The Tax Cuts and Jobs Act (the Act) was signed by President Trump on
December 22, 2017. The following are highlights that are pertinent to manufacturing and distribution companies and owners. As with past tax acts, there are
likely to be “technical corrections” passed in future legislation.
While technical corrections are often minor, occasionally the changes
Business Tax Provisions
- Accounting for inventory and uniform capitalization rules (UNICAP/263A). Companies that have revenue of less than $25 million will be exempt from having to capitalize certain
general and administrative costs to inventory for tax purposes (UNICAP rules).
- Research and experimentation tax credit is explicitly preserved.
- Cash method of accounting.
The law allows companies with revenue less than $25 million to utilize
the cash method of accounting for tax purposes.
- Increased depreciation expensing limits. Bonus depreciation and Section 179 depreciation are both increased under the new law.
bonus depreciation will be allowed for qualified property purchases after September 27, 2017 and before January 1, 2023.
The bonus depreciation provisions will phase out between 2023 and 2026.
- Section 179 limitations will be increased to $1 million on
purchases of $2.5 million or less. The standard rules requiring active
business income will remain.
- Partial exclusion of pass-through income.
The Act will allow a 20% exclusion from tax of qualified income of
pass-through entities, such as S-corporations, partnerships and
sole-proprietorships. The exclusion will be generally limited to the
lesser of 20% of qualified business income or 50% of W-2 wages paid by
- Reduction in C-Corporation tax rates. The
tax rate for corporations under the Act will be 21% effective for
taxable years beginning after December 31, 2017. The tax rate is
- Elimination of C-Corporation AMT. The Act repeals the alternative minimum tax for C-Corporations.
- Repeal of the Domestic Production Activities Deduction/Section 199.
Effective for tax years beginning after 2017, the law would repeal the
9% deduction for domestic production activities. Nearly every manufacturing and distribution company will be impacted by this repealed
- Limitation of business interest expense. An
interest deduction limitation provision generally limits the deduction
of interest expense to 30% of taxable income before interest expense.
There is a “small business” exception as well as a transitional rule for
certain expenses. The limitation applies to tax years beginning after
December 31, 2017.
- Limitation on like-kind exchanges. Nonrecognition of gain for like-kind exchanges no longer applies to personal property or real property held primarily for sale.
- Net Operating Loss limitations. Net
Operating Losses (NOL) are limited to 80% of taxable income and the Act
eliminates most NOL carrybacks. New NOL’s are to be available for
carryover indefinitely. The changes are effective for tax years ending
after December 31, 2017.
- Entertainment Expense limitation. Entertainment
expenses are further limited. Certain expenses that were 50% deductible
will become 100% nondeductible. Other expenses that were fully
deductible will be limited to a 50% deduction. The effective date is
generally for expenses paid or incurred after December 31, 2017.
Individual Tax Provisions
rates for the individual income tax brackets will be reduced to a top
rate of 37% compared to the current top rate of 39.6%. Since there are
other changes to the tax base, especially with respect to deductions and
alternative minimum tax, the degree to which the Act will result in a
reduction of tax may vary greatly depending on the taxpayer. The change
in rates generally apply as of January 1, 2018 and is slated to end
after December 31, 2025.
- The standard deduction will be
increased to $24,000 for joint filers and $12,000 for single filers
beginning as of January 1, 2018 and ending after December 31, 2025.
- Personal exemptions are not allowed for tax years beginning after December 31, 2017 and before January 1, 2026.
home mortgage interest deduction is generally not changed for existing
acquisition indebtedness. The deduction for new loans after December 31,
2017 will generally be limited to the interest on $750,000 of
acquisition indebtedness. The deduction for home equity indebtedness
will be suspended beginning after December 31, 2017 and before January
1, 2026. Generally, taxpayers will not be able to claim a deduction for
interest on home equity indebtedness after December 31, 2017.
Act will increase the individual limit on annual charitable
contributions as a percentage of Adjusted Gross Income (AGI). The limit
will increase to 60% of AGI for cash contributions made in tax years
beginning after December 31, 2017 and before January 1, 2026.
state and local tax deduction is capped at $10,000. Unlike earlier
proposals, the $10,000 may include state income taxes or sales tax in
addition to property taxes. The new provision is effective beginning for
tax years after December 31, 2017 and before January 1, 2026.
- Miscellaneous itemized deductions subject to the 2% floor under current law are suspended after December 31, 2017.
- The medical expense deduction is retained with some temporary changes.
moving expense deduction is suspended for tax years beginning after
December 31, 2017 and before January 1, 2026. Likewise, the exclusion
for qualified moving expense reimbursement is suspended.
education savings plan rules are changed to allow payment of certain
expenses up to $10,000 per year in connection with attendance of a
student at a public, private or religious elementary or secondary
school. The definition of eligible expenses was narrowed before the
final Senate vote. This provision is effective after 2017.
Minimum Tax (AMT) for individuals is retained but is significantly
modified. The AMT exemption amounts increase by approximately 30%. More
importantly, the phase out of the AMT exemptions begins at $1 million
for married taxpayers filing jointly and at $500,000 for single
taxpayers. These phase-out thresholds are substantially higher than
current law. These Act provisions generally apply to tax years beginning
after December 31, 2017 and before January 1, 2026.
- The estate
tax is retained, however the amount exempt from the tax will be
increased to $10 million for decedents dying after 2017 and before 2026.
you have questions regarding changes in the Tax Cuts and Jobs Act or if
you would like more information, please contact one of RubinBrown's Manufacturing & Distribution Services Group professionals.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
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