Tax Cuts and Jobs Act Summary

November 7, 2017

On November 2, 2017, the House Ways and Means Committee presented the comprehensive tax reform bill, "Tax Cuts and Jobs Act (“The Act”)". While there are many procedural steps and likely significant revisions ahead before ultimately becoming law, we have summarized the following important income tax changes proposed in the legislation.

Tax Cuts and Jobs Act: Proposed Changes to Business Income Taxation:

The effective date for the proposed changes are for tax years beginning after December 31, 2017, unless otherwise noted.

  • Repeal of Alternative Minimum Tax (AMT)
    The Act would repeal the Alternative Minimum Tax and offer taxpayers 50% of any current AMT credit carryforward in 2019, 2020, and 2021; a taxpayer would be able to claim a refund of all remaining carryforward credits in 2022.
  • Modification of C Corporation Tax Rates
    • The corporate tax rate would become a flat rate of 20%, rather than the current graduated rates of 15% to 35%.
    • A flat tax rate of 25% rather than 35% for personal service corporations (attorneys, accountants, architects, et al).
  • New Business Income Tax Rate of Individuals, including Pass-through Income
    • A maximum tax rate of 25% would apply for business income taxed at the individual level, including income from s corporations and partnerships. To avoid abuse, the Act provides for additional rules and definitions for calculating the income subject to the 25% rate. For simplicity, taxpayers can elect 30% of distributive income to be taxed at the 25% business income tax rate with the remaining 70% taxed at their ordinary personal rate.
    • The business income percentage would increase for capital intensive businesses.
    • Personal service businesses are not eligible for the 25% business income tax rate.
  • Increased Asset Depreciation Expensing Limitations
    • Section 179 depreciation expensing would increase from $510,000 to $5 million, with the phase-out increasing from $2 million to $20 million. This provision would be effective for tax years after 2017 through tax years beginning before 2023.
    • Bonus depreciation expensing would increase to 100% of the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. Unlike prior bonus provisions, eligible assets are not required to be original use, but rather the taxpayer's first use (i.e. used assets may qualify).
  • Cash Method of Accounting
    The $5 million average gross receipts threshold requiring the accrual method of accounting would increase to $25 million (defined as small businesses) regardless of whether the business maintains inventory.
  • Modification of Long-term Contract Accounting
    Similar to the modification of the cash method rules, contractors also under the $25 million gross receipts threshold are not required to use percentage of completion, but are permitted to use the completed contract method or any other permissible exempt contract method.
  • Limitation of Interest Expense Deductions
    The Act would limit the deduction for net interest expenses incurred by a business in excess of 30% of the business's adjusted taxable income before depreciation, amortization, and depletion. This provision does not apply to businesses under $25 million gross receipts OR real estate entities.
  • Limitation of Net Operating Loss (NOL) Deductions
    The Act would decrease the current NOL carryforward and carryback utilization from 100% to 90% of a taxpayer's taxable income for newly incurred NOLs. NOLs incurred prior to the tax period beginning 2017 will carryforward and be utilized at 100%.
  • Repeal of the Domestic Production Activities Deduction (DPAD)
    The Act would repeal all deductions allowed for Domestic Production Activities.
  • Disallowance of Corporate Entertainment Expenses
    The Act would disallow expenses incurred for entertainment, but the deduction for 50% of business meals would remain.
  • Repeal of Certain Federal Tax Credits
    Many Federal tax credits would be repealed including, but not limited to, the Employer-Provided Child Care Credit, Rehabilitation Credit, and the Work Opportunity Tax Credit.
  • Like-Kind Exchanges
    The rule for allowing deferral of gain on like-kind exchanges would be modified to allow for exchanges only with respect to real property. Personal property like-kind exchanges would not be allowed except for exchanges transitioned at December 31, 2017.
  • There are no proposed changes to the Research & Experimentation Tax Credit. This remains a permanent fixture in the tax code.

Tax Cuts and Jobs Act: Proposed Changes to Individual, Estate, Gift, and Trust Taxation

The effective date for the proposed changes are for tax years beginning after December 31, 2017, unless otherwise noted.

  • Condensed Tax Brackets
    The number of tax brackets would shrink from seven to four; 12%, 25% (beginning at $90,000 for joint returns), 35% (beginning at $260,000 for joint returns), and 39.6% (beginning at $1 million for joint returns). In addition, there are phase-out provisions of the 12% rate.
  • Capital Gains Rates
    The capital gains rates of 0%, 15% and 20% remain unchanged.
  • Increased Standard Deduction
    The standard deduction would increase to $24,000 for joint filers (and surviving spouses), $12,000 for single filers, or $18,000 for single filers with one qualifying child.
  • Repeal of Personal Exemptions
    The Act would repeal the deduction for personal exemptions.
  • Modification of Child Tax Credit
    The Child Tax Credit would increase from $1,000 per child to $1,600 per child and would include a $300 credit for any non-child dependents. Additionally, the phase-out would increase to $230,000 and $115,000 for joint and single filers, respectively.
  • Repeal of Certain Nonrefundable Credits
    Certain Federal tax credits would be repealed including, but not limited to, the Adoption Credit, the credit associated with mortgage credit certificates, and the credit for plug-in electric vehicles.
  • Modification of Educational Savings Accounts
    New contributions to Coverdell accounts would be prohibited, however tax-free rollovers from Coverdell into Section 529 plans would be permitted. Additionally, elementary and high school expenses up to $10,000 per year would be considered qualified expenses under a Section 529 plan.
  • Repeal of Certain Deductions
    Deductions for student loan interest, qualified tuition, moving expenses, and dependent care assistance expenses and medical expenses, among others, would be repealed.
  • Decreased Mortgage Interest Deduction
    Under the current law, mortgage interest is fully deductible up to $1 million of indebtedness; under the proposed legislation, this limitation would decrease to $500,000 for homes purchased in tax periods beginning after December 31, 2017.
  • Decreased State and Local Tax Deductions
    State and local property taxes will be deductible up to $10,000. However, state and local income taxes and sales taxes would be nondeductible.
  • Modification of Gain on Sale of Residence Exclusion
    The exclusion of gain on the sale of a joint-filing taxpayer's principal residence will remain at $500,000 ($250,000 for other filers); however the principal residence requirement will increase from two of the previous five years to five of the previous eight years. Dollar for dollar phase out of this exclusion would commence when the taxpayer's gross income exceeds $500,000 ($250,000 other filers). This exclusion, under the provisions, would only be allowable once every five years.
  • Increase of Estate and Gift Tax Credit
    The Federal Estate and Gift Tax Unified applicable exclusion amount increased to $10 million with index for inflation likely to equal $11.2 million total per person. Additionally, the Federal estate tax would be repealed for decedents dying after 2023 and would lower the gift tax rate from 40% to 35% for gifts made after 2023.
  • Repeal of Alimony Income & Deductions
    Taxpayers paying or receiving alimony will no longer need to include their respective payments as income/deduction items under the new provisions.
  • Repeal of Individual Alternative Minimum Tax (AMT)
  • Repeal of Exclusion From Self-Employment Tax for Certain Taxpayers
    The bill repeals currently exempt income to self- employment taxes including rental real estate income, income allocated to limited partners and limited liability company non-manager partners and s corporation owners’ share of income taxed at  ordinary tax rates under proposed pass-through taxation regime.
  • Although there were expectations that the following would change, these items have remained unchanged:
    • 401(k) contributions
    • Passive activity rules under IRC §469
    • 3.8% Net Investment Income Tax (NIIT)

How may we help you?


Accounting News