Significant highlights of the US new tax reform
28 March 2018
On December 22, 2017, U.S. President Donald Trump signed into law the Tax Cuts and Jobs Act of 2017 (TCJA). This new legislation represents the biggest U.S. tax reform in more than 30 years, and it will affect nearly all U.S. individuals and businesses.
TCJA legislation changes that are most pertinent to US companies:
- Significant reduction in corporate income tax rates: Starting in 2018, TCJA eliminates the graduated corporate rate structure and reduces corporate income tax rate from 35% to a flat rate of 21 percent.
- Repeal of corporate alternative minimum Tax (AMT)
- Increased depreciation expenses through Sec. 179 and 100% bonus depreciation.
- Net Operating Losses (NOLs): Prior to TCJA, a business with net operating losses (NOLs) was allowed to carry back the NOL to 2 prior tax years (to offset prior taxable income) and carry forward the NOL up to 20 years (to offset future taxable income). Starting in 2018, NOLs may no longer be carried back, although they now may be carried forward indefinitely. The TCJA provisions also limit the allowed NOL deduction to 80 percent of taxable income (determined without regard to the NOL). Any disallowed excess is to be carried forward indefinitely. However, this limitation applies only to losses arising in tax years that begin after Dec. 31, 2017 based upon section 172(e)(1) of the amended statue.
- The deductibility of interest expense is further limited: the deductibility of net business interest is effectively capped at 30% of EBITDA (earnings before interest, taxes, depreciation, and amortization) for five years, and then at 30% of EBIT thereafter.
- 2017 One Time Tax on Deemed Repatriation of Accumulated Foreign Earnings: Under the new TCJA legislation, U.S. taxpayers owning at least 10% of a foreign corporation must include in their 2017 income their pro-rata share of the foreign corporation’s previously untaxed earnings, as if the associated income has been repatriated to the U.S. (and thus subject to current U.S. taxation). It is a one-time tax on undistributed corporate earnings, referred to as “deemed repatriation” income. Deemed repatriation income is calculated based on the company’s level of accumulated earnings and profits as of the end of 2017. The income is taxed at two discounted rates – 15.5 percent for accumulated earnings held as cash and cash equivalents, and 8 percent for all other earnings. U.S. shareholders may elect to pay the tax liability in installments over an eight-year period.
- Current-Year Taxation for Global Intangible Low-Taxed Income ("GILTI") for U.S. Shareholders of CFC companies: The Act adds a new type of current year inclusion by a US shareholder of a CFC for years 2018 and onward. This inclusion is defined as the global intangible low-taxed income ("GILTI") of the CFC which is the US shareholder's pro rata share of the foreign corporation net income after factoring in a deduction of 10% of the shareholder's pro rata share of the adjusted tax basis of tangible depreciable assets used in the business of the foreign corporation. This inclusion will be treated as Subpart f income.
- Participation exemption: Domestic corporations allowed 100% deduction for the foreign-source portion of dividends received from 10% owned foreign subsidiaries.( Deduction not available for capital gains)