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US Congress passes tax reform bill

US tax legislation to have global impact

The US Congress passed a final version of the Tax Cuts and Jobs Act that reconciles the differences between the House and Senate versions of the bill.

Key business provisions in the final bill include:

  • Permanently reducing the 35% corporate income tax rate to 21%, beginning in 2018
  • Repealing the corporate alternative minimum tax (AMT), beginning in 2018
  • Imposing a one-time transition tax on deferred foreign earnings of 15.5% for liquid assets and 8% for illiquid assets
  • Establishing a participation exemption system by allowing a 100% dividends received deduction on qualifying dividends paid by foreign corporations to 10% US corporate shareholders
  • Imposing new anti-deferral rules to make certain that the imputed intangible returns of CFCs are subject to a minimum rate of US and/or foreign tax
  • Imposing a new base erosion minimum tax that would be calculated by reference to all deductible payments made to a foreign affiliate for the year and apply to certain US corporations with average annual gross receipts of $500 million or more over three years
  • Creating an incentive for US companies to sell goods and provide services abroad by effectively taxing income from those activities at a reduced rate
  • Limiting deductions for net interest expense to 30% of earnings before interest, taxes, depreciation and amortization through 2021 and of earnings before interest and taxes thereafter, but excluding a proposed limitation based on comparative debt levels between US and non-US affiliates
  • Allowing businesses to expense the cost of certain new and used qualified property placed in service after September 27, 2017, and before January 1, 2027, but gradually phasing out the amount expensed from 100% in 2022 to 0% in 2027
  • Repealing the Section 199 domestic production deduction, beginning in 2018
  • Allowing certain pass-through business owners to deduct 20% of “qualified business income,” beginning in 2018 through 2025
  • Limiting net operating loss (NOL) usage to 80% of taxable income for losses arising in tax years beginning after 2017, eliminating NOL carrybacks and allowing indefinite carryforwards for NOLs generated after December 31, 2017
  • Expanding the $1 million deduction limit on compensation paid to certain top executives of publicly traded companies to include compensation paid to the CFO, as well as deferred compensation paid to individuals who previously held those top-level positions (does not apply to remuneration under a written binding contract that was in effect on November 2, 2017, and was not materially modified thereafter)
  • Requiring partners who receive certain carried interests to hold those interests for three years to treat any gain as long-term capital gain
  • Retaining the work opportunity credit

Key provisions in the final bill affecting individuals include:

  • Modifying the current seven income tax brackets for individual taxpayers to rates of 10%, 12%, 22%, 24%, 32%, 35% and 37% from 2018 through 2025
  • Increasing the “exemption amounts” for the individual AMT for tax years beginning after 2017 and before 2026, including significant increases in the amounts at which the exemption phases out
  • Effectively repealing the “individual mandate” under the Affordable Care Act by reducing to zero the tax that applies to individuals who fail to purchase health insurance, beginning in 2019
  • Limiting deductibility of interest on new home mortgages of $750,000 or more from 2018 through 2025
  • Eliminating the ability to deduct home equity interest from 2018 through 2025
  • Limiting the individual itemized deduction for state and local taxes to $10,000 of combined income and property taxes from 2018 through 2025
  • Extending the medical expense deduction floor of 7.5% of adjusted gross income to individuals in 2017 or 2018
  • Doubling the child tax credit to $2,000 from 2018 through 2025
  • Retaining the estate tax but doubling the exclusion and adjusting it for inflation

Visit ey.com/taxreform to keep track of important developments.

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