Changes to the Taxation of US Corporations under the Tax Cuts and Jobs Act
By Howard Bakrins, Kutchins, Robbins & Diamond, Ltd. (KRD)
2018 brings in sweeping reforms to the US taxation of corporations. Among the many changes are lower corporate tax rates and changes to some corporate deductions, as well as changes to the taxation of foreign subsidiaries of US corporations.
The new tax legislation (H.R. 1), provides for a flat 21% tax corporate income tax rate beginning in 2018, and it makes this new rate permanent. This is a significant decrease from the maximum tax rate of 35% prior to 2018. Under the new law, the 80% and 70% corporate dividends received deduction are reduced to 65% and 50% respectively. In addition, the corporate Alternative Minimum Tax (AMT) is eliminated.
The new legislation also includes a deduction of up to 20% qualifying business income from pass-through entities, such as partnerships, LLCs and S corporations.
The new law also provides for a 100% ‘bonus’ deprecation deduction for qualifying property placed in service after 27 September 2017 and before 1 January 2023 (1 January 2024 for longer production property and certain aircraft). Bonus deprecation amounts are phased-out after that date. Equally important is that the legislation also removes the original use of the property requirement, allowing bonus depreciation to be claimed on purchases of used equipment.
Unfavourable changes to corporate deductions include a limitation of net interest expense to 30% of adjusted taxable income for companies with average gross receipts of USD 25 million or more. The law also eliminates the Domestic Production Activities Deduction (DPAD), and makes changes to the tax treatment of meals & entertainment, research & development expenditures (after 2021) and net operating losses.
The new law also establishes a territorial system for the taxation of foreign income that replaces the prior-law system of taxing US corporations on the foreign earnings of their foreign subsidiaries only when the earnings are distributed. The new legislation creates a permanent tax exemption for US corporations on the foreign earnings when those earnings are distributed (provided the corporation owns 10% or more of the foreign corporation). Thus, with certain exceptions, repatriation of foreign subsidiaries’ earnings by US corporations will no longer be taxed in the US beginning in 2018.
Generally, however, all cumulative post-1986 deferred foreign earnings, whether distributed or not, will be subject to a one-time US tax on the transition to this territorial tax system. Cumulative deferred foreign earnings that are in liquid form will be subject to a one-time 15.5% tax and non-liquid deferred foreign earnings will be subject to a one-time 8% tax. This tax can be paid over an 8 year instalment period. The one-time tax applies equally to both C and S corporations with foreign subsidiaries; however, S corporations in the US can elect to defer taxation on the cumulative deferred earnings of their foreign subsidiaries.
Howard BakrinsKutchins, Robbins & Diamond, Ltd. (KRD), Chicago (IL), USA
T: +1 847 240 1040
Published: January 2018 l Photo: Rosana - Fotolia.com