On December 22, 2017, President Trump signed the “Tax Cuts and Jobs Act” (“The Act”) into law. The Act constitutes the most massive reform of the Internal Revenue Code (IRC) since 1986. The Act generally sunsets the individual provisions starting in 2026 while the business provisions are for the most part permanent.
This article is intended to highlight certain selected provisions of the Act.
The Act maintains a seven-bracket system with individual brackets of 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top rate applies to single filers with income over $500,000 and to married individuals filing jointly with income over $600,000. It also nearly doubles the standard deduction to $12,000 for single filers to $24,000 for married individuals filing jointly.
The cost of these measures is offset by the disallowance of certain tax benefits. The Act suspends the personal exemption deduction and the miscellaneous deductions. It also significantly limits the ability to deduct state and local taxes by capping the maximum deduction from state and local sales, income or property taxes to $10,000 ($5,000 if married filing separately) and capped the home-mortgage interest deduction to interest on $750,000 of acquisition indebtedness. The Act suspends home equity interest deduction through 2025. In addition, the Act retains the individual alternative minimum tax (“AMT”).
Regarding businesses generally, the Act increases the average gross receipt threshold to $25 million for the mandatory use of the accrual method of accounting. Thus, more small businesses can now use the cash method of accounting. The Act also relaxes the rules to account for inventory as material and supplies.
The Act doubles the expensing deduction for properties in the year placed in service to $1 million (Section 179 Deduction) subject to certain limitations. More importantly, the Act generally provides the bonus depreciation deduction to 100% for qualified properties (and is not limited to new properties) through 2022 (80% for 2023, 60% for 2024, 40% for 2025 and 20% for 2026).
On the offset side, the Act disallows deductions for entertainment and certain fringe benefits, generally limits net interest expenses to 30% of the business’s adjusted taxable income, and a deduction from net operating losses to 80% of taxable income, and narrows like-kind exchange deferral to real property. 50% of business meals can be deducted under the Act.
CORPORATE TAX PROVISIONS
The Act reduces the corporate tax rates from the graduated tax rates of up to 35% to a flat 21% rate (as of January 2018) and repeals the corporate AMT. This reduction constitutes the largest reduction in the United States’ history and is aimed to boost the U.S. economy, as the United States previously had the highest corporate tax rate among OECD members.