Question

Congress is constantly making changes to the tax law. Search on the Internet to find a recent change to the tax law affecting corporations. Describe the tax law change and discuss how it would be affecting the tax provisions of US companies.

Answer 1

I have to admit, I dreaded reading about and listening to all the commotion in 2018 about the new tax reforms. It was nerve-racking. But now that the regulations are in effect, I have dedicated some time to learning about these changes and to figuring out how they impact my clients and myself. Below are the eight most relevant tax law changes.

1. Increased Standard Deduction

The standard deduction was increased to $12,000 for single taxpayers (up from $6,350 in 2017) and to $24,000 for taxpayers who are married filing jointly (up from $12,700 in 2017).

2. Elimination of Personal Exemptions

You can forget about the race to find dependents to claim on your tax return. For example, if you were supporting your brother and getting a tax saving when claiming him on your return, that will no longer be an incentive to continue supporting him. Starting in 2018, the previous personal exemptions of $4,050 each for yourself and your dependents have been eliminated.

3. Higher Child Tax Credit and Increased Income Phaseout Threshold

The child tax credit was increased from $1,000 to $2,000 in 2018. Meanwhile, the phaseout income limits were increased from $110,000 to $400,000 for married filing jointly and from $75,000 to $200,000 for single taxpayers. Just when I would have been able to qualify for this credit, one of my sons turned 17!

4. A Decrease in the Amount of Mortgage Eligible for Interest Deduction

For mortgages issued on or after Dec. 15, 2017, you can only take the mortgage interest deduction on mortgage amounts of up to $750,000. This was lowered from $1,000,000 prior to Dec. 15, 2017.

5. Lower State and Local Tax (SALT) Deduction

Double ouch! This one hurts me personally. Starting in 2018, the SALT deduction for property and income tax is limited to $10,000. This is down from no limit in prior years.

6. The Most Welcomed 20 Percent Pass-Through Business Deduction

Taxpayers who own sole proprietorships, LLCs, partnerships, and S corporations might qualify for a 20 percent deduction of their pass-through income from these businesses.

Pass-through income refers to non-W-2 income generated from the business. For example, if your business generates $50,000 in profits after subtracting all expenses (including your W-2 salary), this $50,000 is treated as pass-through income in your tax return.

That money is eligible for the 20 percent deduction. But there are income limits on this deduction for professional services firms.

Seek the guidance of a tax professional for assistance with this particular aspect of your tax return.

7. Bye-Bye, Miscellaneous Deductions

If you, like me, took advantage of the moving and unreimbursed employee expense deductions in prior years, you will need to do some planning next time you consider moving for work or spending your own money to benefit your employer.

Starting in 2018, the following expenses are no longer deductible: casualty and theft losses, unreimbursed employee expenses, tax preparation expenses, moving expenses.

8. Calculator, Please!

Many of us will need to brush up our math skills. I love numbers, but this is a little more than what I asked for. First, with the increased standard deduction and the decrease in allowed itemized deductions (hint: SALT), many of us will find ourselves trying to figure out whether to even bother gathering and calculating itemizable deductions.

Second, we can get into the game of planning when to incur those itemizable expenses in an attempt to bulk more of them into a given year and reduce them in another. This will give us the ability to claim the standard deduction one year, but potentially benefit from itemizing deductions in another.

Lastly, for the professional services firms with phaseout income threshold for the 20 percent deductions, I expect we will look for strategies to legally push income to future years in order to fall within the threshold for the deduction.

Tax Reform Substantially Changes US International Provisions for Businesses

• David Springsteen
• 1/11/2018

The Tax Cuts and Jobs Act contains U.S. international tax provisions that significantly affect both inbound and outbound multinational companies. These are designed to make our international tax system more competitive, drive domestic growth, and protect the U.S. tax base.

The new tax reform law intends to bring the U.S. international tax system more in line with other Organization for Economic and Cooperative Development (OECD) member countries. The legislation also aims to protect the U.S. tax base by imposing certain base erosion provisions which limit or tax payments between U.S. and foreign related parties.

This has also been an area of focus by the OECD through its base erosion and profit shifting (BEPS) initiative. It has yet to be determined whether the base erosion and anti-abuse tax (BEAT) and the foreign-derived intangible income (FDII) provisions will be challenged by the World Trade Organization as unfair trade practices and illegal export subsidies.

Participation exemption system for taxation of foreign income

The new participation exemption system is implemented through a 100 percent dividends-received deduction for domestic C corporations receiving dividends from 10 percent specified foreign corporations. As the United States moves to a territorial system of taxation, there is a transition tax on deferred foreign earnings for all U.S. persons that are 10 percent shareholders in a specified foreign corporation.

Foreign earnings that have not been previously subject to U.S. taxation held in cash and cash equivalents are subject to a 15.5 percent rate, while non-cash amounts attract an 8 percent rate. The tax on the deferred foreign earnings is eligible to be paid over eight years on an escalating scale, and S corporation shareholders may elect to defer the tax until a triggering event (e.g., sale of S corporation stock, liquidation of an S corporation, etc.).

Rules related to passive and mobile income

There is now a 37.5 percent deduction for foreign-derived intangible income for U.S. corporations. In addition, there is a global intangible low-taxed income (GILTI) inclusion provision for income earned in offshore controlled foreign corporations that exceeds a minimum rate of return on tangible assets. This is applicable to all U.S. persons owning these foreign entities.

These provisions employ the “carrot and stick” approach to ensure that moveable intangible income is taxed at a minimum rate of 13.125 percent for FDII and 10.5 percent for GILTI. The FDII provision is similar to “patent box” regimes used by foreign jurisdictions to encourage locating and maintaining intangible property within their jurisdiction by providing a favorable tax rate on income associated with intangibles.

Prevention of base erosion

The BEAT applies to U.S. corporations with $500 million or more in average gross receipts and make base erosion payments that exceed 3 percent of deductible expenses. It operates similarly to the repealed corporate alternative minimum tax (AMT) regime, where the taxpayer pays the higher of its regular tax liability or the liability calculated under the BEAT.

The BEAT adds back the base erosion payments and calculates the liability at a 10 percent rate. Base erosion payments include any amount accrued or paid to a related foreign person that reduces U.S. taxable income but does not include cost of goods sold (COGS), which is a reduction to income.

Notable provisions not included in the final law

Various proposed versions of the tax reform bill included new or removed existing international provisions that ultimately didn’t become part of the final legislation. Most notable among these were the creation of Section 163(n) (which would have limited U.S. interest deductions if U.S. indebtedness exceeded 110 percent of the worldwide group’s indebtedness) and the repeal of IC-DISC. Though IC-DISC is alive and well, consideration should be given to its future benefit under certain scenarios as the benefit may be diminished because of the new pass-through deduction.

Effective dates of new provisions

The international provisions are generally applicable for tax years beginning after December 31, 2017, while the transition tax is applicable to tax years beginning in 2017. In addition, several provisions also have rate changes that are triggered for tax years beginning after December 31, 2025.