The Tax Cut and Jobs Act will have significant income tax implications for technology, life sciences, and communications and media companies. A few provisions will impact 2017 tax returns, but most of them will be effective beginning in 2018.
Corporate Tax Rate
This was reduced to a 21% flat rate. Additionally, the corporate alternative minimum tax has been repealed. Fiscal year taxpayers will need to apply a blended rate for the tax year that includes January 1, 2018.
New 20% Deduction for Qualifying Pass-Through Businesses
This is intended to be available for ordinary income earned on capital, not for professional services. This provision should be carefully considered and there are limitations that may apply.
This was retained, while the orphan drug credit was reduced. Most other credits were eliminated.
Amortization of Research and Experimental Expenditures
The amount identified as specified research or experimental expenditures must be capitalized and amortized ratably over a five-year period if US-based research and 15 years if research was conducted outside of the United States. This provision is effective for expenses incurred in taxable years beginning after December 31, 2021.
Net Operation Losses (NOL)
The act limits the deduction for net operating losses arising after December 31, 2017, to 80% of taxable income before deduction for NOL carryforward. These limited NOLs are provided an indefinite carryforward period. Additionally, the NOL carryback is eliminated for NOLs arising after December 31, 2017. NOLs generated prior to 2018 won’t be subject to the 80% limitation and remain limited to the 20-year carryforward period.
Expansion of Cash Method of Accounting
The act allows business taxpayers to use the cash method of accounting if they have average gross receipts of $25 million or less in the three prior tax years.
Interest Expense Deduction
The deduction for business interest expense is limited to the sum of business interest income plus 30% of the taxpayer’s adjusted taxable income for the year, though taxpayers that meet the $25 million gross receipts test are exempt. Disallowed interest expense is carried forward indefinitely.
The act extends and modifies bonus depreciation, beginning retroactively in 2017. This allows for an immediate 100% deduction of the cost of eligible property in the year placed in service.
Territorial System of Taxation
The overall system of US taxation is changed from a worldwide system of income inclusion to a territorial system. Generally, a US company won’t be taxed on earnings from foreign subsidies going forward.
Taxation of Foreign Dividend Income
The act allows a 100% deduction for the foreign-sourced portion of dividends received from “specified 10% owned foreign corporations” by domestic corporations that are US shareholders of those foreign corporations.
Deemed Repatriation of Foreign Earnings
For the last tax year beginning before January 1, 2018, any US shareholder of a specified foreign corporation is required to include in income its pro-rata share of the accumulated post-1986 deferred foreign income that’s then subject to a reduced tax rate of 15.5% on cash and 8% for all other earnings.
The act allows a qualified employee to elect to defer, for income tax purposes, the inclusion in income of the amount attributable to qualified stock transferred to the employee from the employer.
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