New Tax Law

Tax Rate

C corporate tax rate 21% (effective January 1, 2018)

• Fiscal year end filers may have blended rate for 2018

AMT

Corporate alternative minimum tax (AMT) is repealed for tax years beginning after December 31, 2017.

Credits

Business Credits - modifies, but does not eliminate, the rehabilitation credit and the orphan drug credit, while limiting the deduction for FDIC premiums. Research and development credit is retained without modification from current law.

• Modifies rehabilitation credit to provide 20% historic credit ratably over 5 years, repeals credit for pre-1936 property
• Work Opportunity Tax Credit, New Markets Tax Credit, Low Income Housing Tax Credit - Retains current law for WOTC, NMTC, and LIHTC, however, modifies rehabilitation credits for old and/or historic buildings
• Orphan drug credit survived, but modified - Reduces credit to 25% and generally would need to exceed 50% of the average expenses over a three-year period. Reduced credit applies to amounts paid or incurred in tax years beginning after 12/31/17

Deductions

Dividends Received Deduction - Reduces the deduction for dividends received from other than certain small businesses or those treated as “qualifying dividends” from 70% to 50%. Reduces dividends received from 20% owned corporations from 80% to 65%

Eliminates deduction for certain fringe benefit expenses

• Business entertainment activities and membership dues; transportation or commuting expenses are not excludable from income or deductible by the employer
• Employee achievement awards may not be deducted or excluded from income if the award is paid in cash, gift cards, meals, lodging, tickets, securities, or other similar items
• No longer exempts employer-provided eating facilities from 50% deduction limitation; in 2026, deductions are completely disallowed for employer-provided eating facilities and meals provided for the convenience of the employer

Expands the Section 162(m) $1 million deduction limit that applies to compensation paid top executives of publicly held companies for TY beginning after 12/31/17

• Covered employees would to include the CFO and all executives once identified
• Eliminates the performance-based compensation exceptions and extends deduction limitation to deferred compensation paid to executives who previously held a covered employee position
• Expands applicability of the deduction limitation to certain foreign private issuers and private companies that have publicly traded debt
• Provides a transition rule for compensation paid pursuant to a plan under a written binding contract that is in effect on 11/2/17 and is not materially modified thereafter

Interest Expense

Interest Expenses - Caps net interest deduction at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years, and 30 percent of earnings before interest and taxes (EBIT) thereafter. Limits deduction to net interest expense that exceeds 30% of adjusted taxable income (ATI). Initially, ATI computed without regard to depreciation, amortization, or depletion. Beginning in 2022, ATI would be decreased by those items. Regulated utilities generally excepted.

Energy Provisions

Energy provisions - Does not repeal any conventional energy tax credits and leaves untouched the deductibility of intangible drilling costs, taxpayers’ eligibility to take percentage depletion and the designation of certain natural resource related activities as generating qualifying income under the publicly traded partnership rules

Deductions

Pass-through Income – 20% deduction for pass-through income limited to the greater of (a) 50 percent of wage income or (b) 25 percent of wage income plus 2.5 percent of the cost of tangible depreciable property for qualifying businesses, including publicly traded partnerships but not including certain service providers. Limitations (both caps and exclusions) do not apply for those with incomes below $315,000 (joint), and phase out over a $100,000 range.

• Allows individual taxpayers to deduct 20% of domestic “qualified business income” (QBI) from a partnership, S corporation, or sole proprietorship (“qualified businesses”) subject to certain limitations and thresholds. Trusts and estates may take the deduction. Effective for tax years beginning after 12/31/17 and before 1/1/26
• QBI for a tax year means the net amount of domestic qualified items of income, gain, deduction, and loss with respect to a taxpayer’s qualified businesses. “Qualified businesses” does not include specified services trades or businesses such as accounting, law, health, several other professions, service businesses related to investing, but does include engineering and architecture trades
• Deduction is limited for taxpayers with income above $315,000 (mfj) to the greater of 50% of the W-2 wages, or the sum of 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property. Limitation fully phased-in for taxpayers with income of $415,000 and above (mfj). For taxpayers with income from specified service businesses, deduction starts being phased out at $315,000 (mfj) income amount and fully phases out over a $100,000 range (mfj) at $415,000 (mfj) income amount
• Other key changes include repeal of partnership technical termination rules; a rule imposing a three-year holding period to treat capital gain as long-term capital gain for certain partnership interests held in connection with the performance of certain services; a rule limiting taxpayers (other than C corporations) ability to deduct business losses for tax years beginning after 12/31/17 and before 1/1/26, with excess business losses carried forward.

Other Details

• Disallows active pass-through losses in excess of $500,000 for joint filers; $250,000 for all others (sunsets 12/31/25)
• Tax gain on sale of a partnership interest on look-thru basis
• Charitable contributions and foreign taxes taken into account in determining limitation on allowance of partner’s share of loss
• Expands the definition of substantial built-in loss for purposes of partnership loss transfers
• Modifies treatment of S corporation conversions into C corporations
• Recharacterization of certain gains on property held for fewer than 3 years in the case of partnership profits interest held in connection with performance of investment services