New Federal Tax System to Become Law
Dec 20, 2017
The first overhaul in 30 years of the nation’s tax code is set to become law this week after the House and Senate sent legislation to President Trump. The Tax Cuts and Jobs Act (H.R. 1) is expected to be signed by the president before the end of the year and will take effect beginning in 2018.
Key business provisions of the legislation include:
- Corporate tax rate: Cuts corporate income tax rate to 21 percent from 35 percent, beginning Jan. 1, 2018.
- Pass-through businesses: This change affects many small businesses that currently use individual tax brackets to determine how much tax to pay. The new law creates a 20 percent deduction for the first $315,000 of qualified business income for joint filers of pass-through businesses such as partnerships and sole proprietorships. For income above that threshold, the legislation phases in limits that produce an effective marginal tax rate of no more than 29.6 percent.
- Corporate minimum tax: Repeals the 20 percent federal corporate alternative minimum tax, which was set up to ensure that profitable corporations pay at least some tax.
- Capital expensing: Allows businesses to immediately write off, or expense, the full value of equipment for five years, then gradually eliminates 100 percent expensing over a five-year period beginning in year six.
- Interest deduction limit: Caps business deduction for debt interest payments at 30 percent of taxable income, without regard to deductions for depreciation, amortization or depletion.
- Clean energy: Leaves tax credits for producing electricity from wind, biomass, geothermal, solar, municipal waste and hydropower in place.
Foreign Business Provisions:
- Territorial system: Exempts U.S. corporations from U.S. taxes on most of their future foreign profits, ending the present worldwide system of taxing profits of all U.S.-based businesses, no matter where the profits are earned.
- Repatriation: Sets a one-time mandatory tax of 8 percent for illliquid assets and 15.5 percent for cash and cash equivalents on $2.6 trillion in U.S. business profits currently held overseas. That foreign cash pile was created by a rule that allowed foreign profits to be tax deferred if they were not brought into the U.S., or repatriated, a tax rule that would be rendered obsolete by the territorial system.
- Anti-base erosion measures: Includes provisions to prevent companies from shifting profits out of the United States to lower-tax jurisdictions abroad. These include an alternative minimum tax on payments between U.S. corporations and foreign-related companies and limitations on the shifting of corporate income through transfers of intangible property, including patents.
Click here for additional analysis and findings, including changes to the individual tax code, provided by the Tax Foundation. The Economic Alliance will offer programming to our members on how this law will affect businesses. Be on the lookout for those sessions beginning in early 2018.