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TAX REFORM Summary of key provisions in the Tax Cuts and Jobs Act

Summary of key provisions in the Tax Cuts and Jobs Act 1

Keeping Current With U.S. Tax ReformIn the most sweeping overhaul of the U.S. tax code in more than three decades,

tax reform has been passed by both houses of Congress and has been signed

into law. This handout provides an overview comparison between previous

law and new changes enacted by the passage of the Tax Cuts and Jobs Act

of 2017 and how it will affect tax filings for individuals and businesses.

Tax Brackets

Kiddie Tax

Standard Deduction

Personal Exemption

Child Tax Credit

Mortgage Interest

State and Local Taxes

Seven tax brackets with highest mar-ginal rate of 39.6 percent for income in excess of $480,050 Married Filing Jointly (MFJ).

A child’s unearned income taxed at parent’s rate.

$12,700 for MFJ; $6,350 Single

$4,050 per individual claimed on a tax return.

$1,000 credit, per qualifying child, that began phasing out at incomeof $110,000 MFJ and $75,000 Single.

Itemized deduction available for mortgage interest incurred on loans up to $1 million of acquisition debt and up to $100,000 of home equity debt.

Itemized deduction available for allstate and local income and property taxes.

Retains seven tax brackets with a reduction of rates and an increased income range in most brackets. Highest marginal rate reduced to 37 percent for income in excess of $600,000 (MFJ).

A child’s unearned income is taxed at trust and estate income tax rates and no longer connected to parent’s tax rate.

$24,000 for MFJ; $12,000 Single

Suspends personal exemptions.

$2,000 credit, per qualifying child, that begins phasing out at income of $400,000 MFJ and $200,000 Single.

Itemized deduction available for mortgageinterest on acquisition debt up to $750,000 for mortgages entered into after Dec. 15, 2017. Interest deduction for home equity indebtedness has been suspended.

Limits the itemized deduction available for all state and local taxes, including property taxes, to a total of $10,000.

INDIVIDUAL

TOPIC OLD LAW NEW LAW

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Charitable Donations

Medical Expense Deduction

Affordable Care Act Individual Mandate

Alimony

Casualty Losses

Moving Expenses

Miscellaneous Itemized Deductions

529 Plans

Pass-Through Taxation

Charitable donations of cash deduct-ible up to 50 percent of adjusted gross income (AGI). 80 percent of the amount donated to universities in ex-change for the right to purchase athletic tickets was deductible.

Excess of medical expenses over 10 percent of AGI allowed as an item-ized deduction.

Penalty for taxpayers who failed to maintain health insurance coverage.

Deduction for payer and taxable income for recipient.

Itemized deduction available for property losses due to casualty not covered by insurance.

Above-the-line deduction available for work-related moving expenses.

Certain miscellaneous itemized de-ductions allowed subject to two percent of AGI floor.

Tax-free distributions allowed only for qualifying college expenses.

Pass-through entity income report-ed on owner’s individual tax return and taxed at the individual owner’s tax rate.

Charitable donations of cash deductible up to 60 percent of AGI. No deduction is allowed for charitable donations made to universities for the right to purchase athletic tickets.

Excess of medical expenses over 7.5 percentof adjusted gross income allowed as an itemized deduction through 2019. Deduction returns to 10 percent threshold in 2020.

Penalty reduced to $0 as of Jan. 1, 2019 ef-fectively repealing the individual mandate.

For agreements executed on or after Jan. 1, 2019, alimony is not deductible for the payer and will not be income to the recipient.

Limits deduction to casualty losses incurred in a declared disaster zone.

Suspended.

Suspends all miscellaneous itemized de-ductions subject to the two percent of AGI floor. These include, among other items, tax preparation fees, investment fees, and unreimbursed employee expenses.

Tax-free distributions include qualifying college expenses and up to $10,000/year of qualifying K-12 expenses.

Income from pass-through entities is still taxed at the owner’s individual rate. There is a 20 percent deduction for Qualified Business Income (subject to certain limitations) which will reduce the owner’s taxable income (not adjusted gross income). Additional restrictions may apply to certain service businesses.

BUSINESS AND MISCELLANEOUS


INDIVIDUAL



Business Loss Limitation

Corporate Tax Rate

Personal Service Corporation Tax Rate

Corporate AMT

Like-Kind Exchange

Self-Created Property

Depreciation

Section 179 Expense

Interest Expense Deduction

There were no limitations on oth-erwise deductible business losses.

Graduated tax rates from 15 percent to 35 percent.

Flat 35 percent corporate tax rate.

20 percent of corporation’s alterna-tive minimum taxable income minus the exemption amount minus AMT foreign tax credit.

Applied to both personal and real property.

Self-created patent, invention, mod-el or design, or secret formula or process was treated as a capital asset.

Certain qualified property was al-lowed 50 percent bonus depreci-ation in the first year.

A business could immediately ex-pense up to $500,000 of Section 179 property subject to a phase-out beginning at $2 million of Section 179 property.

Business interest generally allowed as a deduction.

Aggregate business losses over $500,000 for MFJ ($250,000 for all other taxpayers) are disallowed in the current year. The excess loss can be carried forward under the NOL rules.



Corporate AMT repealed.

Like-kind exchange rules only apply to real property. Personal property exchanges in process as of Dec. 31, 2017 can be completed tax-deferred.

Gain or loss from self-created patent, inven-tion, model or design, or secret formula or process is now ordinary in character to the original creator.

Temporarily provides that certain qualified property is allowed 100 percent bonus depreciation in the first year. The qualified property now also includes used property subject to certain restrictions. The bonus amount phases down from 2023 to 2027.

Increases the amount of deduction to $1 million and increases phase-out threshold to $2.5 million of Section 179 property.

Generally, business interest is limited to 30 percent of modified taxable income (taxableEBITDA through 2021, taxable EBIT after 2021). This does not apply to businesses with average gross receipts, for the prior three years, of $25 million or less, subject to certain aggregation rules.




Domestic Production Activity Deduction

Net Operating Loss Deduction

Entertainment Expenses

Meals Furnished to Employees

Qualified Transportation Fringe

Research and Experimentation Expenses

Carried Interest

Roth IRA Conversions

Qualified Equity Grants

Provided a deduction for certain qualified production activities.

NOL could be carried back two years to reduce taxable income and carried forward 20 years. NOL could be used to offset 100 percent of taxable income. NOL could only offset 90 percent of alternative minimum taxable income.

50 percent deduction allowed for entertainment directly related or associated with the active conduct of a trade or business.

A deduction was allowed for em-ployer-operated eating facilities that furnished food to employees on the business premises.

A deduction was allowed when paying for certain employee trans-portation expenses.

Taxpayer had the option of imme-diately expensing research and ex-perimentation expenses or capital-izing and amortizing the expenses.

Disposition of certain profits in-terest received in exchange for performance of services treated as long-term capital gain if the interest was held for at least one year.

Taxpayers were allowed to unwind a conversion of a Traditional IRA to a Roth IRA, if done timely.

Did not exist under prior law.

Repealed the deduction for domestic pro-duction activities.

NOLs incurred after Jan. 1, 2018 can only offset 80 percent of taxable income in any year. The ability to carryback NOL is eliminated but it can be carried forward indefinitely. NOLs incurred prior to Jan. 1, 2018 can offset 100 percent of taxable income even if carried forward. AMT lim-itation remains unchanged.

No deduction for entertainment expenses subject to certain limited exceptions.

A 50 percent deduction is allowed until Dec. 31, 2025 for employer-operated eating facilities. Beginning Jan. 1, 2026 no deduction is allowed.

This deduction is suspended (although benefit is still excluded from employee’s income).

Research and experimentation expenses incurred after Dec. 31, 2021 must be capi-talized and amortized over 60 months (180 months for foreign expenses).

Holding period for disposition of certain profits interest received in exchange for performance of services increased to three years.

Taxpayers can no longer unwind conversions to a Roth IRA. Conversions done in 2017 can be unwound if completed by the due date of the taxpayer’s return.

Election that allows a qualified employee to defer the income inclusions from certain stock options and RSUs, awarded pursuant to a qualified employer plan, in income of the employee for up to five years. This election also defers the employer’s deduction.




Unrelated Business Taxable Income (UBTI)

Tax-Exempt Organization Executive Compensation

Excise Tax on Investment Income of Private Colleges and Universities

Gross Receipts Limit for Cash Method of Accounting

Small Business Exception to Accounting for Inventories

Small Business Exception to UNICAP Rules

Small Construction Exception to Accounting for Long-Term Contracts

Partnership Technical Terminations

Unrelated business taxable income was calculated on an aggregate basis allowing losses from one un-related trade or business to offset income from a different unrelated trade or business.

No excise tax imposed on compen-sation paid to executives.

No excise tax on net investment income.

Corporations with average annual gross receipts of $5 million or less, for all prior tax years, eligible to use cash method.

Taxpayers with average gross receipts of $1 million or less ($10 million or less in certain industries) were exempt from accounting for inventories.

Resellers of personal property with gross receipts of $10 million or less (averaged over prior three years) exempted from UNICAP rules.

Taxpayers with average gross re-ceipts of $10 million or less for the prior three years were exempt from using percentage-of-completion for contracts to be completed within two years.

If 50 percent or more of capital and profits interest sold or transferred within a 12-month period, part-nership tax year closed, elections ceased to apply, and depreciation restarted.

Income and losses from unrelated trades or businesses must be calculated separately and losses from one unrelated trade or busi-ness cannot offset income from a different unrelated trade or business.

Generally, subject to limited exceptions, a21 percent excise tax is imposed on the organization on compensation in excess of $1 million paid to any of the five highest-paid employees.

A 1.4 percent excise tax is imposed on net investment income of applicable private colleges and universities.

Corporations with average gross receipts of $25 million or less over prior three years eligible to use cash method.

Taxpayers with average gross receipts of $25 million or less over prior three years exempt from accounting for inventory.

Taxpayers with average gross receipts of $25 million or less over prior three years are exempt from UNICAP requirements. This includes both producers and resellers of personal and real property.

Taxpayers with average gross receipts of $25 million or less over prior three years are exempt from requirement to use percent-age-of-completion method for contracts to be completed within two years.

Technical terminations are repealed. Part-nership will continue even if 50 percent or more of capital and profits interests are sold or transferred.




Deduction for Foreign Source Dividends

Amounts Treated as Dividends Under Code Sec. 1248 are Deductible

Basis Adjustment for Deductible Dividends

Fines and Penalties

Contribution to Capital of a Corporation

Employer FMLA Credit

Estate, Gift, and GST Tax Exemption

The foreign income earned by a foreign corporation was generally not subject to U.S. tax until the in-come was distributed as a dividend to its U.S. shareholders.

Gain on disposition of foreign stock can be considered a dividend to the extent the foreign corporation has untaxed earnings and profits.

None

No deduction was allowed for fines or penalties paid to the government for any violation of law.

Contributions to capital of a cor-poration by a governmental entity were not treated as income to the corporation.

No credit for employers offering paid FMLA leave.

Exemption amount $5 million in 2011 adjusted annually for inflation ($5.49 million in 2017).

100 percent deduction (similar to U.S. dividends received deduction) for the foreign-source portion of dividends re-ceived from specified 10 percent owned foreign corporations (only available to U.S. C corporations).

Any amount received by a domestic cor-poration that is treated as a dividend for purposes of Code Sec. 1248 is treated as a dividend for purposes of applying the deduction for foreign-source dividends.

The adjusted basis in foreign subsidiary stock is reduced by the amount of any deduction for foreign-source dividends. This adjustment applies for purposes of determining a loss (but not gain).

Generally, no deduction allowed for any amount paid or incurred, after Dec. 22, 2017, to, or at the direction of, a governmental entity in relation to the violation of law, or the investigation or inquiry by such government or entity into the potential violation of any law with limited exceptions.

Contributions to capital of a corporation by any governmental entity or civic group (other than a contribution made as a share-holder) are now includable in income of the corporation.

Provides a credit up to 25 percent of amounts paid under qualified FMLA policy for 2018 and 2019 tax years.

Exemption amount increased to $10 million (base year still 2011) adjusted annually for inflation, until Dec. 31, 2025, at which point the exemption reverts back to prior law ($5 million in 2011). The 2018 exemption is estimated to be about $11 million.

INTERNATIONAL





Deemed Repatriation

Global Intangible Low-Taxed Income (GILTI)

GILTI Deduction

Foreign Derived Intangible Income (FDII)

Base Erosion Anti-Abuse Tax (BEAT)

Foreign income earned by a for-eign corporation was generally not subject to U.S. tax until distributed as a dividend to U.S. shareholders.

None

None

None

None

One-time transition tax on the untaxed accumulated earnings and profits of any 10 percent owned specified foreign corporation. The portion of the inclusion comprising of cash (or cash equivalents) is taxed at an effective rate of approximately 15.5 percent and any remaining inclusion amount is taxed at an effective rate of approximately eight percent. The U.S. shareholder may elect to pay the tax over a period of eight years.

A new inclusion (similar to a Subpart F in-clusion) for the excess (if any) of the share-holder’s net CFC tested income over such shareholder’s net deemed tangible income return (approximately 10 percent of the CFC’s adjusted basis in tangible property). Certain income items are excluded from the GILTI calculation including income subject to high foreign taxes.

C corporations are allowed to deduct 50 percent of GILTI inclusions. The allowed deduction decreases to 37.5 percent after 2025.

FDII is approximately equal to the excess of certain income amounts of a corporation over 10 percent of such corporation’s adjust-ed basis in tangible property. C corporations are allowed to deduct 37.5 percent of the FDII. The allowed deduction decreases to 21.875 percent after 2025.

Imposes a tax associated with deductible payments to foreign related parties made by certain C corporations with average annual gross receipts of at least $500 million. The tax is imposed to the extent BEAT exceeds the regular U.S. tax liability. BEAT is deter-mined as the BEAT tax rate times modified taxable income determined without regard to deductible base erosion payments. The BEAT tax rate is five percent for 2018, 10 percent for 2019 through 2025, and 12.5 percent starting in 2026.

INTERNATIONAL



Use of Overall Domestic Losses in Determining Foreign Tax Credits

Definition of U.S. Shareholder for Determining Controlled Foreign Corporation Status

Look-Through Rule on Sale of Partnership Interest

Active Trade or Business Exception for Contributing Appreciated Property to a Foreign Corporation

PFIC Active Insurance

An overall domestic loss allows a taxpayer to treat a portion of his U.S. source income as foreign-source in subsequent years. The recharacter-ization amount was limited to the lesser of the amount of the loss or 50 percent of the taxpayer’s U.S. source income.

U.S. shareholder is a U.S. person who owns 10 percent of the voting power of a foreign corporation.

A foreign partner’s gain on the sale of an interest in a partnership that engaged in a U.S. trade or business wasn’t U.S. source income and wasn’t effectively connected with a U.S. trade or business.

A taxpayer who contributed ap-preciated property to a foreign corporation for use in the active conduct of a trade or business did not have to recognize gain on the transaction.

Exception from PFIC treatment for income derived in the active con-duct of an insurance business.

A taxpayer can elect to increase the per-centage limitation of U.S. source income recharacterized as foreign-source income to any amount between 50 percent and 100 percent.

U.S. shareholder is a U.S. person who owns 10 percent of the voting power or value of a foreign corporation.

The character of a foreign partner’s gain on the sale of an interest in a partnership is determined as though it was a sale of the partnership’s assets.

The active trade or business exception has been repealed.

This exception is narrowed to require insur-ance business to have applicable insurance liabilities which are more than 25 percent of its total assets as stated on the insurance company’s financial statements.

INTERNATIONAL


ksmcpa.com/taxreform

INDIANAPOLIS800 East 96th Street, Suite 500Indianapolis, IN 46240

TEL 317.580.2000

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TEL 260.496.8297

NEW YORK7 Penn Plaza, Suite 1500New York, NY 10001

TEL 212.557.9800

The information presented herein is general in nature and should not be acted upon without the advice of a professional.

©2018 KSM Business Services, Inc.

TAX REFORM - az480170.vo.msecnd.net · Corporate AMT Like-Kind Exchange Self-Created ... loss can...

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