Question

How did the 2018 Tax Reform Bill address Corporate Tax Reform? Highlight and

Analyze the major provisions.

Answer 1

Introduced as the Tax Cuts and Jobs Act, the “Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal year 2018,” P.L. 115-97, was signed into law by the President on December 22, 2017.  

1. Corporate Tax Rate Reduction and the Alternative Minimum Tax Repeal-  The top corporate tax rate has been permanently reduced by 40 percent from 35 to a flat tax rate of 21 percent. The prior four corporate tax rates, with a top rate applicable to income over $10 million, have been reduced to a single flat rate thereby converting the corporate progressive tax system into a flat tax system.

2. Capital Contributions and Dividends to Corporations- Certain capital contributions from state and local governments will no longer be excluded from income. 70 and 80 percent dividend received deduction percentages for corporations have been reduced to 50 and 65 percent, respectively, under the new law.

3. Debt versus Equity and the New Limitation on Deducting Interest Expense- The recent section 385 regulations were identified by the Administration for possible elimination. That elimination determination was put on hold after statements that new statutory provisions may eliminate or mitigate the need for the regulations. he new provision limits the deduction of business interest by any taxpayer to the sum of (1) business interest income; (2) 30 percent of the adjusted taxable income of the taxpayer; and (3) the floor plan financing interest of the taxpayer for the taxable year.  

4. Corporate Net operating losses- Under current law, section 172 allows businesses to offset current taxable income by any NOL carry forward or carry back, subject to several limitations. Although no limitation is placed on the use of NOLs under section 172, the AMT as it applies to businesses effectively limits utilization of NOLs to an offset of 90 percent of taxable income

5. Bonus Depreciation and Full Expensing- Under current section 168(k), an allowance for 50 percent “bonus” depreciation gives businesses an immediate deduction for half the purchase price of certain qualified property in addition to the first year tax depreciation expense (calculated after the reduction by 50 percent).