NAED News

House Passes Historic Tax Reform

Business Tax Rates:

• C-corporations will have their tax rate reduced from 35 percent to 20 percent. One of the largest pay-fors to lower the corporate rate is a deem repatriation of foreign profits, since NAED members are almost exclusively domestic there is no downside to the reduction in the corporate tax rate by itself.

• Corporate Alternative Minimum Tax is repealed.
  

• Pass through companies (sole proprietorships, partnerships, S-corporations, and limited liability companies) will receive a cap of 25 percent tax rate on business income, however the committee has put special rules in place to combat abuse by individuals trying to hide salaries as pass through income.
  
• For owners who are also employed by the firm there are two options for dividing total income between business and labor income:
  
  • Option 1 would allow business owners to consider 30 percent of the total profits as business income, the rest is considered labor income to the business owner and taxed at the personal rate.
  • Option 2 is a formula that will calculate the business income derived from returns to business capital. The formula would measure the capital percentage based on a rate of return (the Federal short-term rate plus seven percent) multiplied by the capital investments of the business. This formula would be binding for five years. 
  • For the percentage of income considered labor income, the personal tax rates have been cut from seven brackets to four: 

• For business owners employed at the firm, using the 70/30 split will create a top blended effective tax rate of between 28 percent and 35 percent depending on total income. 
• For owners who are not employed by the firm, the profit is all considered business income and is capped at the 25 percent tax rate. 
  
• All of the changes to the business and personal tax rates are considered permanent.

Death Tax Repeal:

• The unified exclusion for estate and gift taxes is immediately doubled to $11.2 million per individual and effective January 1, 2024, the estate tax is repealed and the gift tax rate will be reduced to 35 percent. 
  • Full step-up in basis is retained.
    

Interest deductibility:

• Pass through firms with gross receipts of less than $25 million (averaged over three years) can deduct interest in full. Corporations and large pass through firms are limited to an interest deduction equal to 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA), with a five year carry forward.
  • These new rules will only apply to new loans, not existing loans.
    

Section 179 small business expensing:

• The small business expensing limitation under section 179 would be increased to $5 million (from $500,000) and the phase-out amount would be increased to $20 million. The provision would modify the expensing limitation by indexing both the $5 million and $20 million limits for inflation. 
  • The increase in limits will sunset January 1, 2023, policy changes are permenent.

Expensing:

• The legislation increases Bonus Depreciation to 100% for five years. Any property with a depreciation schedule of less than 20 years qualifies for Bonus Depreciation. NAED members will be able to expense any qualifying property placed in service after September 27, 2017, and before January 1, 2023. 
  • This provision sets up the next “extenders” debate starting in 2022.

LIFO:

• The Tax Cut and Jobs Act does not change LIFO accounting rules.
  

Section 1031 exchanges:

• Section 1031 exchanges for the purpose of deferral of capital gains will be limited to real property. With the allowance of full expensing on most personal property there is no longer a need to provide preferential treatment to personal property under Section 1031.

Geothermal:

• Several parts of Section 48 are extended. The 10 percent tax credit for geothermal heat pumps is extended for any product in which construction began prior to January, 1, 2028. This provision is also retroactive to December 31, 2016.

Section 179D:

• Section 179D expired at the end of 2016, the Tax Cut and Jobs Act does not extend it. 

Section 25(D):

• Section 25(D) is extended through 2021 with a phase down from 30 percent currently to 26 percent in 2020 and 22 percent in 2021. This is another provision that could possibly be extended in the future.

Please continue to stay engaged as tax reform moves forward in Congress!