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

Transcription

1 Business Provisions Under the Tax Cuts and Jobs Act 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tax rate Top rate of 35 percent Flat rate of 21 percent (effective 1/1/2018) Alternative minimum tax (AMT) 20 percent Repealed; AMT credits refundable from 2018 through 2021 (1) Personal service corporations Flat rate of 35 percent Flat rate of 21 percent Dividends received deduction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Modifies recovery period to five years for certain farm property; required use of 150 percent declining balance method repealed (6) Maintains previous law recovery periods for residential rental real property & nonresidential real property; 30-year alternative depreciation system (ADS)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 Business Provisions Under the Tax Cuts and Jobs Act 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 Business Provisions Under the Tax Cuts and Jobs Act 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 Business Provisions Under the Tax Cuts and Jobs Act 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 Business Provisions Under the Tax Cuts and Jobs Act 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 Business Provisions Under the Tax Cuts and Jobs Act 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 Business Provisions Under the Tax Cuts and Jobs Act 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 Business Provisions Under the Tax Cuts and Jobs Act 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 and corporate 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

9 Insurance Company Provisions Under the Tax Cuts and Jobs Act General Provisions Corporate tax rate Top rate of 35 percent Flat rate of 21 percent (effective January 1, 2018) Alternative minimum tax (AMT) 20 percent Repealed; AMT credits refundable from 2018 to 2021 Dividends received deduction Bonus depreciation 70 & 80 percent deduction for any dividend received from corporations owning < 20 or > 20 percent of stock of another corporation, respectively (1) 40, 30 & 20 percent bonus depreciation for qualified property in 2018 to 2020, respectively; property must be new to qualify Deduction amounts reduced to 50 & 65 percent for corporations owning < 20 or > 20 percent of stock of another corporation, respectively (1) 100 percent through 2022 for qualified property placed in service after September 27, 2017 (2) ; 80, 60, 40 & 20 percent bonus depreciation for property placed in service in 2023 to 2026, respectively 179 expensing 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 (3) 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 (4) Net operating loss (NOL) Retains current law treatment for property & casualty (P&C) insurance companies & permits NOL deductions for life insurance companies (5) Deferred compensation Carried back two years & carried forward 20 years 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 Employee compensation not includable in gross income until year of receipt; employer deduction allowed at that time Deduction limited to 80 percent of taxable income for tax periods after 2017; no carryback; carried forward indefinitely. Modifies recovery period to five years for certain farm property; required use of 150 percent declining balance method repealed (6) 9

10 Insurance Company Provisions Under the Tax Cuts and Jobs Act 162(m) deduction for excessive employee remuneration Accounting methods tax year of inclusion Proration rules General Provisions, Continued Deduction for compensation paid or accrued with respect to a covered employee of a publicly traded corporation limited to no more than $1 million per year. Commissions, performance-based remuneration & payments to a taxqualified retirement plan are excluded from this limitation For an accrual-basis taxpayer, an amount is included in gross income when all events have occurred that fix the right to receive such income & the amount thereof can be determined with reasonable accuracy (the all events test, unless an exception applies) Insurance Company Provisions (Other than Life) P&C insurance companies required to reduce reserve for losses incurred deduction by 15 percent of tax-exempt interest, deductible portion of dividends received & increase in cash value of life insurance, endowment or annuity contracts owned by company Redefines covered employee; covered employees maintain that distinction for all future years; repeals the performancebased compensation exception Accrual-basis taxpayers would be required to recognize income no later than the tax year in which item is recognized as revenue on the applicable financial statement; this change may limit the 1276 treatment to defer market discounts for tax purposes Proration factor changed to applicable percentage of 5.25 percent divided by top corporate tax rate, i.e., 25 percent beginning in 2018 Loss reserve discounting Nonlife tax reserves Loss payment pattern for each line of insurance business determined by reference to industrywide historical loss payment pattern applicable to such line of business; may elect to use own particular historical loss payment patterns P&C companies must discount deduction for unpaid losses based on loss payment pattern using midterm applicable federal rates (6) Historical payment pattern election repealed Amount of unpaid losses discounted using corporate bond yield curve (as specified by the U.S. Department of the Treasury) (7) 847 special loss discount account P&C companies may elect to claim a deduction equal to difference between amount of reserves computed on a discounted basis & amount computed on an undiscounted basis (8) Repealed 10

11 Insurance Company Provisions Under the Tax Cuts and Jobs Act Life Insurance Company Provisions Company & policyholder share percentages Complex calculation based on company s share of net investment income Company s share is 70 percent; policyholder s share is 30 percent Small life insurance company deduction Life insurance companies with assets < $500 million may deduct 60 percent of first $3 million of life insurance-related income; deduction is phased out for companies with income between $3 & $15 million Repealed Life insurance surtax Deferred acquisition costs Life insurance tax reserves Adjustment for change in computing life insurance reserves ( 807(f)) Policyholders surplus account (PSA) No surtax on life insurance companies currently exists 1.75 percent for annuities; 2.05 percent for group life; 7.7 percent for other specified insurance contracts; 60-month & 120-month amortization periods based on premium level Actuarial-based tax reserves; can t be less than contract s cash surrender value; can t be greater than statutory reserve Adjustments in computing reserves may be taken into account over 10 years, regardless of effect on taxable income Special rule for distributions from pre-1984 PSAs provides tax deferral opportunity (9) 2.09 percent for annuities; 2.45 percent for group life; 9.2 percent for other specified insurance contracts; expands 120-month amortization period to 180 months; preserves 60-month amortization of the first $5 million (with phaseout) Tax reserves for any contract equal to greater of (1) net surrender value of contract or (2) percent of reserve computed as required by the National Association of Insurance Commissioners (NAIC) at time reserve is determined. Tax reserves can t be less than contract s cash surrender value or greater than the statutory reserve Adjustments treated as a change in method of accounting; subject to 481 rules Eight-year inclusion of PSA balances 11

12 Insurance Company Provisions Under the Tax Cuts and Jobs Act Footnotes * Unless stated otherwise, these provisions generally apply to tax years beginning after Deduction is 100 percent of dividend received where member of the same affiliated group. 2. Definition of qualified property expanded by removing requirement that original use begin with taxpayer. 3. 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. 4. Adjusted taxable income is 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. Interest deduction not limited for any taxpayer who meets a $25 million gross receipts test, is a regulated public utility business (including electric cooperatives) or a real property business. Farming businesses may elect not to be subject to limitation provided they use ADS method to depreciate farming property with recovery period of 10 years or more. Electing farming businesses specifically include agricultural and horticultural cooperatives. 5. 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). 6. Loss payment pattern computed based upon assumption that all losses are paid (1) in general, during the accident year and the three calendar years following the accident year, or (2) in the case of lines of business relating to auto or other liability, medical malpractice, workers compensation, multiple peril lines, international coverage and reinsurance, during the accident year and 10 calendar years following the accident year. For long-tail lines of business, a special rule extends the loss payment pattern period, so the amount of losses that would have been treated as paid in the tenth year after the accident year is treated as paid in the tenth year and in each subsequent year (up to five years) in an amount equal to the amount of the losses treated as paid in the ninth year after the accident year. 7. Amount of losses that would have been treated as paid in the third year after the accident year treated as paid in third year and in each subsequent year in an amount equal to the average of the amount of the losses treated as paid in the first and second years after the accident year, and in the case of lines of business relating to auto or other liability, medical malpractice, workers compensation, multiple peril lines, international coverage and reinsurance, the amount of losses that would have been treated as paid in the tenth year after the accident year would be treated as paid in the tenth year and in each subsequent year in an amount equal to the average of the amount of the losses treated as paid in the seventh, eighth and ninth years after the accident year; would result in a lower tax deduction for reserves. 8. Companies that make this election are required to make a special estimated tax payment equal to the tax benefit attributable to the deduction. Amounts added to the special loss discount account are automatically subtracted from the account and made subject to tax if they have not already been subtracted after 15 years. 9. Tax rules for insurance companies enacted in 1959 included a rule that half of a life insurer s operating income was taxed only when the company distributed it, and a PSA kept track of untaxed income. In 1984, this deferral of taxable income was repealed, although existing policyholders surplus account balances remained untaxed until they were distributed. Legislation enacted in 2004 provided a two-year holiday that permitted tax-free distributions of these balances during 2005 and

13 Individual Provisions Under the Tax Cuts and Jobs Act Reduction & Simplification of Individual Income Tax Rates Individual rates on ordinary income (1) Seven brackets with top rate of 39.6 percent # Seven brackets with top rate of 37 percent #^ Unearned income of children Unearned income exceeding $2,100 taxed at parents rates; remaining income up to $2,100, less child s standard deduction, taxed at child s rate Unearned income exceeding $2,100 taxed at rates applicable to estates & trusts; remaining income up to $2,100, less child s standard deduction, taxed at child s rate Capital gains rate (1) Top rate of 20 percent # Carried interest Standard deduction Capital gains rate after one-year holding period for interests received in exchange for performance of services $6,500 for single filers, $9,550 head of household & $13,000 MFJ Capital gains rate after three-year holding period $12,000 for single filers, $18,000 head of household & $24,000 MFJ (2) Personal exemption $4,150 (3) Repealed^ Identification of shares of stock sold, exchanged or otherwise disposed of Taxpayers may use either a first-in, first-out (FIFO) or specific identification method Treatment of Business Income of Individuals, Trusts & Estates Nonpassive losses from flow-through entity Deductible to extent sufficient tax basis exists Nonpassive losses limited to $250,000 ($500,000 MFJ); excess loss treated as NOL & carried forward (2) Pass-through tax rate Individual rate on ordinary income Deduction of 20 percent of domestic qualified business income (QBI); subject to limitation (4) ; expires after 12/31/2025 Simplification & Reform of Family & Individual Tax Credits Child tax credit $1,000; phaseout at $75,000 for single filers ($110,000 MFJ) $2,000 ($1,400 refundable); phaseout beginning at $200,000 for single filers ($400,000 MFJ) (2) Family tax credit Not addressed $500 nonrefundable credit for dependents other than qualifying children; phaseout at $200,000 for single filers ($400,000 MFJ) (2) Education tax credits Three higher education tax credits provided: American Opportunity Tax Credit (AOTC), Hope Scholarship Credit & Lifetime Learning Credit 13

14 Individual Provisions Under the Tax Cuts and Jobs Act Education savings rules Simplification & Reform of Family & Individual Tax Credits, Continued Qualified education expenses restricted to qualified higher education Elementary & secondary school expenses, up to $10,000, treated as qualified expenses for 529 plans Student loan indebtedness Student loan interest Tuition & related expenses Qualified tuition program rollovers to qualified ABLE programs Generally included in taxable income unless certain exceptions apply Deduction for qualified student loan interest paid during year for nondependent taxpayers with adjusted gross income (AGI) less than $80,000 single ($160,000 MFJ) Deduction for qualified tuition & fees paid during year Tax-free rollovers to qualified ABLE accounts under 529A are not permitted Income from discharge of student loan debt on account of death or total & permanent disability of student excluded from taxable income (2) Permits rollover of amounts from qualified tuition programs to ABLE accounts without penalty; effective for distributions made after December 22, 2017 (2) Itemized deductions limitation Total amount of otherwise allowable itemized deductions reduced by 3 percent of the amount by which the taxpayer's AGI exceeds a threshold; does not reduce itemized deductions by more than 80 percent Repealed (2) Simplification & Reform of Deductions & Exclusions Home mortgage interest State & local taxes paid or accrued not in connection with a trade or business Personal casualty & theft losses Wagering losses Deduction for mortgage interest paid or incurred on up to $1 million of acquisition indebtedness & $100,000 of home equity indebtedness Deduction for: (1) state, local & foreign real property taxes, (2) state & local personal property taxes & (3) state & local income taxes (or state & local sales tax paid, if higher) Deduction for casualty & theft losses incurred Deduction allowed to extent of wagering gains Deduction for mortgage interest paid or incurred on up to $750,000 of acquisition indebtedness; deduction for interest paid on home equity loans eliminated (2)(5) Deduction limited to $10,000 for the aggregate of: (1) state & local real & personal property taxes & (2) state & local income tax (or state & local sales tax paid, if higher) (2) Eliminated except for losses incurred within a major disaster area under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (as amended 2016) (2) Clarifies that wagering losses include any otherwise allowable deduction incurred in connection with wagering transactions 14

15 Individual Provisions Under the Tax Cuts and Jobs Act Simplification & Reform of Deductions & Exclusions, Continued Gifts to charity Miscellaneous itemized deductions Medical & dental expenses Alimony paid Moving expenses Educator expenses Bicycle commuting reimbursement Deduction for charitable contributions made during year; deduction for cash contributions limited to 50 percent of AGI Deduction for tax preparation fees, unreimbursed employee expenses & other miscellaneous items paid during year to extent they exceed 2 percent of AGI Deduction for out-of-pocket expenses paid or incurred during year to extent expenses exceed 10 percent of AGI Deduction for qualifying amounts paid under a divorce or separation instrument Deduction & income exclusion for qualified expenses paid for moving at least 50 miles in connection with a job or business Deduction up to $250 ($500 MFJ) for qualified expenses paid by eligible educators Reimbursements up to $20 per month excludible from employees gross income Deduction for cash contributions modified to increase AGI limitation to 60 percent (2)(6) Repealed (2) For 2017 & 2018, deduction for out-ofpocket expenses paid or incurred during year to extent expenses exceed 7.5 percent of AGI; threshold raises to 10 percent of AGI beginning in 2019 Repealed (both deduction & income inclusion); effective for divorce decrees executed after December 31, 2018 Deduction & income exclusion eliminated except for active-duty members of the armed forces (2) Repealed (2) Gain on sale of principal residence Recharacterization of certain IRA & Roth IRA contributions Extended rollover period for the rollover of plan loan offset amounts in certain cases Length-of-service award programs for bona fide public safety volunteers Exclusion up to $250,000 for single filers ($500,000 MFJ) of gain from sale of principal residence where home used as principal residence for at least two of previous five years Simplification & Reform of Savings, Pensions & Retirement Contributions to a traditional IRA permitted to be recharacterized as contributions to a Roth IRA or vice versa; permits recharacterization of conversions An employee who receives a plan loan distribution has 60 days to contribute the distribution to an eligible retirement plan to avoid additional tax Provides exception to deferred compensation plan rules if aggregate amount of length-of-service awards accruing for a bona fide volunteer with respect to any year of service does not exceed $3,000 Recharacterization can t be used to unwind Roth IRA conversions The 60-day rollover period is extended to the due date for filing the employee's tax return for that year (including extensions) Increases the aggregate amount of lengthof-service awards for bona fide volunteers to $6,000 15

16 Individual Provisions Under the Tax Cuts and Jobs Act Alternative Minimum Tax Alternative minimum tax 28 percent top rate; exemption of $55,400 for single filers ($86,200 MFJ); exemption amounts begin to phase out at $123,100 & $164,100, respectively Affordable Care Act individual mandate 28 percent top rate; exemption of $70,300 for single filers ($109,400 MFJ) beginning after 12/31/2017; exemption amounts begin to phase out at $500,000 & $1 million, respectively^ Elimination of Shared Responsibility Payment for Individuals Failing to Maintain Minimal Essential Coverage Individuals not covered by health plan that provides at least minimum essential coverage must pay individual shared responsibility payment (7) Other Provisions Individual shared responsibility payment reduced to zero for months beginning after 12/31/2018 Contributions to ABLE accounts Contesting IRS levy Combat zones Contributions are not deductible & generally may not exceed the annual gift tax exclusion amount or limits imposed on accounts under the qualified tuition program of its respective state The IRS has nine months to return the monetary proceeds from the sale of wrongfully levied property; an action for wrongful levy must be brought within nine months from the levy date Members of the armed forces serving in combat zones are afforded a number of tax benefits, including income exclusions for certain military pay Increases contribution limit to ABLE accounts under certain circumstances; designated beneficiary may claim saver s credit for contributions made to ABLE account (2) Extends period of time IRS has to return monetary proceeds to two years; also extends the time period for bringing a civil action for wrongful levy to two years (8) Grants combat zone tax benefits to the Sinai Peninsula of Egypt (9) 2016 disaster area relief Distributions from qualified retirement plans are generally included in income; early distributions are generally subject to a 10 percent additional early withdrawal tax taxpayers may roll over distributions into another eligible retirement plan within 60 days to avoid income inclusion; individuals may claim itemized deductions for personal casualty losses, subject to limitation Provides an exception to the 10 percent early withdrawal tax in the case of a distribution due to a qualified 2016 disaster taxpayers may recognize income attributable to a qualified 2016 disaster distribution ratably over three years; taxpayers are allowed a period of up to three years for recontributions of qualified 2016 disaster distributions modifies casualty loss limitations associated with a 2016 disaster (10) 16

17 Individual Provisions Under the Tax Cuts and Jobs Act Footnotes *Unless stated otherwise, these provisions generally apply to tax years beginning after # Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $200,000 for single filers ($250,000 married filing jointly (MFJ)). ^ Expires after December 31, 2025, except amounts would continue to be indexed for inflation using chained measurement of the consumer price index where applicable. 1. See also Individual Brackets available at /taxreform. 2. Reverts to its form before January 1, 2018, after December 31, Subject to phaseout based on AGI under previous law. This limitation is repealed under the new law, except would revert to its form before January 1, 2018, after December 31, 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 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 and corporate 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. 5. Interest deductions related to acquisition indebtedness for existing mortgages are unchanged. Interest deductions related to home equity loans, except where proceeds are used for home acquisition or improvement, is disallowed, regardless of when the debt was incurred. 6. Repeals exception to contemporaneous written acknowledgment requirement for contributions of $250 or more when donee organization files required return. Effective for contributions made in tax years beginning after December 31, Tax imposed for any month an individual does not have minimum essential coverage unless an exception applies. Tax for any calendar month is one-twelfth of tax calculated as an annual amount. Annual amount is equal to greater of flat dollar amount (lesser of sum of individual annual dollar amounts for members of taxpayer s family or 300 percent of adult individual dollar amount of $695 for 2018) or excess income amount (2.5 percent of excess of taxpayer s household income for taxable year over threshold amount of income for requiring taxpayer to file income tax return). 8. Effective for levies made after December 22, 2017, and levies made on or before December 22, 2017, if the nine-month period has not expired as of December 22, Generally effective beginning June 9, 2015, through any subsequent tax year beginning before January 1, A qualified 2016 disaster distribution includes any distribution made on or after January 1, 2016, and before January 1, 2018, to an individual whose principal place of abode at any time during calendar year 2016 was in a 2016 disaster area. Personal casualty loss relief applies to losses arising in tax years beginning after December 31, 2015, and before January 1,

18 Individual Tax Brackets After the Tax Cuts & Jobs Act Effective in 2018, the Tax Cuts and Jobs Act (TCJA) reduced the top marginal tax rate and provides new rates for the seven individual income tax brackets. The tax brackets will be adjusted annually for inflation using a chained method of the U.S. Consumer Price Index. The new rates expire after December 31, Married Filing Jointly (MFJ) Ordinary Rates Bracket Previous Tax Law New Tax Law $0 $19,050 10% 12% 19,051 77,400 22% 24% 77, ,150 25% 156, ,000 28% 165, ,950 32% 237, , , ,000 33% 400, , , ,050 35% 37% 480, , % More than 600,000 10% 12% 22% 24% 25% 28% 32% 33% 35% 37% 39.6% 2018 MFJ Capital Gains Rates Bracket Previous Tax Law New Tax Law $0 $77,200 77,201 77,400 77, , , ,050 More than 480,051 0% 20% 0% 20% *Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $250,000 18

19 Individual Tax Brackets After the Tax Cuts & Jobs Act 2018 Single Ordinary Rates Bracket Previous Tax Law New Tax Law $0 $9,525 9,526 38,700 38,701 82,500 82,501 93,700 93, , , , , , , , , , , ,000 More than 500,000 10% 12% 22% 24% 25% 28% 32% 33% 35% 37% 39.6% 10% 12% 22% 24% 25% 28% 32% 33% 35% 37% 39.6% 2018 Single Capital Gains Rates Bracket Previous Tax Law New Tax Law $0 $38,600 38,601 38,700 38, , , ,700 More than 426,701 0% 20% 0% 20% *Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $200,000 19

20 Individual Tax Brackets After the Tax Cuts & Jobs Act 2018 Head of Household (HOH) Ordinary Rates Bracket Previous Tax Law New Tax Law $0 $13,600 10% 10% 12% 12% 13,601 51,800 51,801 51,850 22% 22% 24% 51,851 82,500 82, ,850 25% 24% 133, , , ,000 28% 25% 28% 32% 200, ,700 33% 216, ,950 32% 33% 35% 424, ,350 35% 37% 453, ,000 37% 39.6% More than 500, % 2018 HOH Capital Gains Rates Bracket Previous Tax Law New Tax Law $0 $51,700 0% 51,701 51,850 51, , , ,350 More than 453,351 20% 0% 20% *Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $200,000 20