Question

The Tax Cuts and Jobs Act, enacted December 22, 2017, contained many provisions that impact US corporations. Please select one corporation and summarize how this Act has or will effect the corporation. Review recent public information including press releases, articles, and SEC filings.

Answer 1

FOR CORPORATION

Tax Cuts and Jobs Act 21 percent Prior Law Top corporate income tax rate 35 percent Corporate Alternative Minimum Tax Yes New investment purchases Repealed 2018: 40 percent bonus depreciation for qualified property; 2019: 30 percent bonus deprecation for qualified property; 2020:20 percent bonus depreciation for qualified property; small business (section 179) expensing up to $500,000 2018-22: 100 percent bonus depreciation for qualified property; 2023: 80 percent bonus depreciation for qualified property; 2024: 60 percent bonus depreciation for qualified property; 2025: 40 percent bonus depreciation for qualified property; 2026: 20 percent bonus depreciation for qualified property; small business (section 179) expensing up to $1,000,000 Business interest deduction Fully deductible (generally) Disallowed for net interest in excess of 30 percent of business income (excluding depreciation after 2022); exemption for businesses with gross receipts of $25 million or less Net operating losses Fully deductible; unused losses can be carried back for 2 years or carried forward for 20 years Deduction limited to 80 percent of taxable income; unused losses cannot be carried back but can be carried forward indefinitely

Highlights of Tax Law Changes

Most of the TCJA’s tax provisions are effective beginning January 1, 2018. Even though the law was not yet effective, U.S. GAAP requires companies with a December 31 fiscal year-end to consider the impact of the legislation’s provisions in their 2017 financial statements, to the extent that those effects can be reasonably estimated.

Reduction in corporate tax rates.

One of the TCJA’s more publicized aspects is the permanent reduction in corporate tax rates, from 35% to 21%. Though the reduced rate did not affect 2017 tax payments, companies were required to remea-sure their deferred tax accounts to reflect the new rate as of the end of the year.

Repeal of corporate AMT.

The new law repealed the alternative minimum tax (AMT). As a result, companies that had incorporated the impact of the AMT into their deferred tax accounts had to remea-sure those accounts to remove its effect.

Shift to territorial system.

The TCJA changed rules governing the taxation of foreign operations of U.S. companies when those operations are held in the form of a 10%-or-greater-owned foreign subsidiary. The changes represent a movement toward a territorial system, in which these foreign earnings are generally exempt from taxation for U.S. purposes, although some exceptions apply.

Transition tax.

As a means of shifting from the previous rules regarding taxation of foreign operations to the new territorial system, multinational U.S. corporations must pay a one-time toll tax on certain post-1986 earnings and profits from foreign operations if those earnings were not previously taxed for U.S. purposes. These foreign earnings are taxed at a reduced rate for purposes of the one-time transition tax, which can be paid in installments over an eight-year period.

Net operating losses.

The law made numerous changes to net operating loss (NOL) rules. The more significant changes involve expirations, elimination of carry-backs, and limits on deductibility. Prior to the new law, NOLs expired after 20 years, which could affect their realizability, but NOLs were also generally eligible for a two-year carryback and could normally be used to fully offset taxable income. NOLs arising after 2017 have the benefit of never expiring, and accordingly, their realizability should rarely be an issue. Though these NOLs can be carried forward indefinitely, carrybacks are no longer permitted for most companies, and the NOL deduction is now generally limited to 80% of taxable income.

Because the TCJA was not effective until January 1, 2018, some provisions will affect financial statements only after the related transactions have occurred or taxes have been triggered. Accordingly, only financial statements after 2017 will be affected by the provisions described below.

Expensing qualifying tangible assets.

This provision allows a 100% bonus depreciation deduction for assets placed in service after September 27, 2017. Previous law allowed a deduction of 50% of the cost of tangible personal property, so the new law’s provisions are a significant benefit for companies. In addition to allowing a larger deduction, the new rules have expanded the definition of eligible property to include used assets. This provision of the law does phase out, but this does not begin until 2023.

Increased section 179 expense.

Though Internal Revenue Code (IRC) section 179 is primarily applicable to smaller businesses, the TCJA increases the amount of business property that can be expensed each year to $1 million; this is a substantial increase from the previous $500,000 deduction. The law has also expanded the definition of section 179 property to include “qualified improvement property” and other assets in addition to the “qualified real property” available under previous law.

Repeal of DPAD.

The domestic production activity deduction (DPAD) has been repealed for tax years beginning after December 31, 2017.

New taxes—GILTI.

The TCJA added some new taxes, including on global intangible low taxed income (GILTI). GILTI is designed to curb erosion of the U.S. tax base by multinational companies, is applicable only to companies with controlled foreign corporations, and is an exception to the territorial rules that would exempt income earned by a foreign subsidiary from U.S. taxation. Broadly, this law applies a U.S. tax to certain high-return income earned by controlled foreign corporations. The tax rate on GILTI is generally half of the corporate tax rate, or 10.5%, for tax years beginning after December 31, 2017. The applicable rate increases to 13.5% for tax years beginning after December 31, 2025.

New taxes—BEAT.

Another new tax related to companies with foreign operations is the base erosion anti-abuse tax (BEAT). BEAT effectively reverses at least part of the deduction resulting from “base erosion” payments to foreign related parties and creates a new minimum tax on certain payments to foreign related entities. This tax is a potential addition to the regular tax and is only triggered when the BEAT liability exceeds the company’s regular tax liability. Broadly, this tax focuses on outflows from U.S. companies to foreign related parties.

FDII deduction.

This new deduction provides reduced effective tax rates for U.S. companies on certain foreign-derived intangible income (FDII). This provision allows a deduction for 37.5% of FDII, which results in a reduced tax rate of 13.125% [21% × (100% − 37.5%)] for income that U.S. companies earn from foreign sales or services associated with a U.S.-based intangible asset.

Limitations on interest deductions.

The law amends IRC section 163 to limit corporate interest deductions. In general, net interest deductions (defined as the amount of interest paid or accrued during the year less the amount of interest income reported) are limited to 30% of adjusted taxable income. The change takes effect for tax years beginning after December 31, 2017; however, a more restrictive definition of adjusted taxable income applies to tax years beginning after December 31, 2021.

Additional limits on executive compensation.

The TCJA expands the application of the $1 million limit on a public company’s deductible executive compensation by 1) broadening the definition of a “covered employee,” 2) expanding the definition of a public corporation, and 3) repealing the exclusion for commissions and qualified performance-based compensation.