Income Tax Rates and Exemptions Tax Rates and Brackets Key Individual Tax Provisions Quickfinder 1(j) 2018 2025 The following seven tax brackets apply for individuals: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The specific brackets and the income levels at which they apply, compared to prior law, are shown in the Individual Income Tax Rates chart on Page 7. Kiddie Tax 1(j)(4) 2018 2025 The taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child s ordinary income and his income taxed at preferential rates. Personal Exemption Standard and Itemized s Standard Medical Expense State and Local Tax Mortgage Interest 151(d) 2018 2025 The deduction for personal exemptions is eliminated. 63(c)(7) 2018 2025 The standard deduction is increased to $24,000 for MFJ, $18,000 for HOH and $12,000 for all other taxpayers, adjusted for inflation in tax years after 2018. No changes are made to the currentlaw additional standard deduction for the elderly and blind. 213(f), 56(b)(1) 2017 2018 The threshold for medical expense deductions is 7.5%-of-AGI. In addition, the rule limiting the medical expense deduction for AMT purposes to the excess of such expenses over 10%-of-AGI doesn t apply. 164(b)(6) 2018 2025 The itemized deduction for state and local taxes is limited to $10,000 ($5,000 for MFS) of the aggregate of (1) state and local property taxes and (2) state and local income, war profits and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year. Caution: The provision also includes a rule stating that an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future tax year in order to avoid the dollar limitation applicable for tax years. 163(h)(3) 2018 2025 The deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for MFS). The deduction for interest on home equity indebtedness is eliminated. Note: The new lower limit doesn t apply to any acquisition indebtedness incurred on or before 12/15/17. The following seven tax brackets applied for individuals: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The net unearned income of a child was taxed at the parents tax rates if the parents tax rates were higher than the tax rates of the child. The remainder of the child s taxable income [earned income, plus unearned income up to $2,100 (for 2018), less the child s standard deduction] was taxed at the child s rates. The deduction for each personal exemption was $4,150 for 2018, subject to a phaseout for higher earners. For 2018, the standard deduction amounts were to be: $6,500 for single and MFS, $9,550 for HOH and $13,000 for MFJ. Additional standard deductions may be claimed by taxpayers who are elderly or blind. The threshold was 10%-of-AGI for both regular tax and AMT. Real estate taxes and personal property taxes were fully deductible (as were state and local income taxes, unless the taxpayer elected to deduct state and local sales taxes instead). Qualified residence interest, which included interest paid on a mortgage secured by a principal residence or a second residence was deductible to the extent the underlying mortgage loans were acquisition indebtedness of up to $1 million, plus home equity indebtedness of up to $100,000. Copyright 2018 Thomson Reuters Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 1
Quickfinder Key Individual Tax Provisions (Continued) Standard and Itemized s (Continued) Charitable Contribution 170(b)(1)(G) 2018 and later The limitation under IRC Sec. 170(b) for cash contributions to public charities and certain private foundations is 60%. Contributions exceeding the limitation are generally allowed to be carried forward and deducted for up to five years, subject to the later year s ceiling. Charitable Donations for College Athletic Seating Rights Casualty and Theft Loss Gambling Losses Miscellaneous Itemized s Overall Limitation on Itemized s 170(l) 2018 and later No charitable deduction is allowed for any payment to an institution of higher education in exchange for the right to purchase tickets or seating at an athletic event. 165(h)(5) 2018 2025 The personal casualty and theft loss deduction is eliminated, except for personal casualty losses incurred in a federally-declared disaster. Note: The TCJA includes special relief provisions for tax years 2016 2017 for taxpayers who incurred losses from certain 2016 major disasters. 165(d) 2018 2025 All deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are deductible only to the extent of gambling winnings. 67(g) 2018 2025 The deduction for miscellaneous itemized deductions that are subject to the 2%-of-AGI floor is eliminated. 68(f) 2018 2025 The overall limitation on itemized deductions is eliminated. Such contributions were subject to a 50%-of-AGI limit with a carryforward period of five years. A taxpayer could treat 80% of a payment as a charitable contribution where: (1) the amount was paid to or for the benefit of an institution of higher education and (2) such amount would be allowable as a charitable deduction but for the fact that the taxpayer received, as a result of the payment, the right to purchase tickets for seating at an athletic event in an athletic stadium of such institution. Personal casualty or theft losses are deductible if they exceed $100 per casualty or theft and to the extent they exceed 10% of an individual s AGI. Special rules apply to losses incurred in a federally-declared disaster. Gambling losses are deductible to the extent of gambling winnings. Individuals can deduct expenses for the production of income and unreimbursed employee business expenses, subject to a 2%-of-AGI floor. Higher-income taxpayers who itemized their deductions were subject to a limitation on these deductions. 2 Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 Copyright 2018 Thomson Reuters
Income and Losses for Qualified Business Income Carried Interests Excess Business Losses Key Individual Tax Provisions (Continued) Quickfinder 199A 2018 2025 An individual generally may deduct 20% of qualified business income from a partnership, S corporation or sole proprietorship, as well as 20% of aggregate qualified REIT dividends, qualified cooperative dividends and qualified publiclytraded partnership income. Special rules apply to specified agricultural or horticultural cooperatives. The 20% deduction is not allowed in computing AGI, but rather is allowed as a deduction reducing taxable income. A limitation based on W-2 wages paid or capital investment is phased in for MFJ taxpayers with taxable income of $315,000 or more ($157,500 for other individuals). A disallowance of the deduction with respect to specified service trades or businesses also is phased in above these threshold amounts of taxable income. A specified service trade or business means any trade or business (1) involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners or (2) involving the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests or commodities. 1061 2018 and later A three-year holding period requirement applies in order for certain partnership interests received in connection with the performance of services to be taxed as long-term capital gain rather than ordinary income. 461(l) 2018 2025 Excess business losses are not allowed for the tax year, but are instead carried forward and treated as part of the taxpayer s NOL carryforward in subsequent tax years. This limitation applies after the application of the passive loss rules. An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to the taxpayer s trades and businesses over the sum of aggregate gross income or gain of the taxpayer attributable to such trades or businesses plus a threshold amount. The threshold amount for a tax year is $500,000 for MFJ and $250,000 for other individuals, with both amounts indexed for inflation. In the case of a partnership or S corporation, the provision applies at the partner or shareholder level. Carried interests were taxed in the hands of the taxpayer (that is, the fund manager) at favorable capital gain rates instead of as ordinary income. A loss limitation applied only to excess farm losses. An excess farm loss for a tax year means the excess of aggregate deductions that are attributable to farming businesses over the sum of aggregate gross income or gain attributable to farming businesses plus the threshold amount. The threshold amount is the greater of (1) $300,000 ($150,000 for MFS) or (2) for the five-consecutive-year period preceding the tax year, the excess of the aggregate gross income or gain attributable to the taxpayer s farming businesses over the aggregate deductions attributable to the taxpayer s farming businesses. Copyright 2018 Thomson Reuters Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 3
Quickfinder Income and Losses (Continued) Self-Created Property 1221(a)(3) Dispositions Alimony 215, 61(a)(8), and 71 Moving Expenses Student Loan Discharged on Death or Disability Qualified Bicycle Commuting Exclusion Eliminated 132(g) and 217(k) 108(f)(5) Alternative Minimum Tax Alternative Minimum Tax (AMT) Key Individual Tax Provisions (Continued) Alimony paid with respect to agreements executed after 2018 Patents, inventions, models or designs (whether or not patented) and secret formulas or processes, which are held either by the taxpayer who created the property or by a taxpayer with a substituted or transferred basis from the taxpayer who created the property (or for whom the property was created), are added to the list of items specifically excluded from the definition of a capital asset. Alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse. Caution: The new rule can also apply to divorce or separation agreements executed before 2019 but modified after 2018 if the modification so provides. 2018 2025 Only members of the armed forces on active duty (and their spouses and dependents) who move pursuant to a military order and incident to a permanent change of station can deduct moving expenses and exclude moving expense reimbursements. Loan discharges 2018 2025 The exclusion of cancellation of debt income for certain student loans is expanded to provide that certain student loans that are discharged on account of death or total and permanent disability of the student are excluded from gross income. 132(f)(8) 2018 2025 Qualified bicycle commuting reimbursements are taxable. 55(d)(4) 2018 2025 The 2018 AMT exemption amounts are $109,400 for MFJ, $70,300 for single or HOH and $54,700 for MFS. The exemptions are reduced by 25% of alternative minimum taxable income (AMTI) over $1,000,000 for MFJ and $500,000 for single, HOH or MFS. Amounts are indexed for inflation after 2018. Certain assets are specifically excluded from the definition of a capital asset, including inventory property, depreciable property and certain self-created intangibles (for example, copyrights and musical compositions). Alimony and separate maintenance payments are deductible by the payor spouse and includible in income by the recipient spouse. An above-the-line deduction is allowed for moving expenses in connection with work by the taxpayer as an employee or as a self-employed individual at a new principal place of work. Employer reimbursements of qualified moving expenses were nontaxable. The exclusion for discharges of student loans only applied to forgiveness contingent on the student s working for a certain period of time in certain professions for any of a broad class of employers. An employee was allowed to exclude up to $20 per month in employer-provided qualified bicycle commuting reimbursements. The 2018 AMT exemption amounts were $86,200 for MFJ, $55,400 for single or HOH and $43,100 for MFS. The exemptions were reduced by 25% of AMTI over $164,100 for MFJ, $123,100 for single or HOH and $82,050 for MFS. 4 Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 Copyright 2018 Thomson Reuters
Tax-Advantaged Savings Accounts ABLE Account Contribution Limit ABLE Account Contributions Saver s Credit Eligible ABLE Accounts Rollovers From QTPs QTPs Qualified Distributions Other Significant Items Child Tax Credit Credit Amount Child Tax Credit Nonchild Dependents Key Individual Tax Provisions (Continued) Quickfinder 529A(b) 2018 2025 The contribution limitation to ABLE accounts with respect to contributions made by the designated beneficiary is increased. After the overall limitation on contributions is reached (that is, the annual gift tax exemption amount; for 2018, $15,000), an ABLE account s designated beneficiary can contribute an additional amount, up to the lesser of (1) the federal poverty line for a one-person household or (2) the individual s compensation for the tax year. 25B(d)(1) 2018 2025 The designated beneficiary of an ABLE account can claim the saver s credit under IRC Sec. 25B for contributions made to his ABLE account. 529(c)(3) 529(c)(7) 24(h)(2) and (3) Distributions after 12/22/17 Distributions Amounts from qualified tuition programs (QTPs) are allowed to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of such designated beneficiary s family. Such rollovers are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee. The term qualified higher education expenses is expanded to include tuition at an elementary or secondary public, private or religious school, up to a $10,000 limit per tax year. 2018 2025 The child tax credit is $2,000 per qualifying child under the age of 17 and the AGI levels at which the credit phases out are $400,000 for MFJ and $200,000 for all other taxpayers (not indexed for inflation). 24(h)(4) 2018 2025 A $500 nonrefundable credit is provided for certain qualifying dependents other than qualifying children. The contribution limit equals the annual gift tax exemption amount ($15,000 for 2018). The earnings on funds in a QTP could be withdrawn taxfree only if used for qualified higher education expenses at eligible schools. Eligible schools included colleges, universities, vocational schools or other post-secondary schools eligible to participate in a student aid program of the Department of Education. The credit was $1,000 per qualifying child and phased out by $50 for each $1,000 of modified AGI over $75,000 for single or HOH, $110,000 for MFJ and $55,000 for MFS. Copyright 2018 Thomson Reuters Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 5
Quickfinder Other Significant Items Child Tax Credit Refundability Affordable Care Act (ACA) Individual Mandate Roth IRA Recharacterizations Deferral Election for Qualified Equity Grants 24(h)(5) and (6) 5000A(c) 408A(d) 83(i) Estate and Gift Tax Exemption 2010(c)(3 Amount Key Individual Tax Provisions (Continued) 2018 2025 To the extent the child tax credit exceeds the taxpayer s tax liability, the taxpayer is eligible for a refundable credit of up to $1,400 (adjusted for inflation after 2018) per qualifying child, and the earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500. Months after 2018 2018 and later Stock attributable to options exercised or RSUs settled Decedents dying and gifts made in 2018 2025 The ACA required individuals, who were not covered by a health plan that provided at least minimum essential coverage, to pay a shared responsibility payment (also referred to as a penalty) with their federal tax return. The amount of the individual shared responsibility payment is permanently reduced to zero. The special rule that allowed IRA contributions to one type of IRA (either traditional or Roth) to be recharacterized as a contribution to the other type of IRA is repealed. Thus, a recharacterization cannot be used to unwind a Roth conversion, but is still permitted with respect to other contributions. A qualified employee can elect to defer, for income tax purposes, recognition of the amount of income attributable to qualified stock transferred to the employee by the employer. The election is available for qualified stock attributable to a statutory option. The election applies for qualified stock of an eligible corporation. A corporation is treated as such for a tax year if: (1) no stock of the employer corporation (or any predecessor) is readily tradable on an established securities market during any preceding calendar year and (2) the corporation has a written plan under which, in the calendar year, not less than 80% of all employees who provide services to the corporation in the U.S. (or any U.S. possession) are granted stock options, or restricted stock units (RSUs), with the same rights and privileges to receive qualified stock. The base estate and gift tax exemption amount is $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple). The refundable additional child tax credit was allowed up to the lesser of the $1,000 credit or 15% of earned income in excess of $3,000. The amount of the penalty is $695 for 2018, indexed for inflation for later years. Roth IRA recharacterizations were allowed anytime before the due date of the individual s income tax return for the year of the conversion. If an employee s right to stock is nonvested at the time the stock is transferred to the employee, under IRC Sec. 83(b) the employee may elect within 30 days of transfer to recognize income in the tax year of transfer, referred to as a Section 83(b) election. RSUs were not eligible for a Section 83(b) election. For 2018, the base estate and gift tax exemption amount was $5.6 million ($11.2 million for a married couple). 6 Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 Copyright 2018 Thomson Reuters
Individual Income Tax Rates Quickfinder Prior law (2018) New law (2018) Over But not over Rate Over But not over Rate Married Filing Joint or Qualifying Widow(er) Married Filing Joint or Qualifying Widow(er) $ 0 $ 19,050 10% $ 0 $ 19,050 10% 19,050 77,400 15% 19,050 77,400 12% 77,400 156,150 25% 77,400 165,000 22% 156,150 237,950 28% 165,000 315,000 24% 237,950 424,950 33% 315,000 400,000 32% 424,950 480,050 35% 400,000 600,000 35% 480,050 39.6% 600,000 37% Single Single $ 0 $ 9,525 10% $ 0 $ 9,525 10% 9,525 38,700 15% 9,525 38,700 12% 38,700 93,700 25% 38,700 82,500 22% 93,700 195,450 28% 82,500 157,500 24% 195,450 424,950 33% 157,500 200,000 32% 424,950 426,700 35% 200,000 500,000 35% 426,700 39.6% 500,000 37% Head of Household Head of Household $ 0 $ 13,600 10% $ 0 $ 13,600 10% 13,600 51,850 15% 13,600 51,800 12% 51,850 133,850 25% 51,800 82,500 22% 133,850 216,700 28% 82,500 157,500 24% 216,700 424,950 33% 157,500 200,000 32% 424,950 453,350 35% 200,000 500,000 35% 453,350 39.6% 500,000 37% Married Filing Separate Married Filing Separate $ 0 $ 9,525 10% $ 0 $ 9,525 10% 9,525 38,700 15% 9,525 38,700 12% 38,700 78,075 25% 38,700 82,500 22% 78,075 118,975 28% 82,500 157,500 24% 118,975 212,475 33% 157,500 200,000 32% 212,475 240,025 35% 200,000 300,000 35% 240,025 39.6% 300,000 37% Notes Copyright 2018 Thomson Reuters Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 7
Quickfinder C Corporations Income Tax Rates Dividends Received Alternative Minimum Tax (AMT) Contributions to Capital S Corporations Conversion to C Corporation Status Electing Small Business Trusts 11(b) Key Entity-Specific Tax Provisions 243 55 118 Contributions to capital after 12/22/17 The corporate income tax rate is changed to a flat 21%. This rate also applies to personal service corporations (PSCs). If the corporation owns at least 20% of another corporation, a 65% dividends received deduction is permitted. Otherwise, the deduction is limited to 50%. If the payor and recipient corporations are members of the same affiliated group, a 100% dividends received deduction is allowed. Corporate AMT is repealed. The term contributions to capital does not include (1) any contribution in aid of construction or any other contribution as a customer or potential customer and (2) any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such). 1371(f) 12/22/17 For distributions of cash by an eligible terminated S corporation, the accumulated adjustments account (AAA) is allocated to such distribution, and the distribution is chargeable to accumulated earnings and profits (AE&P) on a pro rata basis. An eligible terminated S corporation is a C corporation that (1) was an S corporation before 12/22/17, (2) revoked its S corporation election during the two-year period on 12/22/17 and (3) had the same owners on 12/22/17 and the revocation date. 1361(c)(2) 1/1/18 The type of taxpayers who are allowable beneficiaries of Electing Small Business Trusts (ESBTs) is expanded to include nonresident aliens. Graduated tax rates applied, with a top rate of 35% if taxable income exceeded $10 million. PSCs were taxed at a flat rate of 35%. If the corporation owned at least 20% of another corporation, an 80% dividends received deduction was permitted. Otherwise, the deduction was limited to 70%. Affiliated group members were allowed a 100% deduction. AMT was imposed on a corporation to the extent its tentative minimum tax exceeded its regular tax. The tentative minimum tax was computed at the rate of 20% on the AMTI in excess of a $40,000 exemption amount that phased out. Certain small corporations were exempt. The gross income of a corporation does not include any contribution to its capital. A contribution to capital did not include any contribution in aid of construction or any other contribution from a customer or potential customer. For an S corporation that converts to a C corporation, distributions of cash by the C corporation to its shareholders during the post-termination transition period (PTTP) (to the extent of the amount in the AAA) are tax-free to the shareholders and reduce the adjusted basis of the stock. The PTTP is generally the one-year period after the S corporation election terminates. An ESBT may be a shareholder of an S corporation. Generally, the eligible beneficiaries of an ESBT include individuals, estates and certain charitable organizations eligible to hold S corporation stock directly. 8 Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 Copyright 2018 Thomson Reuters
Partnerships Technical Terminations Substantial Built-In Loss Rule Charitable Contributions and Foreign Taxes Copyright 2018 Thomson Reuters 708(b)(1) 743(d) Nonprofit Organizations Excise Tax on Excess Executive Compensation Excise Tax on Investment Income of Private Colleges and Universities Unrelated Business Taxable Income (UBTI) Calculation Key Entity-Specific Tax Provisions (Continued) Quickfinder Transfers of partnership interests 704 Partnership tax years 4960 4968 512(a) The technical termination rule is repealed. The definition of a substantial built-in loss is expanded to also exist if the recipient of the interest would be allocated a net loss in excess of $250,000 upon a hypothetical disposition of all partnership assets in a fully taxable transaction for cash equal to the assets FMV immediately after the transfer of the interest. A partner s distributive share of the partnership s charitable contributions and foreign taxes is taken into account in determining the amount of his allowable loss. However, in the case of a charitable contribution of property with a FMV that exceeds its adjusted basis, the partner s distributive share of the excess is not taken into account. A new 21% excise tax is imposed on tax-exempt organizations that pay excessive compensation to their top executives. The tax applies to the sum of (1) compensation in excess of $1 million paid to a covered employee and (2) any excess parachute payment made to a covered employee. A covered employee is one of the five highest compensated employees of the tax-exempt organization for the tax year or was a covered employee of the organization (or a predecessor) for any preceding tax year after 2016. Special rules apply to compensation paid to licensed medical professionals. A new 1.4% excise tax is imposed on the net investment income of certain private colleges and universities. The college or university must have at least 500 students, more than 50% of which are located in the U.S. In addition, the college or university must have assets (other than those used directly in carrying out the institution s exempt purpose) of at least $500,000 per student. When computing UBTI, losses from one unrelated trade or business may not be used to offset income derived from another unrelated trade or business. Therefore, nonprofit organizations must separately calculate and apply their unrelated business gains and losses. A partnership is considered to terminate for tax purposes if, within a 12-month period, there was a sale or exchange of 50% or more of the partnership s capital and profits interests. A partnership must adjust the basis of its property following the transfer of a partnership interest if it had a substantial built-in loss. A substantial built-in loss existed if the partnership s adjusted basis in the property exceeded its FMV by more than $250,000. In applying the basis limitation on partner losses, IRS regulations did not take into account the partner s share of partnership charitable contributions and foreign taxes. This differed from the rules for S corporation shareholders. In determining UBTI, an organization that operated multiple unrelated trades or businesses aggregated income from all such activities and subtracted from the aggregate gross income the aggregate of deductions. As a result, a deduction from one unrelated trade or business could offset income from another, thereby reducing total UBTI. Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 9
Quickfinder Trusts and Estates Income Tax Rates and Brackets 1(j)(1) and (2) Key Entity-Specific Tax Provisions (Continued) and before 2026 The following four income tax brackets apply to trusts and estates: 10%, 24%, 35% and 37%. The specific brackets and the income levels at which they apply, compared to prior law, are shown in the chart below. The following five tax brackets applied to trusts and estates: 15%, 25%, 28%, 33% and 39.6%. Trust and Estate Income Tax Rates Prior Law (2018) New Law (2018) Over But not over Rate Over But not over Rate $ 0 $ 2,600 15% $ 0 $ 2,550 10% 2,600 6,100 25% 2,550 9,150 24% 6,100 9,300 28% 9,150 12,500 35% 9,300 12,700 33% 12,500 37% 12,700 39.6% Notes 10 Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 Copyright 2018 Thomson Reuters
Key General Business Tax Provisions Quickfinder Expensing and Depreciating Property Section 179 Limits 179(b) For property placed in service in tax years Section 179 Qualifying Property Immediate Expensing of Qualifying Business Assets Luxury Automobile Depreciation Limits Increased 179(f) 168(k) 280F For property placed in service in tax years Property acquired and placed in service after 9/27/17 and before 2023 (2024 for certain property with longer production periods and certain aircraft) Passenger autos placed in service after 2017 The maximum Section 179 deduction and phaseout threshold are increased to $1 million and $2.5 million, respectively. These amounts will be indexed for inflation after 2018. The definition of Section 179 property is expanded to include certain tangible personal property used predominantly to furnish lodging and certain improvements to nonresidential real property (roofs, HVAC, fire protection and alarm systems and security systems). The additional (bonus) first-year depreciation deduction allowed for qualified property is increased to 100% and applies to new and used property. In later years, this first-year deduction phases down as follows: 80% for property placed in service in 2023. 60% for property placed in service in 2024. 40% for property placed in service in 2025. 20% for property placed in service in 2026. For certain property with longer production periods and certain aircraft, the phase down is as follows: 80% for property placed in service in 2024. 60% for property placed in service in 2025. 40% for property placed in service in 2026. 20% for property placed in service in 2027. The definition of qualified property is expanded to include certain qualified film or television productions and qualified live theatrical productions. And while qualified improvement property is removed from the qualified property list in IRC Sec. 168(k), it remains qualified as it is now MACRS property with a recovery period of 20 years or less (see Real Property Recovery Period on Page 12). The annual limit on the amount of depreciation allowed for passenger autos for which bonus depreciation is not claimed for 2018 is $10,000 for the placed-in-service year, $16,000 for the second year, $9,600 for the third year and $5,760 for the fourth and later years. These amounts will be indexed for inflation for autos placed in service after 2018. For passenger autos eligible for bonus depreciation, the increase to the first-year depreciation limit remains $8,000. The maximum Section 179 deduction was $520,000 for 2018. In addition, the qualifying property phase-out threshold was $2,070,000. Such property was not included in the definition of Section 179 property. An additional (bonus) first-year depreciation deduction of 50% was allowed for qualified property placed in service, generally, before 2018. The deduction generally phased down to 40% for property placed in service in 2018, 30% for property placed in service in 2019 and none for property placed in service after 2019. To qualify, the property generally had to be new and be (1) MACRS property with a recovery period of 20 years or less, (2) water utility property, (3) computer software other than computer software covered by IRC Sec. 197 or (4) qualified improvement property. 2018 amounts were not released but the 2017 applicable amounts were: $3,160 for the placedin-service year, $5,100 for the second year, $3,050 for the third year and $1,875 for the fourth and later years. Increased limits applied to certain trucks and vans. Copyright 2018 Thomson Reuters Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 11
Quickfinder Expensing and Depreciating Property (Continued) Farming Equipment Recovery Period Real Property Recovery Period 168(b) and (e) 168(e) and (g) Key General Business Tax Provisions (Continued) Property placed in service Property placed in service General s, Exclusions and Credits Interest 163(j) Expense Net Operating Losses (NOLs) Domestic Producers Like-Kind Exchanges 172 NOLs arising in tax years 199 1031 Exchanges completed The recovery period of new machinery or equipment used in a farming business (other than any grain bin, cotton ginning asset, fence or other land improvement) is five years. Use of the 150% declining balance depreciation method for these assets is no longer required. The separate definitions of qualified leasehold improvement, qualified restaurant and qualified retail improvement property are eliminated. A 15-year recovery period (20 years for ADS) and straight-line method applies for qualified improvement property. Qualified improvement property means any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service. In addition, the ADS recovery period for residential rental property is shortened to 30 years. Regardless of its form, every business is subject to a net interest expense disallowance. Net interest expense in excess of 30% of the company s adjusted taxable income is disallowed. Adjusted taxable income is generally defined as taxable income computed without regard to deductions for depreciation, amortization, depletion or the Section 199 deduction. However, taxpayers (other than tax shelters) with average annual gross receipts for the prior three years of $25 million or less are exempt from this limitation. NOLs cannot be carried back but carry forward indefinitely. The NOL deduction is limited to 80% of taxable income. Exceptions: The two-year carryback rule still applies to certain losses incurred in a farming business, and property and casualty insurance companies can carry their NOLs back two years and forward 20 years to offset 100% of taxable income. The domestic producers deduction is repealed. Like-kind exchanges are allowed only with respect to real property that is not held primarily for sale. However, under a special transition rule, the like-kind exchange rules continue to apply to exchanges of personal property if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before 12/31/17. The recovery period of such property was seven years and 150% declining balance depreciation was required. Qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property were 15- year MACRS property. The ADS recovery period for residential rental property was 40 years. Interest paid or accrued by a business generally is deductible in the computation of taxable income subject to a number of limitations. An NOL generally could be carried back two years and carried over 20 years to offset taxable income in such years. Extended carryback periods were allowed for NOLs attributable to certain specified liability, farming and casualty and disaster losses. A deduction equal to 9% of the income earned from certain manufacturing and other production activities conducted within the U.S. was allowed. Nontaxable like-kind exchanges were available to exchanges of both real and personal property held for productive use in a trade or business or for investment. 12 Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 Copyright 2018 Thomson Reuters
Key General Business Tax Provisions (Continued) General s, Exclusions and Credits (Continued) Research and Experimental (R&E) Expenses Fringe Benefits Excessive Employee Compensation Credit for Employer-Paid Family and Medical Leave 174 Amounts paid or incurred in tax years after 2021 274 Amounts paid or incurred 162(m) 45S Quickfinder and before 2020 Specified R&E expenses must be capitalized and amortized ratably over five years (15 years if R&E is conducted outside of the U.S.). Specified R&E expenses include costs for software development and exploration for ore and other minerals. The following changes are made to the fringe benefit rules: s for entertainment expenses are disallowed. The 50% limit on the deductibility of business meals is expanded to those provided in an inhouse cafeteria or otherwise on the employer s premises. The deduction for employee transportation fringe benefits is eliminated. However, the exclusion from income for such benefits received by an employee is retained. The deduction for transportation expenses that are the equivalent of commuting for employees is eliminated, except as provided for the safety of the employee. For amounts paid or incurred after 2025, an employer s deduction for expenses associated with meals provided for the convenience of the employer on its business premises, or provided on or near the employer s business premises through an employer-operated facility that meets certain requirements, is disallowed. The exceptions to the deduction limit for excess employee compensation attributable to commissions and performance-based compensation are repealed. Note: These changes do not apply to written binding contracts that were in effect on 11/2/17 (unless the contract is materially modified). Businesses can claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave if the rate of payment is 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. All qualifying full-time employees have to be given at least two weeks of annual paid family and medical leave. Taxpayers currently deducted R&E expenses paid or incurred in connection with a trade or business. Alternatively, taxpayers could capitalize their R&E expenditures and amortize them ratably over the useful life of the research (not to exceed 60 months) or a period of 10 years. Entertainment expenses directly related to (or associated with) the active conduct of a trade or business generally are 50% deductible. Similarly, a deduction for any expense for food or beverages generally is allowed for 50% of the otherwise deductible amount, subject to some exceptions. Certain employee fringe benefits are deductible by the employer and excluded from the employee s gross income. A deduction limit of $1 million generally applied for compensation paid by a publicly-held corporation during any tax year to a covered employee. However, there were exceptions for commissions, performance-based compensation (including stock options), payments to a tax-qualified retirement plan and amounts that are excludable from the executive s gross income. Copyright 2018 Thomson Reuters Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 13
Quickfinder Accounting Method Changes Inclusion Year 451(b) Cash Method of Accounting Long-Term Contracts 448(c), 471(c), 263A(i) 460(e) Key General Business Tax Provisions (Continued) Contracts entered into after 2017 An accrual method taxpayer subject to the all events test for an item of gross income must recognize such income no later than the tax year in which such income is taken into account as revenue in an applicable financial statement (AFS) or another financial statement under rules specified by the IRS, but there is an exception for taxpayers without such a financial statement. This rule is subject to an exception for long-term contract income under IRC Sec. 460. If an accounting method change is needed to conform to this new rule, such change will be treated as initiated by the taxpayer and made with IRS consent. The availability of the cash method is expanded to include taxpayers (other than tax shelters) that satisfy a $25 million gross receipts test, regardless of whether the purchase, production or sale of merchandise is an income-producing factor. In addition, such taxpayers are not required to account for inventories under IRC Sec. 471 or 263A. Instead, they may treat inventories as nonincidental materials and supplies or conform to their financial accounting treatment of inventories. The exemption from the requirement to use the Percentage of Completion Method (PCM) is expanded to contracts for the construction or improvement of real property if the contract (1) is expected to be completed within two years and (2) is performed by a taxpayer that meets a $25 million gross receipts test. For an accrual basis taxpayer, an amount is included in gross income when all the events have occurred that fix the right to receive such income and the amount thereof can be determined with reasonable accuracy (that is, when the all events test is met), unless an exception permits deferral or exclusion, or a special method of accounting applies. A C corporation and a partnership that has a C corporation as a partner generally may not use the cash method. An exception is made if the entity s average annual gross receipts do not exceed $5 million for all prior years. Taxpayers maintaining inventory generally must use the accrual method, subject to exceptions for certain taxpayers with gross receipts of $1 million or less or, for certain industries, $10 million or less. Construction companies with average annual gross receipts of $10 million or less in the prior three years are generally exempt from the PCM. Notes 14 Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 Copyright 2018 Thomson Reuters
for 245A Foreign-Source Portion of Dividends Deemed Repatriation Tax Foreign Intangible Income Key International Tax Provisions Quickfinder Distributions made after 2017 965 Last tax year of a deferred foreign income corporation which begins before 2018 250 A 100% deduction is provided for the foreign-source portion of dividends received from 10%-owned foreign corporations. No foreign tax credit or deduction is allowed for any taxes paid or accrued with respect to a dividend that qualifies for the deduction. The deduction is available only to C corporations and does not apply to Regulated Investment Companies (RICs) or REITs. If a domestic corporate shareholder sells foreign corporation stock held for one year or more, any amount that is treated as a dividend for purposes of IRC Sec. 1248 is treated as a dividend for purposes of the special dividends received deduction. In addition, if a domestic corporate shareholder benefits from the foreign dividends received deduction, it must reduce its adjusted basis in the stock of the 10%-owned foreign corporation by the amount of the deduction. This is done only for the purpose of determining losses on future sales or exchanges of the stock. To transition to a new territorial system, a deemed repatriation tax is imposed. This requires U.S. shareholders owning at least 10% of a foreign subsidiary to include in income their pro rata share of the subsidiary s post-1986 E&P. The portion of E&P made up of cash or cash equivalents is taxed at 15.5%, while noncash assets are taxed at 8%. The U.S. shareholder may elect to pay the deemed repatriation tax over eight years. The payment for each of the first five years equals 8% of the net tax liability. The sixth installment equals 15% of the net tax liability. The seventh installment increases to 20% of the net tax liability, while the remaining balance of 25% is due in the eighth year. Under a special rule for S corporations, S corporation shareholders are allowed to elect to maintain deferral on such foreign income until the S corporation (1) changes its status, (2) sells substantially all of its assets or (3) ceases to conduct business. Deferral also may be maintained until the electing shareholder transfers its S corporation stock. C corporations are allowed a reduced tax rate on foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). FDII is generally intangible income that is derived from serving foreign markets. GILTI is the domestic corporation s portion of foreign earnings that exceed an amount equal to a standard rate of return on the foreign company s assets. GILTI does not include effectively connected income, Subpart F income, foreign oil and gas income or certain related party payments. The effective tax rate on FDII is 13.125% in tax years and before 2026 and 16.406% after 2025. The effective tax rate on GILTI is 10.5% in tax years and before 2026 and 13.125% after 2025. Copyright 2018 Thomson Reuters Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 15
Quickfinder Base Erosion 59A Anti-Abuse Tax (BEAT) Related Party Payments 267A Key International Tax Provisions (Continued) A base erosion payment means any amount paid or accrued by a taxpayer to a foreign person that is a related party of the taxpayer and with respect to which a deduction is allowed. Certain corporations with average annual gross receipts of at least $500 million are required to pay a BEAT. The tax is generally 10% (12.5% for tax years after 2025) of the modified taxable income of the taxpayer over an amount equal to the regular tax liability of the taxpayer for the year. Members of affiliated groups that include a bank or securities dealer will be taxed at 11%, increasing to 13.5% after 2025. Amounts paid or incurred for services are excluded from the BEAT if those services meet the requirements for the services cost method under IRC Sec. 482. s for certain related-party payments are denied. These include interest or royalty payments to a related party if (1) the related party does not report the payments as income under the laws of the resident country or (2) the related party is allowed a deduction with respect to the payments. These are generally known as hybrid transactions. Notes 16 Quickfinder Handbooks Tax Cuts and Jobs Act of 2017 Copyright 2018 Thomson Reuters