The Tax Cuts and Jobs Act (P.L. 115-97) was signed into law on December 22, 2017. This was a budget reconciliation bill so only needed 51 votes in the Senate rather than 60. Among many things, this means the official name of the bill has the word “reconciliation” in it (an act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018).
The TCJA was primarily intended to make the corporate tax system more internationally competitive by lowering the corporate rate (from a high of 35% to a flat 21%) and make the international system a semi-territorial one rather than worldwide. But, not all businesses operate as C corporations and the TCJA included the §199A qualified business income deduction to provide a rate reduction for business income of sole proprietors, partners and others, with a few exceptions. But that provision is only in the law through 2025 while the 21% corporate rate is permanent (pending any congressional action to change it).
There are many temporary provisions in the TCJA, several of which are built-in tax increases. Here is most of that list:
- Beer, wine and distilled spirits – special rule on interest capitalization (§263A(f)(4) and excise tax rates was to expire 12/31/20 but was made permanent by CAA-21 (PL 116-260; 12/27/20).
- §45S, Employer credit for paid family and medical leave, terminated for wages paid in tyba 12/31/20, but was extended 5 years by CAA-21 (PL 116-260; 12/27/20) (to 12/31/25).
- Staring in tax years beginning after 12/31/21 businesses with R&D must capitalize their total R&D expenditures (§174) each year and amortize them over 5 years using the half-year convention (15 years for foreign research). This is a BIG change since expensing has been the law since 1954. The effect is significant. For example, if a business had $100,000 or domestic R&D in 2022, rathe rather than expensing $100,000 in 2022, they can only expense $10,000 in 2022 and the balance is expensed (amortized) over 2023 to 2017).
- The §163(j) interest limitation calculation becomes less favorable for tax years beginning after 12/31/21 (depreciation, amortization and depletion will reduce adjusted taxable income).
- 100% bonus depreciation of §168(k) begins to phase down generally for property placed in service after 12/31/22 through 12/31/26. For 2023, it will be 80% bonus.
- The deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) are reduced from 37.5% to 21.875% for FDII and from 50% to 37.5% for GILTI for tax years beginning after 12/31/25.
- Individual provisions expire after 2025 such as doubled child tax credit, higher standard deduction, lowered brackets, SALT cap.
- The §461(l) business loss limitation for non-corporate taxpayers expires after 2028 (years changed to 2021 through 2028 by a few post-TCJA public laws).
If there are to be any changes to TCJA now or in very near future, I’d recommend:
- Repeal the §174 change. It is simpler and better encourages R&D to allow for it to be expensed when incurred.
- Remove the SALT cap for state and local taxes attributable to business income such as is on Schedules C, E and F. These business taxes should be deductible FOR AGI.
- Make the Child Tax Credit fully refundable.
- Repeal the individual AMT.
What do you think? Annette Nellen, San Jose State University.
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