Listen to Episode 21 on Corporate Tax Changes
On December 22, 2017 President Donald Trump signed the Tax Cuts and Jobs Act, the most significant legislation of his presidency. I review the changes to the corporate tax code in this second part of Bills with Luke Scorziell’s series on the Tax Cuts and Jobs Act. We compare the corporate tax rate to countries around the world and analyze the bill’s changes to business deductions. To round out the discussion, I provide and overview of some of the long-term and immediate effects of the legislation.
Brief Show Notes
Check out part one of the series here.
Lowers the Corporate Tax Rate
The bill lowers the corporate tax rate from 35% to 21%. This makes the United States more competitive with other advanced economies around the world. The US will go from having the highest corporate tax rate in the Organization for Economic Cooperation and Development, to being below the average of 23%.
Repeals the Corporate Alternative Minimum Tax
According to The Balance, the alternative minimum tax “is designed to prevent wealthier tax payers from slashing their tax debts to a bare minimum by using all the deductions that are available to them under the regular tax rules.”
The first minimum tax was passed in the Tax Reform Act of 1969 after Congress learned that 155 high income earners were not paying any income tax.
Creates a 20% Deduction for Qualifying Business Owners
This deduction is for individuals who are non-corporate owners, S corporations, and sole proprietorships. The formula for calculating the deduction is:
- The deduction is equal to the sum of:
- The lesser of:
- The “combined qualified business income” of the taxpayer, or
- 20% of the excess of the taxable income over the sum of any net capital gain
- Plus the lesser of:
- 20% of qualified cooperative dividends, or
- Taxable income less net capital gain
- The lesser of:
You can find an example of the calculations here. This deduction will expire on December 31, 2025
Limits the Business Interest Expense Deduction
Limits this deduction to 30% of adjusted taxable income. The business interest expense is the cost of interest that is charged on business loans used for business. From now until 2022 the definition of adjusted taxable income is earnings before interest, taxes, depreciation, and amortization. However, after 2022 the definition becomes earnings before tax and interest.
Increases the Section 179 Expensing Cap
The expensing cap will double from $500,000 to $1,000,000. Section 179 of the tax code allows a business to deduct the full purchase price of financed or leased equipment and off-the-shelf software that qualifies for the deductions.
Repeals the Domestic Production Activities Deduction
The Tax Cuts and Jobs Act repeals the Section 199 domestic production activities deduction. This deduction was the second largest domestic corporate deduction, according to the Committee for a Responsible Federal Budget. It allowed business engaged in manufacturing, electricity, film, engineering, and software production within the United States to deduct 9% of related income. Section 199 resulted in a $14 billion dollar loss in revenue in 2013. It was expected to result in a net loss of $200 billion until 2023, according to the Joint Committee on Taxation.
Limits the Carryforward of Net Operating Losses and Eliminates the Carryback
The bill limits the carryforward of net operating losses to 80% of taxable income and eliminates the carryback. The carryforward allows companies to reduce their taxable income using net losses from previous years. The carryback applies losses from a present year to profits or gains from another year. Investopedia gives an easy example of both.
Eliminates the Entertainment Deduction
In the past, 50% of business-related meal and entertainments were allowed as a reduction. The new bill will limit this to 50% of business-related meals.
Lowers the Orphan Drug Tax Credit
The Orphan Drug Tax Credit allows pharmaceutical companies developing a drug to cure a rare illness to deduct 50% of their expenses. The Tax Cuts and Jobs Act reduces this credit to 25% of expenses.
The Congressional Budget Office and Joint Committee on Taxation estimate that the bill would reduce revenues by about $1.649 trillion and decrease spending by $194 billion from 2018-2027. Consequentially, they estimate that the bill will increase the deficit by $1.455 trillion over the next ten years.
The Heritage Foundation also released a report on the bill’s expected effects. They estimate that it will increase GDP by 2.2% in the long run; this translates to an increase of $3,000 per household.
The Tax Policy Center estimates that the bill will increase GDP by 0.8% in 2018 and by diminishing amounts in subsequent years. They say that the revenue will be about 18% of the legislation’s costs and will increase debt as a share of GDP by 5%.
AT&T announced they would give 200,000 US workers a special $1,000 bonus to celebrate the new tax plan. Boeing celebrated the cuts by pledging $300 million for employee training, improved workplace infrastructure, and corporate giving. Both reported by the Boston Globe.
Wells Fargo released a statement pledging a few actions after the tax reform was signed into law. They will raise their minimum hourly pay to $15 an hour, target $400 million in donations to community and nonprofit organizations in 2018, give 2% of its after tax profits in 2019, give $100 million in capital and other resources over the next three years to support small businesses, and donate $75 million in 2018 to support sustainable homeownership and neighborhood revitalization.
Comcast will give $1,000 in bonuses to 100,000 of their employees. They will also invest $50 billion over the next five years in infrastructure. This was in response to the repeal of net neutrality and the passage of the tax reform.
Bills with Luke Scorziell does not provide investment, tax, or legal advice or recommendations. This material is solely intended for educational purposes based on publicly available information and may change at any time.
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About Luke Scorziell
Mr. Scorziell created The Edge of Ideas when he was 15 years old. After a few years of blogging he found a passion for podcasting and now regularly has guests on his show, Bills with Luke Scorziell. Find out more about Luke and his unique journey. Feel free to send Luke a message below.
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