Summary of Changes in 2017 Tax Reform Bill

Summary of Changes in 2017 Tax Reform Bill 

Congress has passed a final version of the tax reform bill, which now is on its way to the President’s desk for signature. Following are some key tax reform provisions of the tax bill:

For individual taxpayers:

• The current seven-bracket structure remains, but the income thresholds and current rates of 10, 15, 25, 28, 33, 35 and 39.6 percent change, with rates under the Act set at 10, 12, 22, 24, 32, 35 and 37 percent, effective Jan. 1, 2018. The top individual tax rate of 37 percent applies for couples with taxable income of $600,000 or more and individuals with taxable income of $500,000 or more.
• Retention of the individual AMT, but with higher exemption amounts ($109,400 for joint filers) and increased phaseout thresholds ($1 million for joint filers).
• Elimination of most itemized deductions other than charitable deductions, home mortgage interest deductions (with the cap lowered from $1 million to $750,000 for new mortgages by joint filers on first or second homes), and state and local income, sales, and property tax deductions (combined cap of $10,000).
• Elimination of the so-called Pease limitation on itemized deductions.
• A (near) doubling of the standard deduction to $12,000 for individuals and $24,000 for joint filers.
• A doubling of the child credit to $2,000 ($1,400 of that being refundable), and permission to use Section 529 accounts to save for certain elementary and secondary education expenses as well as for higher education. Graduate students also may continue to exempt the value of reduced tuition from their income.
• Elimination of the interest deduction on home equity loans.
• Repeal of the Affordable Care Act’s individual mandate.
• An allowance for medical expense deductions in excess of 7.5 percent of Adjusted Gross Income (“AGI”) for 2017 and 2018 (then returning to those in excess of 10 percent).
• Retention of the estate tax, with a doubling of the estate tax exemption thresholds to approximately $11 million and $22 million, with continued inflation indexing after Dec. 1, 2019 (but reverting to pre-Act law after 2025).
• Retention of the current law’s gain recognition rules for sales of securities allowing investors to identify which securities are being sold.
• An increased holding period for long-term capital gains with respect to gains attributable to so-called “carried interest” to three years.

For businesses:

• A corporate tax rate permanently lowered to 21 percent, effective Jan. 1, 2018.
• A territorial system of taxation for corporations, subject to new base erosion rules, including a base erosion and anti-avoidance tax (BEAT) and foreign minimum tax rules on global intangible low-taxed income (GILTI).
• A deduction for corporations on foreign-derived intangible income (FDII), intended to reduce the effective tax rate on certain income from export transactions.
• A one-time repatriation tax on corporate earnings held overseas, applying different rates to liquid assets (15.5 percent) and illiquid assets (8 percent), and payable over eight years in back-loaded installments.
• Repeal of the corporate alternative minimum tax (AMT) and the Section 199 domestic manufacturing deduction, with rules allowing for the refunding of prior-year AMT credits.
• Retention of the research and development credit along with a requirement that research expenditures paid or incurred after Dec. 31, 2021, be capitalized and amortized over 5 years (or 15 if incurred outside of the U.S.).
• Limitations on interest deductions for large businesses to the total of interest income plus 30 percent of “adjusted taxable income” (roughly EBITDA through 2021 and EBIT thereafter), with unlimited carryforwards of unused deductions.
• Limitations on net operating loss (NOLs) deductions to 80 percent of taxable income for losses incurred after 2017.
• Allowance of current deductions for the cost of new investments in qualified depreciable tangible assets (including used property new to a taxpayer) acquired and generally placed in service between Sept. 27, 2017, and Jan. 1, 2023 (with a phasedown for property placed in service in years subsequent to 2022 and before Jan. 1, 2028).
• A new timing rule that accelerates the inclusion of items of income for certain accrual-method taxpayers to when the income is taken into account for financial statement purposes. The rule would not apply to items subject to a special method of accounting (such as the installment method) but would apply to original issue discount.
• An increase to $1 million in Section 179 expensing for smaller businesses.
• Repeal of certain exceptions to the current Section 162(m) limitations on executive compensation, and imposition of a new excise tax on certain excess compensation received by executives of tax-exempt organizations.
• Elimination of deductions for certain entertainment expenses but retention of the 50 percent deduction for food and beverages through 2025.
• Retention of the low-income housing tax credit and new markets tax credits.
• Modification of the 20 percent historic rehabilitation tax credit, requiring that the allowable credit be taken ratably over five years.
• A 20 percent deduction (reducing the maximum marginal rate to 29.6 percent) on certain pass-through domestic-sourced (including from Puerto Rico) business income from sole proprietorships, partnerships and Subchapter S corporations and from qualified REIT or cooperative dividends. Estates and trusts also are eligible to claim the deduction. Noncorporate taxpayers are not permitted to deduct business losses in excess of business income plus $500,000 (for joint return filers).
• Repeal of the like-kind exchange rules, except for real property.

Source: Analysis by BakerHosteler