The Tax Cuts and Jobs Act (TCJA) was a landmark piece of legislation for American corporations. Both the reduction of the top tax rate from 35% to 21% and the switch to a territorial tax system for multinational companies are transformational.
All the provisions included in this new law, taken together, touch on nearly all major aspects of tax planning.
“Tax reform changes everything about business and tax planning for companies across all sectors and industries. It represents the biggest disruption in tax law since 1986, and with disruption comes both opportunities and challenges,” said Dustin Stamper, a managing director at Grant Thornton.
For corporation board members and C-suite executives alike, Grant Thornton’s Year-end tax guide 2018: Public businesses
can be an indispensable tool to avoid tax pitfalls and realize new opportunities in planning your company’s finances.
The headline-grabbing change from tax reform, the corporate tax rate cut, is estimated to reduce tax revenues by $1.3 trillion over the next 10 years. But the rate reduction only begins the discussion about TCJA’s impact. One important consideration is to remember that taxable income is not the same as book income, and significant changes were enacted on how to calculate taxable income.
One of the most beneficial changes is an increase in bonus deprecation from 50% to 100% for property put in service through the end of 2022. This means, essentially, that a business can fully expense qualified property.
“The best part of the change is that used property now qualifies for bonus depreciation. This means companies buying the assets of other businesses can get large immediate deductions,” Stamper said.
The TCJA also repealed the alternative minimum tax (AMT) and, generally, allows companies to claim unused AMT credits as refundable payments over the next four years.
However, there are also unfavorable changes. Net operating losses arising in 2018 and later can offset only 80% of taxable income. Also, there is a new limit on how much interest expense corporations can deduct. You can deduct only up to 30% of a measure of taxable income equivalent to earnings interest, taxes, depreciation and amortization; and in 2022 the calculation gets even worse when depreciation and amortization are included.
U.S. corporations with foreign-earned income saw the rules for them almost completely rewritten. The U.S. is joining other major economic powers to become a more territorial tax system, where certain foreign income is exempt from U.S. tax – once a one-time tax on previously unrepatriated earnings is paid.
While few international tax provisions were untouched, multinational corporations should focus on these points:
- The one-time transition tax on previously unrepatriated earnings
- A 100% dividends received deduction exempting part of foreign income from U.S. tax
- The new base erosion and anti-abuse tax
- The new minimum tax on global intangible low-taxed income
- A reduced effective tax rate for foreign derived intangible income
“The international changes are sweeping. Previous structures, cost-sharing agreements, transfer pricing arrangements, supply chains and inter-company financing are likely to be tax-efficient under the new regime. Every company needs to rethink their international tax arrangements from the bottom up,” Stamper said.
Apart from the TCJA, the Supreme Court early this year delivered a long-anticipated knockout blow to the “physical presence” standard used to determine when states can require internet sellers to collect and remit sales tax. In , the court struck down the 1992 Quill v. North Dakota standard, finding that businesses can be required to collect and remit sales and use tax on online sales to buyers in states where the business has no physical business presence and no association with an in-state individual or business.
While the case itself was remanded back to South Dakota for further review, many states are already passing laws imposing sales taxes for out-of-state online sales. While it’s obvious any business likely to exceed state de exceptions needs to check state sales tax laws, don’t forget businesses are buyers, too. Companies that make large purchases, or frequent ones, may want to use a sales and use tax reverse audit to find missed exemptions, misapplied rates and overpayments.
In the realm of compensation and benefits, the new tax laws often reduced or eliminated deductions. Tax reform imposed new limits on deductions for meals, travel and transportation expenses. Also, the cap on deductions for compensation over $1 million is now much stricter, with no exception for incentive compensation like stock options.
However, other benefits procedures remain intact and are worth considering, such as incentive stock options for employees (although there are restrictions) and restricted stock units for executives. For retirement plans, defined contribution plans like 401(k) plans still remain the most popular, although care must be taken, as administering them can be costly and complex.
The IRS has spent 2018 interpreting the provisions of the TCJA, so just reading the bill’s contents won’t begin to explain all the nuances of this major piece of tax legislation. Grant Thornton’s Year-end tax guide 2018: Public businesses
is a great reference tool for breaking down the changes into practical insights that help companies overcome challenges and seize opportunities created by tax reform.