Employment and Labor Supply Impact

With a significant reduction in the tax rates on labor as a result of the additional tax rate bracket with generally lower rates for most coupled with the increase in the child credit, strong incentives are provided for an increase in labor supply.

 

Contributor: Trisha Davidson

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Tips for the Taxpayer

The Act brings with it an abundance of changes to individual and business taxation. There are many specific nuances on a variety of topics that are affected by the new law. It is in the best interest of individuals and corporate taxpayers alike to analyze the Act as it pertains to their business practices and determine strategies and impacts on their taxes. Stay updated with the latest legislation and consult a tax professional for clarity.

How Can We Help?

Allyn offers tax compliance and consulting services for companies throughout the United States. Allyn has significant experience assisting businesses as they adjust to changing tax laws, and we can use that experience to help you navigate the tax reforms in the Tax Cuts and Jobs Act as they pertain to your business.

We can help your business maintain compliance with federal and state tax responsibilities and put procedures in place to ensure future streamlining of processes and increased data accuracy for tax purposes.

Allyn’s tax team is experienced in all aspects of Federal, state, and local tax compliance and consulting for large US and global corporations. We use that experience to your advantage.

Allyn files state and local sales and use, property, and license tax returns in every US taxing jurisdiction in addition to excise tax filings such as Federal Excise Tax, Heavy Highway Vehicle Use Tax, and International Fuel Tax Agreement returns. We can manage your tax compliance, create a solid tax process, and provide audit defense for your company.

Contact us and we can provide a customized cost-effective solution to meet your company’s needs. For further information on Allyn Tax services, please contact tax@allynintl.com.

For More Information

If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News and Events at www.allynintl.com. Additional supporting documents concerning this legislation can be found at www.jct.gov, www.congress.gov, www.archives.gov/federal-register/laws.

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About Allyn International

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