Business Provisions Under the Tax Cuts and Jobs Act Compared to Previous Tax Law

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1 Tax Rates Corporate tax rate Top rate of 35 percent Flat rate of 21 percent (effective 1/1/2018) Alternative minimum tax (AMT) 20 percent Repealed; AMT credits refundable from 2018 through 2021 (1) Personal service corporations Flat rate of 35 percent Flat rate of 21 percent Dividends received deduction 70 & 80 percent deduction for any dividend received from corporations owning < 20 or > 20 percent of stock of another corporation, respectively (2) Deduction amounts reduced to 50 & 65 percent for corporations owning < 20 or > 20 percent of stock of another corporation, respectively (2) Pass-through treatment Individual rate on ordinary income Deduction of 20 percent of domestic qualified business income (QBI); subject to limitation (3) ; expires after 12/31/2025 Cost Recovery Bonus depreciation Luxury auto depreciation limitations Cost recovery for certain farm property Cost recovery for residential rental & nonresidential real property Citrus plant replanting costs 40, 30 & 20 percent bonus depreciation for qualified property in , respectively; property must be new to qualify $3,160, $5,100, $3,050 & $1,875 for first, second, third & remaining recovery years, respectively (5) Seven-year recovery period for machinery & equipment, grain bins, fences & cotton ginning assets; property (other than nonresidential real property, residential real property & trees or vines bearing fruit or nuts) is subject to the 150 percent declining balance method 27.5 years for residential rental real property & 39 years for nonresidential real property Deductible by materially participating third parties holding a minority interest during the entire taxable year while the loss-suffering taxpayer holds an equity interest of at least 50 percent 100 percent through 2022 for qualified property placed in service after 9/27/2017 (4) ; 80, 60, 40 & 20 percent bonus depreciation for property placed in service in 2023 to 2026, respectively $10,000, $16,000, $9,600 & $5,760 for first, second, third & remaining recovery years, respectively (5) Modifies recovery period to five years for certain farm property; required use of 150 percent declining balance method repealed (6) Maintains previous law recovery periods for residential rental real property & nonresidential real property; 30-year alternative depreciation system (ADS) recovery period for residential rental property Expands deductibility to cover third parties acquiring the entire equity interest held by the loss-suffering taxpayer; effective for replanting costs paid after 12/22/2017 & before 12/22/2027 For more on how the Tax Cuts and Jobs Act might affect your personal tax situation, visit /taxreform. 1

2 Section 179 expensing Small Business Reforms Up to $520,000; phaseout beginning at $2,070,000 of assets placed in service Up to $1 million; phaseout beginning at $2.5 million of assets placed in service (7) Cash method of accounting Allowed for C corporations that do not exceed a $5 million gross receipts test Allowed for C corporations with less than $25 million of gross receipts Required use of inventories Gross receipts > $10 million Gross receipts > $25 million Required application of 263A uniform capitalization rules to inventory Required use of percentage-of-completion method for long-term contracts Gross receipts > $10 million for property acquired for resale; no threshold for manufactured property Gross receipts > $10 million Gross receipts > $25 million for property acquired for resale or manufactured property Gross receipts > $25 million S corporation conversion to C corporation Not addressed Distributions from an eligible terminated S corp treated as paid from accumulated adjustments account & earnings & profits on a pro rata basis; 481(a) adjustments taken into account ratably over six-year period; applies to S corps that revoke elections during two-year period following enactment date Reform of Business-Related Exclusions, Deductions, etc. Interest expense Deduction allowed for interest expense Deduction limited to business interest income, floor plan financing interest & 30 percent of entity s adjusted taxable income; excess carried forward indefinitely (8) Net operating loss (NOL) Like-kind exchanges Capital contribution definition Local lobbying expenses Deduction for domestic production activities Entertainment expenses (10) Carried back two years & carried forward 20 years Deferral of gain permitted on like-kind exchanges of certain property held for productive use in a trade or business or for investment Contributions to capital do not include any contribution in aid of construction from a (potential) customer Deduction allowed for expenses incurred in connection with influencing local legislation Up to 9 percent for domestic production activities Deduction limited to 50 percent of expense Deduction limited to 80 percent of taxable income for tax periods after 2017; no carryback, carried forward indefinitely retains previous law treatment for property & casualty (P&C) insurance companies & permits NOL deductions for life insurance companies (9) Limits deferral of gain on like-kind exchanges to real property that is not held primarily for sale Expands previous law to also exclude contributions made by a non-shareholder governmental entity or civic group No deduction for amounts paid or incurred after 12/22/2017 Repealed; effective for taxable years beginning after 12/31/2017 No deduction for amounts paid or incurred after December 31,

3 Reform of Business-Related Exclusions, Deductions, etc., Continued Employee achievement awards Defined as an item of tangible personal property given to an employee in recognition of either length of service or safety achievement presented as part of a meaningful presentation; deductible by employer, excludible from employee income Clarifies tangible personal property; excludes cash & gift cards FDIC premiums Deductible Deduction limited for taxpayers with consolidated assets more than $10 billion (11) Tax-free rollover of publicly traded securities gain into small business investment companies Capital assets Partnership technical termination Carried interest Research & development credit Accrual basis income recognition Fines & penalties Deduction for settlements paid in connection with sexual harassment or sexual abuse Permitted within 60 days of sale Property held by taxpayer generally considered capital asset unless otherwise excluded Partnership treated as terminated if, within any 12-month period, there s a sale or exchange of 50 percent or more of the total interest in partnership capital & profits Capital gains rate after one-year holding period for interests received in exchange for performance of services Tax credit available to businesses that develop new or improved products or processes Taxpayers may defer recognition of income for advance payments to the end of succeeding tax year if same methodology is followed for financial statement purposes No deduction allowed if related to any law violation Generally deductible as ordinary & necessary trade or business expense Repealed Self-created patents, inventions, models, designs & secret formulas or processes are excluded Repealed Capital gains rate after three-year holding period with respect to any applicable partnership interest Explicitly retained (12) Explicitly retained Deduction allowed for payments identified in a court order or settlement agreement as restitution, remediation or required to come into compliance with a law violation No deduction for settlement, payout or attorney fees related to sexual harassment or sexual abuse if subject to a nondisclosure agreement 3

4 Reform of Business Credits Clinical testing expense credit Rehabilitation credit Work opportunity tax credit Unused business credits Employer credit for paid family & medical leave 50 percent business tax credit for certain expenses related to testing drugs for rare diseases or conditions 20 percent credit for qualified rehabilitation expenditures related to a certified historic structure; 10 percent credit if related to a qualified rehabilitated building (13) Nonrefundable tax credit for 40 percent of qualifying wages paid to certain employees who qualify as members of disadvantaged groups Deduction allowed for unused business credits; carried back one year; carried forward 20 years Not addressed Bond Reforms 50 percent credit decreased to 25 percent 20 percent credit for qualified rehabilitation expenditures, to be claimed over a 60-month period; repeals 10 percent credit for qualified rehabilitated buildings Tax credit available to eligible employers of 12.5 percent of wages paid to qualifying employees during any period such employees are on family & medical leave if payment rate under program is 50 percent of wages normally paid (14) Taxation of private activity bond interest Tax-exempt Taxation of governmental advance refunding bond interest Tax-exempt Repealed Tax credit & direct-pay bonds Professional sports stadium bonds Provide tax credits to investors in lieu of interest payments Interest on bonds used to finance professional sports stadiums is taxexempt Prospectively repeals ability to issue new bonds 4

5 Compensation Excessive employee remuneration Tax-exempt organization executive compensation Deductible compensation for publicly traded corporate employers limited to $1 million for covered employees includes CEO & three other most highly compensated officers Not addressed Covered employees include CEO, CFO & three other most highly compensated officers; covered employees maintain designation for all future years (15) 21 percent excise tax on compensation more than $1 million paid to five highestpaid employees; remuneration of a covered employee that isn t deductible under the $1 million limitation isn't considered Qualified equity grants Not addressed Allows qualified employees (16) to elect to defer recognition of income attributable to qualified stock (17) Expatriated corporation stock compensation Sales of partnership interests by foreign taxpayers Section 743 substantial built-in loss Partner loss limitations Identification of shares of stock sold, exchanged or otherwise disposed of Qualifying beneficiaries of an electing small business trust (ESBT) Charitable contribution deduction for ESBTs 15 percent excise tax imposed on value of stock compensation held by insiders of an expatriated corporation Other Provisions Taxable gain determined according to asset use & business activities tests (18) Exists if adjusted basis in partnership property exceeds property s FMV by more than $250,000 Basis limitation on partner losses doesn t include partner s share of charitable contributions & foreign taxes Taxpayers may use either a first-in, first-out (FIFO) or specific identification method when less than entire holding of particular stock is sold, exchanged or otherwise disposed of Individuals, estates & certain charitable organizations eligible to hold S corporation stock directly Determined according to rules generally applicable to trusts Increases 15 percent rate to 20 percent Taxable gain determined according to the results of a hypothetical sale of partnership assets; in certain cases, transferee required to withhold 10 percent of realized amount Expands definition to include situations where transferee would be allocated a net loss in excess of $250,000 upon hypothetical disposition of partnership property immediately after transfer of partnership interest Basis limitation on partner losses is decreased to reflect partner s share of charitable contributions & foreign taxes Expands list of qualified beneficiaries to include nonresident alien individuals Determined according to rules generally applicable to individuals 5

6 Other Provisions, Continued UNICAP production period rules for beer, wine & distilled spirits Beer excise tax Transfer of beer between bonded facilities Wine excise tax Interest expense attributable to aging periods must be capitalized $18 per barrel; $7 per barrel for small brewers (19), up to 60,000 barrels Tax-free if breweries are owned by the same brewer $1.07 per wine gallon for alcohol contents of 14 percent or less (excludes mead & sparkling wine); small domestic producers allowed credit against wine excise tax Aging period not considered production period; interest expense attributable to aging periods is currently deductible $18 per barrel; $16 per barrel for first 6 million; $3.50 per barrel for small brewers (19), up to 60,000 barrels Tax-free to transferor even if common ownership does not exist if the transferee accepts responsibility for payment of the tax $1.07 per wine gallon for alcohol contents of 16 percent or less (includes mead & certain sparkling wine); all producers allowed credit against wine excise tax; modifies credit calculation Distilled spirits excise tax $13.50 per proof gallon $2.70 per proof gallon on first 100,000; $13.34 on proof gallons between 100,000 & million; $13.50 per proof gallon exceeding million Bulk distilled spirits Tax treatment of Alaska Native Corporations & Settlement Trusts Aircraft management services Distillers may transfer spirits in bond in containers at least one gallon in size without payment of tax Generally subject to tax under the same rules as other corporations & trusts, with exceptions Excise tax imposed on amounts paid for taxable transportation; 7.5 percent plus a flat dollar amount for each domestic flight Distillers may transfer spirits in approved containers other than bulk containers in bond without payment of tax Native corporations may assign certain payments to a settlement trust without gross income inclusion; Native corporations may elect to deduct contributions made to a settlement trust Exempts certain payments related to the management of private aircraft from excise taxes imposed on taxable air transportation Qualified opportunity zones Not addressed Deferral/permanent exclusion of capital gains reinvested in a corporation or partnership that invests at least 90 percent of its assets in qualified opportunity zone property, which are targeted at certain low-income community population census tracts to be established in each state Low-income housing credit Tax credit available to owners of qualified residential rental buildings in low-income housing projects 6

7 International Tax Provisions Interest-charge domestic international sales corporation (IC-DISC) Future foreign earnings Previously excluded subpart F income inclusion Taxation on profits generated by small U.S. manufacturers from U.S.- manufactured products sold overseas can be deferred indefinitely & reinvested into business Worldwide income tax based on residence & source Not addressed Retained Territorial system with base erosion (20) (21) provisions U.S. shareholders no longer required to include previously excluded subpart F income in qualified foreign base company shipping operations Foreign base company income Not addressed Eliminates foreign base company oilrelated income as a category of foreign base company income CFC stock attribution rules Not addressed Provides downward attribution (22) from a foreign person to a related U.S. person for purposes of determining whether the foreign corporation is a CFC Subpart F U.S. shareholder definition Subpart F 30-day rule PFIC insurance business exception Interest expense apportionment U.S. person owning 10 percent or more of the total combined voting power A corporation must be controlled for an uninterrupted 30 days before subpart F inclusions apply Passive income does not include income from a corporation predominantly engaged in an insurance business Interest expense allocated among members of an affiliated group based on FMV of assets U.S. person owning 10 percent or more of the total share value Repealed Passive income does not include income from a corporation with insurance liabilities constituting more than 25 percent of its total assets Allocation based on adjusted tax basis of assets Untaxed accumulated foreign earnings Not addressed 15.5 percent for cash/cash equivalents, 8 percent otherwise, payable over eight years 7

8 Footnotes *Unless stated otherwise, these provisions generally apply to tax years beginning after Prior-year minimum tax credit is refundable in an amount equal to 50 percent of excess of credit for tax year over amount of credit allowable for year against regular tax liability for 2018 to 2020 (100 percent for 2021). 2. Deduction is 100 percent of dividend received where member of the same affiliated group. 3. Deduction does not apply to specified service businesses, except in case of taxpayer whose taxable income does not exceed $157,500 for single filers ($315,000 married filing jointly (MFJ)) with a phaseout beginning at the same levels over the next $50,000 ($100,000) of taxable income. QBI is all domestic business income other than investment income (except income from publicly traded partnerships that s eligible for inclusion), investment interest income (other than qualified real estate investment trust dividends), net capital gain, foreign currency gains, etc. The deduction is limited to the greater of 50 percent of W-2 wages paid with respect to the business or 25 percent of W-2 wages paid plus 2.5 percent of the unadjusted basis of all qualified property. 4. Definition of qualified property expanded by removing requirement that original use begin with taxpayer. Excludes certain property used in regulated public utility businesses and property used in a trade or business that has floor plan financing indebtedness; includes qualified film, television and live theatrical productions. 5. Amounts adjusted for inflation annually. Additional $8,000 allowed for assets qualifying for bonus depreciation; phased down in 2018 and 2019 to $6,400 and $4,800, respectively, for automobiles acquired before September 28, 2017, but placed in service after September 27, Five-year recovery period does not apply to grain bins, cotton ginning assets, fences or any other land improvement. Original use must commence with the taxpayer. A 150 percent declining balance method will continue to apply to any 15- or 20-year farm property to which the straight-line method does not apply. 7. Definition of qualified property expanded to include certain improvements to nonresidential real property, including roofs, HVAC systems, fire protection and alarm systems and security systems. 8. Adjusted taxable income is calculated without regard to items not properly allocable to a trade or business, any business interest expense or business interest income, the 20 percent pass-through income deduction, floor plan financing interest, any NOL deduction and, for taxable years beginning before January 1, 2022, any deduction for depreciation, amortization or depletion. The interest deduction is not limited for any taxpayer with average annual gross receipts for the preceding three taxable years of $25 million or less or a regulated public utility business (including electric cooperatives). Real property trade or businesses described in IRC 469(c)(7)(C) may elect to not be subject to the limitation provided they make an irrevocable election and use the alternative depreciation system (ADS) for any of its non-residential real property, residential real property and qualified improvement property. Farming businesses may also elect not to be subject to the limitation provided they use the ADS method to depreciate farming property with a recovery period of 10 years or more. Electing farming businesses specifically include agricultural and horticultural cooperatives. 9. NOLs for any tax year are generally excess of life insurance deductions over life insurance gross income for that year. Deduction is limited to 80 percent of the excess and can be carried forward indefinitely (no carryback). 10. Includes entertainment, amusement or recreation activities; does not include qualified meal expenses. 11. No deduction allowed for taxpayers with total consolidated assets of $50 billion or more. For taxpayers with consolidated assets between $10 billion and $50 billion, disallowed deduction calculated based on ratio of the excess of total consolidated assets exceeding $10 billion to $40 billion. 12. For tax periods beginning after December 31, 2021, certain research and experimentation expenditures, including software development costs but excluding land acquisition and improvement costs and mine (including oil and gas) exploration costs, would be required to be capitalized and amortized over a five-year period. For foreign research projects, this amortization period increases to 15 years. Upon retirement, abandonment or disposition of property, any remaining basis would continue to be amortized over remaining amortization period. 13. Requires the use of straight-line depreciation or the ADS method. 14. Credit increased by 0.25 percentage points (but not above 25 percent) for each percentage point by which rate of payment exceeds 50 percent. Credit is effective for wages paid in tax years beginning after December 31, 2017, and before tax years beginning after December 31, Would not apply to any remuneration under written binding contracts in effect on November 2, 2017, that isn t modified in any material respect; renewals are considered material modifications. 16. Qualified employees exclude any individual who, with respect to the employer corporation, (1) was a 1 percent owner at any time during the 10 preceding calendar years, (2) has ever held the position of CEO or CFO, (3) is a family member of an individual described in (1) or (2), or (4) was one of the four highest compensated officers for any of the 10 preceding taxable years. 17. Stock must be received from a nonpublicly traded corporation in connection with the exercise of an option or in settlement of a restricted stock unit granted in connection with the performance of services. 18. In determining whether the asset use or business activities tests are met, due regard is given to whether such assets, income, gain or loss were accounted for through such trade or business. The extent to which the income, gain or loss is derived from assets used in or held for use in the conduct of the U.S. trade or business and whether the activities of the trade or business were a material factor in the realization of the income, gain or loss is considered. 19. Small brewers are defined as brewers producing fewer than 2 million barrels of beer during a calendar year percent of foreign-sourced portion of dividends paid by foreign corporation to U.S. corporate shareholder owning 10 percent or more of foreign corporation s stock exempt from U.S. taxation. No foreign tax credit or deduction allowed for any foreign taxes paid or accrued with respect to any exempt dividend. The new law also includes provisions relating to deductions for disqualified related-party amounts paid or accrued pursuant to a hybrid transaction between a hybrid entity and an expanded definition of intangible property. 21. Provides an election to preserve NOLs and coordinate NOL, overall foreign loss and foreign tax credit carryforward rules upon transition. 22. Downward attribution provides that certain stock of a foreign corporation owned by a foreign person is attributed to a related U.S. person for purposes of determining whether the related U.S. person is a U.S. shareholder of the foreign corporation. 8

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