TAX ALERT (USA) – US Tax Cuts & Jobs Act
On November 2, 2017, the US Congress House Ways and Means Committee unveiled the Republican tax reform plan called the Tax Cuts & Jobs Act. The bill aims to simplify the Internal Revenue Code and introduce tax savings for the average American family. Although it is unlikely that the legislation will make it through Congress unscathed, it does provide a more detailed blueprint of the tax reforms that the Republicans would like to enact. Below are highlights of the proposed changes:
Tax Reform Proposals for Individuals
- Consolidation of the current seven tax brackets into four, with a bottom rate of 12% and a top marginal rate of 39.6%.
- Increase in the standard deduction to $24,000 (from $12,700) for married taxpayers filing jointly, $18,000 (from $9,350) for head of household filers and $12,000 (from $6,350) for single filers.
- Elimination of the personal exemption.
- Increases the child tax credit from $1,000 to $1,600 and introduces a new $300 credit for other dependants in the home.
- In regards to deductions, it caps mortgage interest deduction at $500,000 of principal for new home purchases (current deduction is unchanged for current homeowners), caps property tax deduction at $10,000, eliminates deductions for state and local taxes, preserves the deduction for charitable donations but eliminates many of the other itemized deductions such as the medical expense deduction, tax preparation fee deduction, deduction for student loan interest, moving expense deduction and itemized deduction for unreimbursed employment expenses.
- Elimination of alternative minimum tax.
- Increases the estate tax exemption from the current $5.6 million to $10 million (which is indexed for inflation), with the estate tax to be eliminated after 6 years.
Tax Reform Proposals for Businesses
- Reduction of the top corporate tax rate from 35% to 20%.
- Income from pass through entities such as LLCs, partnerships and S-corps will be subject to a flat tax rate of 25%, subject to anti-abuse rules.
- Immediate expensing of the cost of new investments in short lived capital assets (currently subject to “bonus” depreciation) for 5 years. Section 179 expensing increases from $500,000 to $5 million and the phase out threshold increases from $2 million to $20 million for 5 years.
- Limitation on the deduction for net interest expense incurred by C corporations to 30% of earnings before interest, taxes, depreciation and amortization with a 5 year carry forward. Businesses with gross receipts under $25 million would be exempt.
- Net operating losses (NOL) will be carried forward indefinitely but the deduction of NOLs will be limited to 90% of current year taxable income. The bill repeals NOL carrybacks with a 1 year exception for small businesses and farms in certain cases.
- Eliminates the deduction under Internal Revenue Code §199 for domestic production.
- The deferral of gain on like-kind exchanges would be revised to allow for like-kind exchanges only with respect to real property.
- Elimination of the deduction for entertainment, amusement or recreation activities, or membership dues relating to those activities or other social activities. The current 50% deduction for food and beverage expenses would be maintained but no deduction would be allowed for entertainment expenses.
- Eliminates corporate alternative minimum tax.
- A 100% exemption for dividends received from a foreign subsidiary in which a U.S. parent owns at least 10%.
- Payments made from US corporations to a related foreign corporation will be subject to a new 20% excise tax unless the income is included by the US corporation as effectively connected.
- Foreign profits that are currently deferred will be subject to a deemed repatriation tax at a rate of 12% for cash and cash equivalents and 5% for profits that have been reinvested in the foreign subsidiaries other assets.
The full bill is available using the following link:
To learn more or if you have any questions regarding the above information, please contact your Facet Advisors professional, or call us at 604-534-3004.