The House Ways and Means committee released the Tax Cuts and Jobs Act. This finally gives the American people insight into the tax reform that President Trump and the Republicans have been talking about since April. The Act is being touted as the first major tax reform since the Tax Reform Act of 1986. The Ways and Means committee is indicating that this will save the average American family $1,182 in taxes. In addition, due to simplification, an individual or family will be able to file their taxes on a form as simple as a postcard.
This Act has a long journey to make it through Congress and ultimately President Trump. What may be signed into law by President Trump will most likely not be exactly what was released today, but this at least gives us a road map to the tax reform the Republicans would like enact.
Below is a highlight of some of the provisions that are contained in the Tax Cuts and Jobs Act. There are many other provisions included within the Act, along with many details and limitations to the provisions included in the act. If planning, make sure the Act is fully reviewed, and plan cautiously - remember this is not law yet.
- Reduction and simplification of individual tax rates to four brackets of 12 percent, 25 percent, 35 percent and 39.6 percent versus the seven current brackets. The income levels for the four brackets are as follows:
- Alimony payments would not be deductible by the payor nor includible in income of the payee.
- No deduction for moving expenses would be allowed
- Exclusion for gain from sale of principal residence
Taxpayer must own and use home as a principal residence for at least 5 out of the last 8 years in order to qualify for the $500,000 joint filers ($250,000 for other filers) exclusion of gain on the sale of a principal residence
- New law limits exclusion to once every 5 years vs. every 2 years currently.
- Exclusion is phased out for joint taxpayers with adjusted gross income over $500,000 ($250,000 for single filers). Currently there is no phase out of the exclusion
- Under the new law an IRA contribution could not be re-characterized as a Roth contribution
- Estate and Generation-Skipping transfer taxes
Increase of basic exclusion from $5,000,000 to $10,000,000 indexed for inflation.
- Repeal of estate and generation-skipping transfer taxes in 2023, while maintaining a step-up basis in estate property
- Replaces current graduated rate structure with a top rate of 35 percent with a flat rate of 20 percent
- Allows for 100 percent expensing of qualified property placed in service after Sept. 27, 2017 and before Jan. 1, 2023. Also the provision expands the property eligible beyond original use property to used property that is used by the taxpayer for the first time
- Increased Section 179 limits to allow up to $5 million of property to be immediately expensed with an increased phase out limit of $20 million. This would apply to tax years after 2017 and before 2023
- Allows for the following accounting method simplification for entities with less than $25 million in gross receipts
- Cash method of accounting, including entities with inventory
- Exemption from the Section 263A UNICAP rules
- Exception to percentage-of-completion method
- Exemption from the new interest limitation provisions below
- Generally, limits the amount of interest deductible to 30 percent of the business's adjusted taxable income, which is taxable income computed without regard to interest expense, interest income, net operating losses, depreciation, amortization and depletion
- Repeals the ability to like kind exchanges for personal property
- Repeals the Section 199 Domestic Production Activity Deduction
- No deduction would be allowed for entertainment, amusement or recreation activities, facilities, or membership dues relating to such activities or other social purposes. The current 50 percent limitation would still apply to food or beverages and to qualifying business meals, with no deduction allowed for other entertainment expenses.
- Will treat the gain or loss from the disposition of a self-created patent, invention, model or design (whether or not patented) or secret formula or process as an ordinary gain or loss
- Changes to the following business credits:
- Repeal of the employer-provided child care credit
- Repeal of the rehabilitation credit
- Repeal of the work opportunity tax credit
- New markets tax credit - no new credits will be allocated after 2017
- Repeal of the credit for expenditures to provide access to disabled individuals
- Modifications of the tip credit
- Changes to the treatment of net operating losses (NOL)
- An NOL will only offset up to 90 percent of the taxpayer's taxable income
- For losses after 2017, with the exception of a one year carryback for small businesses, NOLs will only be carried forward
KEY FOREIGN PROVISIONS
- 100 percent dividend deduction on dividends to a US corporate shareholder that owns 10 percent or more of the foreign corporation.
- Taxation of pre-2018 offshore earnings of a foreign subsidiary of a US shareholder that owns at least 10 percent of the foreign subsidiary. The tax would be 12 percent of the earnings that are in cash or cash equivalents and 5 percent for earnings that have been re-invested in the foreign subsidiaries other assets. The US shareholder will have an election to pay the tax for a period of up to 8 years. If the US shareholder is an S corporation, the tax will not apply until the corporation ceases to be an S corporation, substantially all of the assets are sold or liquidated, the S corporation ceases to exist or conduct business or stock in the S corporation is transferred.
Stay tuned as we will keep you informed as this tax reform continues through the legislative process. For more information contact your UHY LLP professional at one of our many locations.