President Donald Trump will sign a Republican-crafted bill into law that overhauls the U.S. tax code.
SEMA has put together some information on changes that the new tax law will bring to U.S. business.
For starters, the new tax law will provide pass-through businesses (sole proprietorships, partnerships and S corporations) that currently pay taxes at the individual rate of their owners with a 20 percent tax deduction that applies to the first $315,000 of joint income. This deduction ensures that these business owners pay a marginal tax rate of no more than 29.6 percent, according to SEMA.
The law allows businesses to write off the full cost of investments for the next five years, doubles the exemption from the estate tax, preserves the research and development credit, and allows small businesses to continue to write off interest expenses on loans, according to SEMA.
Other things to note, according to SEMA, include:
C Corp Rates—21 percent for C corps and personal service corps. This rate would be effective for tax years after 2017 and would be permanent; would reduce the 80 percent dividends received deduction to 65 percent and the 70 percent dividends received deduction to 50 percent
Bonus Depreciation—Companies would be able to immediately write off the full cost of investments in their businesses, starting with assets purchased and placed in service after Sept. 27 and before Jan. 1, 2023. Thereafter, the deduction will phase out by 20 percent each year through 2026
Section 179—Deduction would be increased from $500,000 to $1 million with an increased phase-out threshold at $2.5 million. These amounts will be indexed for inflation starting in 2019. The definition of qualified real property would also be expanded to include improvements made to nonresidential real property including roofs, heating and air-conditioning property
Availability of Cash Method of Accounting—The average gross receipts threshold for using the cash method would be permanently increased from $5 million to $25 million
Employer Credit for Paid FMLA—A new credit would be added for 2018 and 2019 for wages paid to employees on FMLA if certain conditions are met
Deduction of Business Interest—Businesses would only be able to deduct net interest expenses up to 30 percent of their adjusted taxable income. For taxable years beginning after Dec. 31 and before Jan. 1, 2022, adjusted taxable income is computed without regard to deductions allowable for depreciation, amortization, or depletion or the Section 199 deduction (domestic manufacturing deduction which is repealed in the bill). Businesses with annual gross receipts of $25 million or less would not be subject to the 30 percent limit
Contributions to Capital—Added provision providing that capital contributions aren't excludable from taxable income unless they are made by a shareholder, potential customer, or government entity
Technical Termination of Partnership—Technical termination rule would be repealed. Partnership would be treated as continuing even if more than 50 percent of the total capital and profit interests of partnership were sold or exchanged
Estate and Generation Skipping Transfer (GST) Tax—From 2018 through the end of 2025 estate and GST exemptions would double. In 2026, the exemptions would revert back to their current levels, indexed for inflation
Gift Tax—From 2018 through the end of 2025 the gift tax exemption would double. In 2026, the exemption would revert back to their current levels, indexed for inflation
Mortgage Interest Deduction—Deduction limit reduced from $1 million to $750,000 and limited to debt incurred on the principal residence or a second home. Starting next year, no deduction will be allowed for interest on home equity loans. These changes would sunset in 2025. Taxpayers could continue to exclude sale proceeds from the sale of a principal residence as under current law
AMT - Alternative Minimum Tax—This will be repealed for businesses.