The Trump administration’s success in pushing through the new tax legislation marks a major achievement of it’s first year. But, according to one source, “the hurried, largely furtive drafting, and rush to passage at the end of 2017, have helped obscure the new tax regime’s real impact.” Focusing on the politics has muddled the sweeping repercussions of the Tax Cuts and Job Act (TCJA), which brings significant, even revolutionary changes to income tax beyond simply closing loopholes or adjusting rates.
In this two-part series we will review TCJA’s impact on corporations and pass-through entities (businesses taxed at the individual or proprietor level). The Joint Committee on Taxation has estimated TCJA’s revenue cost over a decade at $1.5 trillion: 60 percent for individuals, 22 percent for corporations, and 18 percent for pass-through entities. (But note this number indicates tax cuts offset by tax increases.) The impetus for corporate reforms is to encourage and incentivize corporate investment to nurture productivity gains and better wages for workers. It tempers the high marginal rate that led to moving money throughout the world; and it addresses the problem of taxing corporations’ international income, which led to U.S. corporations shifting their headquarters to other countries and stockpiling cash in offshore jurisdictions.
Five major changes to the corporate tax code are:
Reducing the statutory corporate tax rate from 35 percent to 21 percent.
Modifying the tax treatment of capital expenditures on equipment. Rather than deducting these investments over time according to depreciation schedules, workers can now “expense” these investments in the same year they were purchased—lowering reported income in the year of the expenditure.
Shifting focus to taxing only domestic profits; rather than taxing corporations on income from around the world, then providing credits for taxes paid abroad. The flip side is that foreign profits held abroad, to defer tax obligations, are now subject to tax.
Limiting the deduction of interest at the corporate level to 30 percent of a corporation’s operating profit.
Eliminating the corporate alternative minimum tax (AMT), which makes corporates pay a minimum tax of 20 percent if breaks make their tax bill too low. Kevin Brady, the House Ways & Means Committee Chairman, told CNBC the AMT “undermines many of the pro-growth and pro-American provisions in the tax code.”
In our next post, we’ll explore the implications of these changes. In the meantime, we are here to guide your business in understanding the tax code, its changes and challenges, and how it can best work for you. Visit us at TYSLLP.com.
Harvard Magazine, May/June 2018: “Tax Reform, Round One”
Freakonomics podcasts: “Why the Trump Tax Cuts are Terrible/Awesome,” April 11, 2018 and April 18, 2018