The Tax Cuts and Jobs Act included several new provisions that will have the effect of either increasing or decreasing tax depending on the type of income and taxpayer. Below are the major provisions in this category.
Qualified Business Income Deduction
Section 199A allows many taxpayers to take a deduction for qualified business income from a qualified trade or business operating directly or through a pass-through entity. Eligible taxpayers may be entitled to take a deduction of up to 20% of qualified business income from a domestic business operation as a sole proprietorship or through a partnership, S-corporation, trust, or estate. There are wage limitations on the taxpayer that must be factored into determining the amount of the deduction that will be allowable. The 199A deduction, to some degree, replaces the Domestic Production Activities Deduction that was repealed at the end of 2017
Limitation of Net Interest Expense Deduction
There will be a limitation on the deductibility of corporate interest expense, based on adjusted taxable income. The interest expense will be allowed as a deduction, so long as it does not exceed 30% of the adjusted taxable income, the business interest income for the tax year, or the floor plan financing interest of the tax year. The calculation will need to be done on the entity level. However, disallowed interest expense will be passed through to those receiving a K-1. This will need to be tracked at their level as the deduction will be allowable once there is excess taxable income.
- The Research and Development Credit has remained largely unchanged. There is a new 25/25 limitation which restricts taxpayers with over $25,000 in tax liability from offsetting more than 75% of their tax liability using the credit.
- The Work Opportunity Tax Credit has remained unchanged.
- There is a new tax credit available called the Family Medical Leave Act credit. This allows businesses to take a credit for wages paid to employees for FML for tax years 2018 and 2019. The business must be a business qualified for FMLA. In addition, the employee must have worked for the business for at least one year and make less than $72,000. There are also reduced credits available for businesses who pay out maternity leave outside of the normal paid time off policy.
- US taxpayers with accumulated earnings and profits from foreign subsidiaries at the end of 2017 were required to take those earnings into income under IRC 965 on their 2017 returns. Elections were available to spread out the payment of tax and in the case of S corporation shareholders, to defer payment of tax until a subsequent triggering event took place
- Global Intangible Low-Taxed Income (GILTI) is another new concept in the tax system, and an attempt to deter a multinational business from shifting US profits overseas. Beginning in 2018 a US shareholder of a controlled foreign corporation (CFC) will be subject to tax on certain income derived by the CFC pursuant to a formula that includes an analysis of the current year income of the CFC as adjusted for a portion of the CFC’s investment in its property, less interest expense.
- Foreign Derived Intangible Income (FDII): Certain sales and services by US companies to customers for foreign use will qualify for a deduction beginning in 2018.
- Base Erosion and Anti-Abuse Tax (BEAT): Corporations and REITs with revenues in excess of $500 million will need to review the impact of certain types of deductible payments to foreign subsidiaries to determine if they exceed a percentage threshold based on a formula that compares tax-based “modified taxable income” vs regular income.
For more detailed information on any of the above changes, please reach out to a Mazars USA representative.