President Trump signed the Tax Cuts and Jobs Act (“Act”, P.L. 115-97) on December 22, 2017, enacting the most sweeping change to the U.S. tax code in decades, lowering business and individual tax rates, and modernizing US international tax rules to be an exemption ‘territorial’ system. The Joint Committee on Taxation estimated the net revenue effect to be an increase to the federal deficit by $1.456 trillion over 10 years. Some of the business provisions from the Act are below. For highlights from the Act that impact individuals, please see our previous article, “How the Tax Reform Provisions Will Impact Individuals.”
There are still several questions remaining as to the interpretation and application of some of the provisions mentioned below so we expect further guidance to be issued. Such guidance could adjust the application of the below mentioned provisions and thus taxpayers should exercise caution. While Congress attempted to simplify the tax system by passing the bill, many tax practitioners and taxpayers believe the Act makes income taxes anything but simple, making the need for a competent tax professional increasingly important.
The Act adjusts the tax rate for corporations to a flat 21% starting in 2018, thereby permanently replacing the current 35% top corporate rate, previously the highest among advanced economies. The 21% rate also applies to Personal Service Corporations. The Act also reduces the 70% dividends received deduction to 50% and the 80% dividends received deduction to 65%.
The Act also modifies current rules for net operating losses (NOLs). The NOL carryback period has been eliminated and the carryforward period is now indefinite for these new NOLs. In addition, while all of the NOL will ultimately be deductible, NOL carryforward deductions will be limited to 80% of the current year’s taxable income for losses arising in tax years beginning after December 31, 2017.
In addition, the corporate Alternative Minimum Tax (AMT) has been repealed. Taxpayers with AMT credit carryforwards can claim a refund of 50% of the remaining credits in excess of regular tax for the tax years 2018, 2019, and 2020. Taxpayers will be able to claim a refund for any remaining 2020 AMT credit carryforward beginning on 2021 tax returns.
For tax years 2018 through 2025, noncorporate taxpayers (I.e., individuals and trusts) may deduct up to 20% of domestic qualified business income from a partnership, S corporation, or sole proprietorship. A limitation based on 50% of total wages paid by the entity with respect to the qualified trade or business, or 25% of total wages paid by the entity with respect to the qualified trade or business plus a 2.5% capital element is phased in for taxpayers with taxable income above a threshold amount ($315,000 for married filing joint). The deduction is not allowed for service trades or businesses (e.g., health, law, consulting, etc.) above the income threshold (subject to a phase-out). For individual taxpayers, the 20% deduction will not reduce adjusted gross income, but will reduce taxable income (i.e., below the line deduction).
Excess business losses of noncorporate taxpayers are not allowed for tax years