Landmark Tax Reform Bill Is a Boon for Midmarket Businesses

Update: President Trump on Friday signed the GOP tax plan into law. He also signed a short-term spending bill to fund the government through Jan. 19. ACG Global issued a press release in response to the passage of the tax reform legislation. Read it here. 

Though the conference version of the bill was passed by the House on Dec. 19, the bill required a slight change in order to meet Senate reconciliation rules. The Senate voted on the updated version late Tuesday night, with the House slated to vote again Wednesday morning, after which the bill will be sent to the president’s desk.

The summary of the Senate and House versions, including agreements made in conference, can be found here. The full legislative text can be found here.

Key provisions include:

ACG remained engaged throughout the process, leveraging relationships with legislators, its advocacy arm, and its membership in the Businesses United for Interest and Loan Deductibility, or BUILD, Coalition.

“ACG’s partnership with BUILD Coalition was crucial in saving interest deductibility, an essential component of the corporate tax code for nearly 100 years,” says Pat Morris, ACG Global president and CEO. “Small businesses and startups—companies that rely heavily on debt financing—can now continue to grow.”

Below are some of the major provisions included in the final package. Note that many of the individual reforms are temporary, sunsetting in 10 years, while many of the corporate reforms are permanent.

Corporate Tax Reform:

• Chained CPI Indexing: The package changes the current approach of adjusting income levels for various thresholds based on the consumer price index, or CPI, and transitions toward a chained CPI measurement. Chained CPI factors in the effects of price changes on consumers’ consumption of products, and on average it measures inflation at a level 0.25 percentage points lower than CPI.
  • Overestimating inflation can place individuals in a higher tax bracket, because it overestimates the true value of their earnings.
  • Underestimating inflation does the opposite—it makes one’s income look less valuable, and thus can place an individual near the threshold into a lower tax bracket.
• The legislation reduces the corporate tax rate to 21 percent from 35 percent.
• Pass-through income: A new 20 percent tax deduction applies to the first $315,000 of joint income earned by all businesses organized as S corporations, partnerships, LLCs and sole proprietorships.
  • In addition, for businesses with incomes above this level, the bill generally provides a deduction for up to 29 percent of business profits, reducing their effective marginal tax rate to no more than 29.6 percent.
    • Service industries such as “health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners” are not allowed to claim the tax deduction beyond the first $315,000 of joint income.
• The full and immediate expensing of qualified capital expenditures applies until 2022 for purchases made after Sept. 28, 2017.
  • The percentage of allowable expensing would then be phased out at a rate of 20 percent per year from 2023 (80 percent) to 2026 (20 percent).
  • The Section 179 expensing cap would be increased to $1 million from $500,000.
• Interest Deductibility: The tax reform bill preserves interest deductibility for businesses, with some limitations:
  • The business interest expense deduction is limited to 30 percent of a company’s earnings before interest, taxes, depreciation and amortization (EBITDA) for four years (2018–2021).
  • After 2021, the 30 percent deduction will be defined on the basis of earnings before interest and taxes (EBIT).
  • This limitation does not apply for businesses with average gross receipts of $25 million or less.
  • The final tax reform bill also does not include the Section 163(n) interest limitation.
• The bill removes the domestic production activities (Section 199) deduction.
• It repeals the corporate alternative minimum tax.
• Cash accounting: It allows businesses with less than $25 million in income to take advantage of this, up from the $5 million that current law allows.
• Allows for up to 80 percent of taxable income to have indefinite net operating loss carryforwards, while net operating loss carrybacks are fully eliminated.
• International taxation: a territorial system of taxation would be imposed, in which only income earned within the country would be taxed.
  • In order to prevent base erosion, a 5 percent tax on modified taxable income would go into effect for the first year, followed by 10 percent through 2025, with 12.5 percent for all years after.
• A repatriation tax of 15.5 percent for liquid (cash) assets, with 8 percent for illiquid assets.

• Removes the personal exemption.
  • Current law provides for a personal exemption of $4,050 for each taxpayer and dependent claimed on tax returns.
• Limits the mortgage interest deduction to $750,000 in principal value.
• Limits the state and local tax deduction to a maximum of $10,000.
• Doubles the child tax credit to $2,000.
• Retains the charitable contribution deduction.
• Removes the Affordable Care Act’s individual mandate penalty.
• Doubles the minimum amount required for the estate tax, to $10 million.