2017 to 2018: A Quick Comparison of US Tax Law
By: Brigitte Schultz
Brigitte Schultz is an undergraduate student in the Eli Broad School of Business at Michigan State University.
Approved by Congress on December 22, 2017, as part of the Tax Cuts and Jobs Act (TCJA), the new tax law affects not only individuals, but also businesses. Specifically, corporate tax rates have been impacted by this new law, going from a range of 15%-39% in 2017 to a flat rate of 21% for 2018.
This has a huge positive impact on corporations and big businesses economically. The goal of this change is to help make the United States more competitive with other countries worldwide.
Foreign Earnings and Repatriation of Foreign Cash Balances
Along with this, the new law changes regulations for foreign income so that now there is a 100% deduction for profits that come from 10% foreign owned corporations. This applies if the U.S. corporation is a shareholder in the foreign company.
Specified Corporation is defined as not being a controlled foreign corporation that any U.S. corporation is a shareholder. In the case that the dividend received by the U.S. corporation is a hybrid dividend it is not covered under this deduction. An example of this would be a dividend from a controlled foreign corporation that the 10% foreign owned portion already has received the aforementioned deduction. In line with this law change, there is no tax credit allowed with any dividend that qualifies for this deduction.
As a response to the large number of U.S. Corporations holding money overseas under the worldwide tax system, there is now a one-time repatriation rate of 15.5% for liquid assets and 8% for illiquid assets.
Corporations receive another break because the new law removes the combination of having to pay U.S. taxes and the worldwide tax system rates by changing the requirement to a territorial system. This specific change to the law is important to note for companies, such as Apple (Sym: AAPL), who have large amounts of money held overseas to encourage them to bring it back to the U.S.
Pass through entities, bonus depreciation, qualified property and much more
In the case of sole proprietorships and pass through entities, they are now subject to individual tax rates, but minus a deduction of up to 20%. This means that owners of these pass-through businesses can claim up to 20% of this income as a deduction before the regular tax rates are applied to the overall amount.
There are specific regulations depending on the type of company and its size that determine the amount of deduction available per qualified business income amount, such as for professionals who have a smaller amount available to deduct.
The new law also expands the bonus depreciation, which allows companies to deduct 100% of the cost of qualified property purchases. This change also increases the amount of property that can be included in this provision and prolongs it until 2027, but with a 20% decrease in depreciation per year for the next 5 years.
Another new concept that was added into the TCJA is that companies are now able to expense up to $1,000,000 per year of qualified property placed into service for a company investing in up to $2,500,000 of new property. This is an increase from the previous provision which allowed immediate expenses of up to $500,000 for companies with new property being put into use up to $2,000,000.
Another big impact that this law implements is that for small businesses, those with less than $25,000,000 of annual sales, can use simpler accounting techniques. This allows firms to participate in the method of cash accounting which previously was not allowed because it is viewed by some to be less accurate than the more complex method, accrual accounting. Most companies still must use the accrual accounting method because of the requirement to keep track of inventory. This creates more flexibility for beginning businesses.
Another provision of the new law is the change of limits on business interest deductions. What this means now is that any company that meets the $25,000,000 standard is also exempt from the limitations that are placed on interest deductions. For anyone who is not exempt, the limitation is the sum of the business’s interest income plus 30% of the adjusted taxable income for the current period plus the floor plan financing interest for the next year.
The new law also repealed some provisions from the previous years including the two-year carryback provision and the provision that limits the net operating loss deduction to 80% of taxable income. However, it does still allow for net operating losses to be carried forward indefinitely. Similar exchanges are now limited to exchanges of real property not held mainly for sale. Though there is an exception that can be used for businesses that exchanged the property on or before December 31, 2017. This act also repealed the deduction that could previously be taken on domestic production activities. And no longer can entertainment expenses be counted for deductions, including any activity that can be considered entertainment, membership dues for clubs, organizations, or any facility used for entertainment purposes.
The tax law relating to individuals has kept with the prior seven tax bracket standard even though there was discussion of changing this amount. Each individual bracket is now subject to lower tax rates for the current year and the income numbers defining each bracket have changed slightly.
Below is the tax change for 2018 documented for single filers; there is also a separate table for married taxpayers filing jointly. The personal exemption has been removed for both single and joint filers, but the standard deduction has been raised to accommodate for this change.
Overall, this new law implements many changes for businesses with strong benefits for large and small businesses. The losses of multiple deductions that previously could be claimed is a down side, but the increase in usability of cash accounting, additional 20% deduction for pass through entities and big tax breaks for corporations are benefits. The lowering of the individual tax rates and restructuring of the tax brackets will also provide taxpayers with more flexibility.