On December 22, 2017, President Trump signed into law the Tax Cut and Jobs Act (TCJA), the biggest reform to US taxes in several decades. The tax changes impact every corner of the economy, and every American taxpayer and business. Over the next few weeks, we will summarize important information about the major provisions of the new tax laws, and how they may impact business owners and their preparations for exit. The highlight of our analysis will be an in-depth webinar about exit planning under the new tax laws, to be broadcast on Tuesday, January 23rd at 2:00 pm ET.
Click here to register for our upcoming Exit Planning Under the New Tax Laws webinar.
But first, here is a summary of the major provisions of TCJA:
Selected Changes Impacting Businesses
- C-corporation income tax rates are permanently cut from 35% to 21% starting in 2018. This represents the largest one-time reduction in corporate tax rates in US history.
- The Alternative Minimum Tax (AMT) for C-corporations is eliminated.
- “Pass through” companies (typically S-corporations and LLCs) can now deduct 20% of certain types of non-salary business income, bringing the top marginal tax rate down from 39.6% under current law to 29.6%. Specific service industries, such as health, law, and professional services, with income over $315,000 (married filing jointly) are excluded. This provision expires after 2025.
- Full and immediate expensing of short-lived capital investments for five years. Increases the Section 179 cap from $500,000 to $1 million.
- The current unlimited deduction for net interest expense for C-corporations is capped at 30% of earnings before interest and taxes. For the first four years, the cap applies to 30% of EBITDA. Thereafter, the cap is applied to EBIT.
- Eliminates net operating loss carrybacks and limits carryforwards to 80% of taxable income.
- Income tax brackets and rates have been lowered. There will still be seven brackets, but their cutoff points will be lower: 10, 12, 22, 24, 32, 35, and 37%.
- An increase in the standard deduction. Single filers will get a $12,000 deduction; heads of household, $18,000; and joint filers, $24,000. The personal exemption, though, has been discontinued. These provisions sunset in 2025.
- Property taxes, sales tax, and/or state/local income taxes paid are now limited to a combined $10,000 deduction per year.
- Mortgage interest deduction lowered. This deduction, which can be applied to the acquisition of either first or second homes, is limited to a debt of $750,000. Interest on HELOC loans will not be deductible. For those who have existing loans, the current $1,000,000 cap is retained.
- Expanded use of 529 education savings plans. Taxpayers can now distribute up to $10,000 per year from 529 accounts for K-12 private schools and to help with homeschooling costs.
- Estate tax lifetime exemption amount has doubled to about $11 million per eligible taxpayer, and therefore $22 million for married couples.
These are just some of the changes included in this sweeping tax reform. For the next few weeks, we will provide additional analysis of the new tax laws, and discuss how they impact business owners and exit planning. To receive timely news and articles on exit planning, subscribe now to our weekly Exit Playbook™ Blog.
Disclaimer – This article is for educational purposes and does not constitute tax advice. Readers should consult their tax advisor to evaluate this information and determine how it may apply in their situation.