Rate Change – Tax rate drops to 21% for corporations.
Investors in partnerships and S Corporations will be able to deduct, as an itemized deduction, 20% of pass-through income from their taxable income. Dividends, interest, and capital gains are not entitled to this special rate. Special rules apply if investor’s income exceeds $315,000 (joint returns). Maximum tax rate on pass-through income will be 29.6% on individual returns. Expires in 2026.
Depreciation – Benefits Expanded.
100% expensing for the first $1M in equipment and software purchases. Phase-out of benefit when business income exceeds $2.5M. 100% expensing option only lasts for five years. Recapture occurs if business use drops to 50%. Annual expensing amount for vehicles used in business is increased.
Corporate Alternative Minimum Tax – Eliminated in 2018.
Promoter’s “Carried Interest” in a Partnership – Holding Period Extended.
To qualify for long term capital gains, the interest must be held for three years.
Corporate Dividend Received Deduction – Limited
Deduction reduced to 50% (for less than 20% control) and 65% (for 20% to 79.99% control).
Interest Expense – Limited.
Interest expense cannot exceed 30% of earnings before interest, taxes, depreciation and amortization. In five years, interest expense cannot exceed 30% of earnings before interest and taxes. Small businesses (gross receipts of $25M or less) have some exemptions. For partnerships, the limitations apply at the partnership level. No pre-2018 debt is grandfathered.
Net Operating Losses – Limited.
Net operating losses (NOL) cannot be carried back to generate a refund. Instead they must be carried forward. The NOL that can be used in any year is limited to 80% of taxable income. All other limitations on NOLs remain in place.
Method of Accounting – Expanded.
Businesses that have less than $25M in income, but do not have inventories, may use the cash method of accounting. Small businesses will not have keep inventories. Other businesses must follow book accounting rules for income inclusion if have audited financials.
International Income – Rate Reduced but Income subject to tax Increased.
Deferred income from overseas subsidiaries (post-1986 E&P that was not CFC income when earned) will be subject to a 15.5% tax on liquid assets (8% tax on illiquid assets) on 2017 return. Election available to pay tax in installments.
On an ongoing basis, dividends from foreign subsidiaries will qualify for a reduced rate. Very complicated rules will apply to prevent domestic tax base erosion. Rules benefit “C” corporations.
Like-Kind Exchanges – Tax-free swaps are limited to real estate.
Entertainment Expenses – Mostly eliminated.
Strassburger McKenna Gutnick & Gefsky can help you with your income tax planning. Please contact John Kelly, email@example.com or Dave Pollack, firstname.lastname@example.org at (412) 281-5423 for help with tax matters.
This post is provided for informational purposes only. Nothing in this post creates an attorney client relationship. Many of the rules shown above have complicated exceptions that are not discussed.