In the past 12 months (starting late December 2017), we have seen perhaps the most significant changes to tax laws since the last major tax reform in 1986. These changes came from all three branches of the government. Congress passed the “Tax Cuts and Jobs Act of 2017” (“TCJA”) and the President signed it into law on Dec. 22, 2017.
The TCJA contains several significant changes to the existing Internal Revenue Code. During 2018, the Treasury Department and the Internal Revenue Service (“IRS”) issued several proposed regulations providing much-needed guidance on the TCJA. On the judicial front, in June 2018, the U.S. Supreme Court in South Dakota v. Wayfair, Inc. reversed its key holding on Quill Corp. v. North Dakota regarding what may constitute taxable presence in terms of non-income taxes. Please view our tax alert here describing the Wayfair decision. This blog provides a brief overview of some of the major provisions in the new tax law.
Many of the provisions of the TCJA generally apply to tax years beginning after Dec. 31, 2017, thus taxpayers will be applying these tax rules now as they prepare and file their 2018 tax returns. For closely held, middle-market businesses, some of the provisions that are likely to have significant impacts include:
GHJ will be posting blog articles as we interpret and apply the proposed regulations related to these specific areas in 2019.
Section 199A Deduction
Section 199A generally provides a deduction on a taxpayer’s taxable income arising from qualified business activities via a pass-through business entity such as an S-corporation, a partnership and a sole proprietorship. Such deduction is obtained on the lessor of:
- 20 percent of the taxpayer’s qualified business income, plus 20 percent of the taxpayer’s qualified real estate investment trust dividends and qualified publicly traded partnership income; or
- 20 percent of the taxpayer’s taxable income minus net capital gains
There are many exceptions and exclusions under section 199A. The Treasury and the IRS issued proposed regulations on August 8, 2018 interpreting many aspects of this. Click here to view our article discussing these proposed regulations.
Final regulations were published on Jan. 18, 2019 providing additional clarity to specific technical aspects of the law. The final regulations are applicable for tax years ending after they are published in the Federal Register. However, for 2018 calendar tax year, taxpayers may rely on either the proposed in their entirety or final regulations in their entirety. Click here to view final regulations.
The TCJA increases the bonus depreciation from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. The bonus depreciation percentages then are reduced as follows:
- 80 percent for qualified property placed in service in 2023
- 60 percent for qualified property placed in service in 2024
- 40 percent for property qualified placed in service in 2025
- 20 percent for qualified property placed in service 2026.
Furthermore, unlike the prior bonus depreciation rule, which was only available for new qualified property, bonus depreciation is now available for used property as well. The Treasury and the IRS issued the proposed regulations on August 6, 2018. Click here to view our analysis of these proposed regulations.
Section 163(j) Interest Deduction Limitation
Section 163(j) prior to the TCJA used to limit interest deduction paid or accrued to certain related foreign or tax exempt creditors. The TCJA has greatly expanded the scope of section 163(j) by making all but certain exempt groups of taxpayers subject to the limitation. Once subject to this rule, the deduction for business interest expense is generally limited to the sum of a taxpayer’s business interest income, 30 percent of adjusted taxable income and floor plan financing interest. The adjusted taxable income is defined similar to, but not necessarily the same as, EBITDA for taxable years beginning before Jan. 1, 2022, and EBIT for taxable years beginning after Jan. 1, 2022. The Treasury and the IRS issued the proposed regulations on Nov. 27, 2018 (click here for the proposed regulations).
Under section 951A, a U.S. person who is a U.S. shareholder (a defined term in section 951A) of a controlled foreign corporation is generally subject to U.S. tax on its share of the foreign corporation’s earnings, to the extent such earnings exceed a 10-percent return on the foreign corporation’s tangible assets. The definition of a U.S. shareholder within the meaning of section 951A is 10-percent or more ownership, but various attribution rules should be considered. Section 951A applies regardless of actual repatriation from the foreign corporation and generally applies in addition to Subpart F income. The Treasury and the IRS issued the proposed regulations on Sept. 13, 2018 (click here for the proposed regulations).
The Wayfair decision reversed the long standing Quill Corp. v. North Dakota, which required physical presence within a state before such state could require the collection of sales and use taxes for out-of-state retailers. Subsequent to the Wayfair decision, many states, including California, released various thresholds dictating what will constitute taxable presence for out-of-state retailers. Please view our tax alert here discussing California’s reaction. Once such out-of-state retailers exceed a given state’s threshold, they should generally register, collect and remit sales and use taxes for that particular state.
As noted above, the recent changes to tax laws are very significant and can have material impact to many taxpayers. We are also closely monitoring additional guidance and changes from tax authority. If you have immediate questions, feel free to contact GHJ advisors at 310.873.1600.