Earlier this week the Trump Administration along with House Republicans published the Tax Cuts and Jobs Act. This legislation is based on the tax reform framework issued by the White House in September and focuses on delivering significant reform to the tax system. The legislation includes several changes aligning with promises made by the president, including a corporate tax rate reduction, elimination of the Alternative Minimum Tax and the allowance for immediate expensing of capital assets. The changes are designed to make the tax system less complex and more business friendly. While it’s almost certain the legislation will be changed before it’s passed into law, it does provide insight into what changes are in store. To help clients, prospects and others understand the impact on their business, JLK Rosenberger has provided a summary of key changes below.
Key Business Tax Reform Changes
- Corporate Tax Rate – The legislation is proposing a permanent reduction of the corporate tax rate from 35% to 20%. The Trump Administration has argued that the United States has the fourth highest tax rate on businesses in the world. According to the Tax Foundation, the mean average business tax rate for industrialized countries is 21.97%. This reduction is designed to make the U.S. tax structure more competitive and business friendly.
- Alternative Minimum Tax – Under the proposed legislation, the entire Alternative Minimum Tax (AMT) structure would be eliminated. It was originally implemented to prevent wealthy taxpayers from using loopholes to avoid paying taxes. However, since its inception in 1969, it has become an obstacle for middle-income taxpayers and needed to be addressed.
- 25% Pass Through Tax – Under existing regulations, individuals who own a business are required to pay taxes on income earned by their business at the corresponding individual rate. However, the new pass-through entity tax (maximum of 25%) means that impacted business owners would no longer need to worry about their individual tax rate. There will be rules in place to specify what types of business can claim the rate to ensure the lower tax rate is not abused.
- Repatriation of Foreign Earnings – A key issue for many American businesses has been the tax expense of bringing foreign earnings back to the United States. To address this concern, the proposed legislation calls for repatriated earnings to be taxed at 12%.
- Expensing Capital Investments – Businesses will be allowed to fully expense the costs of capital assets such as equipment, machinery and other items in the year purchased. Under current regulations, short-lived capital investments must be expensed over a five-year or longer period to receive the full tax benefit. In addition, the legislation increases Section 179d amounts from $500,000 to $5M and the phase-out threshold from $2M to $20M. This change provides a significant increase in the tax benefits for making commercial energy-efficient improvements.
- Elimination of the Entertainment Deduction – Under existing regulations, businesses are permitted to make a 50% deduction for qualifying entertainment expenses. The proposed legislation will not permit deductions for entertainment, amusement, recreational or membership dues and fees. The 50% deduction for meal expenses will remain unchanged.
- 1031 Like Kind Exchange – This often method will be changes to limit the tax deferral on gains to real property only. All other exchange transactions would no longer be permitted.
- Elimination of Other Key Incentives – Multiple tax credits and deductions businesses currently rely on would be eliminated in the new tax structure. More notable incentives on the chopping block include the Section 199 deduction, Work Opportunity Tax Credit, New Market and New Markets Credit. Notably the Research & Development and the Low-Income Housing Credit will remain unaffected.
It appears there are many changes in store for 2018 and beyond. Whether this legislation becomes law or not, it clearly reveals the intent of the administration to make sweeping changes. If you have questions about the legislation or need assistance with year tax planning or compliance, JLK Rosenberger can help. For additional information please call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.