Corporate provisions in tax reform proposals

by Luke D. Guettermann, CPA

The United States House Representative and Senate have both pass separate versions of a tax reform bill. Below is a chart that detail the proposals and the current tax law.

 

Corporate and Business Breakdown of Tax Bills
Issue House Bill Senate Bill Current Law
 

 

Corporate Tax Rate

 Beginning in 2018 a flat 20% tax rate and a personal service flat 25% tax rate. Beginning in 2019 a flat 20% tax rate and no special tax rate for personal service corporations Top corporate tax rate of 35% and for personal service corporations a flat 35% tax rate.
 

 

Dividend Received Deduction

 65% Deduction on ownership between 79.99% and 20%; 50% deduction on ownership less than 20%. 65% Deduction on ownership between 79.99% and 20%; 50% deduction on ownership less than 20%. 80% Deduction on ownership between 79.99% and 20%; 70% deduction on ownership less than 20%.
 

Bonus Depreciation (not including property with longer production purposes or plants bearing fruits and nuts)

 100% depreciation for qualified property acquired after 9/27/17 and before 1/1/2023 100% depreciation for qualified property acquired after 9/27/17 and before 1/1/2023 with an annual reduction of 20% from 2023-2027. 50% bonus depreciation for property acquired before 1/1/2018. 40% bonus depreciation for 2018, 30% for 2019, and no bonus depreciation after 12/31/2019.
 

 

 

 

Section 179 expensing

 For tax years 2018 through 2022 the expensing limitation would be $5 million with a phase-out beginning at

$20 million of purchases. Both amounts to be indexed for inflation.

 For 2018 the expensing limitation would be $1 million with a phase-out beginning at $2.5 million. After 2018 the amounts would be indexed for inflation. For 2018 the expensing amount is

$520,000 with a phase-out beginning at

$2.070 million. Both amount will be indexed for inflation.
 

 

 

 

 

 

 

 

 

 

Limitation on business interest expense deduction

 Beginning in 2018 the deduction for interest expenses incurred by a business would be limited to 30% of the business’s adjusted taxable income. Businesses with an average of annual gross receipts of $25 million or less would be exempt from the limit. The disallowed interest could be carried forward for up to 5 years. Beginning in 2018 the deduction for interest expenses incurred by a business would be limited to 30% of the business’s adjusted taxable income, the business interest income and the floor plan financing interest. Businesses with average annual gross receipts of

$15 mil or less would be exempt from the limit. Disallowed interest can be carried forward indefinitely. There are additional exceptions relating to

 No limitation on interest deduction.

 

Example:  In 2019, a business with an average gross income for the prior three years of $50 million, has gross receipts of $55 mil, ordinary deductions of $40 mil, interest expense of $5 mil, qualified asset purchases of $500,000, and nonqualified tangible personal property purchases of $1.5 mil.   Below is a break down of how the entity would fare for Federal tax purposes under the House bill, the Senate bill, and current law (assumes neither AMT nor the domestic activity production deduction applies).
House Bill Senate Bill Current Law
Gross Receipts $55 mil $55 mil $55 mil
Ordinary Deduction $40 mil $40 mil $40 mil
Bonus Depreciation $500,000 $500,000 $200,000
Section 179 Deduction $1.5 mil $1 mil $520,000
Assets (All assets 5 year property)  

$0

 $100,000 ($500,00 of asset purchases not immediately expensed) $256,000 ($1.28 mil of asset purchases not immediately expenses)
Taxable Income before Interest $13,000,000 $13,400,000 $14,024,000
Allowed Interest Expense $3,900,000 $4,020,000.0 $5,000,000
Taxable Income $9,100,000 $9,380,000 $9,024,000
Federal Corporate Income Tax $1,820,000 $1,876,000 $3,068,160