With the House’s passage of the final version of the Republican tax bill today and with the Senate’s thumbs-up expected to follow it, the broad outlines and many of the details of the new regime for corporate taxes (as well as taxes for individuals) starting on January 1, 2018, is in focus.
Indeed, many CFOs might start plotting their companies’ responses starting Tuesday night. Both houses will be voting on the version of the Tax Cuts and Jobs Act released on December 15 by a joint House and Senate Conference committee that resolved the Congressional conflicts that lead up to it.
Most notably, the legislation will slash the corporate tax rate from to 21% from 35%; set up a 20% business-income deduction for owners of pass-through companies; and change the current U.S. global tax system to a territorial system.
Based on an analysis of the final legislation by the Tax Foundation, the key businesses provisions of the act are:
- The act would lower the corporate income tax rate permanently to 21%, starting in 2018.
- It would set up a 20% deduction of qualified business income from the taxes of the owners of certain pass-through businesses that would expire on December 31, 2025. In many cases, taxpayers at pass-through companies in service industries including health, law, and professional services don’t get to take that deduction. But joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries. The framers of think bill think that holding those amounts down will deter high-income service industry taxpayers from trying to convert ineligible compensation to income eligible for the 20% deduction.
- It would allow full and immediate expensing of short-lived capital investments for five years. The provision “would encourage more investment and result in businesses taking larger deductions for capital investments in the first five years of the plan,” according to the Tax Foundation.
- It would curb the deductibility of net interest expense to 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years, and 30% of earnings before interest and taxes (EBIT) after that.
- It would eliminate the deduction for income attributable to domestic production activities that’s been available to manufacturers and other companies.
- It would deem currently deferred foreign profits to be repatriated at a rate of 15.5% for cash and cash-equivalent profits and 8% for reinvested foreign earnings.
- It would move the United States to a territorial system and base erosion rules. Under a territorial system, companies wouldn’t have to pay taxes on income earned abroad.
- It would repeal the corporate alternative minimum tax.