Below is a brief executive summary of domestic business and individual highlights of the recently enacted Tax Cuts and Jobs Act. We’ve attempted to condense nearly 750 pages of statute into an easy-to-use and brief synopsis of some of the most widely encompassing provisions. More interpretations, regulations and insights will be developed as the Act is scrutinized going forward, and we will attempt to keep you informed of the important insights and technical corrections as they come out.
This is obviously not meant to be a complete summary but merely a “Cheat Sheet” for quick reference. Please contact Kevin T. O’Connor or Peggy S. Beistel of our Cleveland office for more in-depth discussion and analysis.
THE 2017 TAX CUTS AND JOBS ACT
Summary of Domestic Business and Individual Provisions
THE ACT
General Business
- Repeals the corporate alternative minimum tax (AMT) for tax years beginning after Dec. 31, 2017.
- Reduces the corporate tax rate to a flat 21% for tax years beginning after Dec. 31, 2017.
- Effective for tax years beginning after Dec. 31, 2017, taxpayers with average gross receipts of less than $25 million (indexed for inflation) for the prior three taxable years are exempt from the requirement to account for inventories under U.S. Code §471, regardless of entity structure or industry.
- Effective for tax years beginning after Dec. 31, 2017, taxpayers with average gross receipts of less than $25 million (indexed for inflation) for the prior three taxable years are exempt from the Uniform Capitalization (UNICAP) rules, regardless of entity structure or industry.
- Initially allows full expensing for property placed in service after Sept. 27, 2017, reducing the percentage that may be expensed for property placed in service after Jan. 1, 2023.
- Provides a 15-year recovery period for qualified improvement property.
- Limits the deduction for net interest expenses incurred by a business to the sum of business interest income, 30% of the business’s adjusted taxable income, and floor plan financing interest.
- Businesses with average annual gross receipts of $25 million or less are exempt from the limit. Disallowed interest could be carried forward indefinitely.
- Deduction for income attributable to domestic production-related activities is repealed for all taxpayers for tax years beginning after Dec. 31, 2017.
- Increases the amount that a taxpayer may expense under U.S. Code §179 to $1,000,000. The Act also increases the phase-out threshold to $2,500,000. These amounts are indexed for inflation for tax years beginning after 2018.
- Limits the Net Operating Loss (NOL) deduction to 80% of taxable income and provides that amounts carried to other years be adjusted to account for the limitation for losses arising in tax years beginning after Dec. 31, 2017. The Act eliminates carrybacks (except for farming NOLs, which would be permitted a two-year carryback) and allows unused NOLs to be carried forward indefinitely.
- No deduction is allowed for entertainment, amusement, or recreation; membership dues for a club organized for business, pleasure, recreation, or other social purposes; or a facility used in connection with any of the above.
- Deduction for 50% of food and beverage expenses associated with operating a trade or business generally is retained.
- Treats gain or loss from the disposition of a self-created patent, invention, model or design, or secret formula or process as ordinary in character.
- Specified research or experimental expenditures, including software development expenditures, are capitalized and amortized ratably over a five-year period (15 years if attributable to research conducted outside of the United States).
- Provides a 20% credit (to be claimed ratably over a five-year period beginning in the tax year when the structure is placed in service) for qualified rehabilitation expenditures with respect to a historic structure.
- The Act generally is effective for amounts paid or incurred after Dec. 31, 2017, with a transition rule for specifically qualified buildings.
- Disallows a deduction for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if the payments are subject to a nondisclosure agreement. Effective for amounts paid or incurred after the date of enactment.
- Repeals the commission and performance-based compensation exceptions to the $1 million yearly limit on the deduction for compensation paid with respect to a covered employee of a publicly traded corporation.
- Reduces the amount of the individual shared responsibility payment enacted as part of the Affordable Care Act to zero (i.e. the so-called Individual Mandate).
Pass-Throughs
- For tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, taxpayers who have domestic “qualified business income” (QBI) from a partnership, S corporation, or sole proprietorship are entitled to deduction of the lesser of such QBI or 20% of taxable income. The deduction reduces taxable income, not adjusted gross income, and eligible taxpayers are entitled to the deduction whether or not they itemize.
- The 20% deduction is also allowed for a taxpayer’s qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. Specified agricultural and horticultural cooperatives would also qualify for the 20% deduction (special rules apply). Trusts and estates are eligible for the 20% deduction.
- Taxpayers with pass-through income from specified service businesses in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services are not eligible for the deduction.
- Neither “W-2 wage” limit (see below) or the prohibition on specified services businesses applies to a taxpayer with taxable income not exceeding $157,500 ($315,000 in the case of a joint return). These limitations are fully phased in for a taxpayer with taxable income in excess of the threshold amount plus $50,000 ($100,000 in the case of a joint return). The deduction expires after Dec. 31, 2025.
- QBI is all domestic business income other than investment income (e.g., dividends, other than qualified REIT dividends and cooperative dividends), investment interest income, short-term capital gains, long-term capital gains, commodities gains, foreign currency gains, etc.
- The deduction is generally limited to the greater of either: (a) 50% of the W-2 wages paid with respect to the qualified trade or business, or (b) the sum of 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property.
- “W-2 wages” of a partnership, S corporation, or sole proprietorship would be the sum of wages subject to wage withholding, elective deferrals, and deferred compensation paid by the business during the calendar year ending during the taxable year. Thus, if the partnership, S corporation, or sole proprietorship does not pay W-2 wages, and the second limitation does not apply, the owner or taxpayer’s deduction would be zero. For this purpose, qualified property is generally defined as tangible property subject to depreciation under U.S. Code §167, held by a qualified trade or business, and used in the production of qualified business income.
- Effective for tax years beginning after Dec. 31, 2017, the Act disallows an excess business loss of a taxpayer other than a C corporation. However, an excess business loss is treated as part of the taxpayer’s net operating loss carryover to the following year. An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount ($500,000 for married taxpayers filing jointly; $250,000 for all other taxpayers, indexed for inflation). The limitation applies at the partner or S corporation shareholder level. The limitation expires after Dec. 31, 2025.
- For tax years beginning after Dec. 31, 2017, a three-year holding period applies in the case of certain net long-term capital gain with respect to any applicable partnership interest held by the taxpayer, notwithstanding the rules of U.S. Code §83 or any election in effect under §83 (i.e. the so-called Carried Interest).
INDIVIDUALS
The Act:
- Has seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These brackets apply to tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.
- Increases the standard deduction to the following amounts:
- $24,000 (joint return or a surviving spouse)
- $18,000 (unmarried individual with at least one qualifying child)
- $12,000 (for single filers)
- Retains the enhanced standard deduction for the blind and elderly that is available under current law.
- Suspends the deduction for personal exemptions for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.
- Increases the AMT exemption amounts for individuals in U.S. Code §55(d)(1) for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, as follows:
- $109,400 for married taxpayers filing jointly or for surviving spouses;
- $70,300 for single taxpayers; and
- $54,700 for married taxpayers filing separately.
- Suspends all miscellaneous itemized deductions that are subject to the 2% floor under present law for tax years beginning after Dec. 31, 2017.
- Suspends the overall limitation on itemized deductions for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.
- Reduces the mortgage interest deduction to interest on $750,000 of acquisition indebtedness interest for debt incurred after Dec. 15, 2017. The $1 million limitation remains for older debt. The deduction is not limited to interest on a taxpayer’s principal residence.
- Individual taxpayers may elect to deduct state and local sales, income, or property taxes up to $10,000 ($5,000 for a married taxpayer filing a separate return) for tax years beginning after Dec. 31, 2017, and beginning before Jan. 1, 2026.
- Provides that individuals may deduct State, local, and foreign property taxes and State and local sales taxes when paid or accrued in carrying on a trade or business and generally disallows a deduction for individual State and local income, war profits, and excess profits taxes.
- Reduces the medical expense deduction floor to 7.5% of adjusted gross income and eliminates the minimum tax preference for tax years beginning after Dec. 31, 2016, and ending before Jan. 1, 2019.
- Eliminates the current above-the-line deduction for alimony payments. The Act does not require the payee receiving alimony payments to include alimony payments into income. This provision is effective for divorce decrees, separation agreements, and certain modifications entered into after 2018.
- Increases the child tax credit is to $2,000.
- Provides that elementary and secondary school expenses of up to $10,000 per year are qualified expenses for qualified tuition programs. The provision applies to distributions made after Dec. 31, 2017 (i.e. so-called Section 529 Plans).