Prior to the end of 2017, Congress passed the Tax Cuts and Jobs Act (“TCJA”). It has a potentially far-reaching effect on American businesses, especially small businesses formed as LLCs. These changes take effect for the 2018 tax year.
Elements of the TCJA include reducing tax rates for businesses and individuals; increaseing the standard deduction and family tax credits, but eliminating personal exemptions and reducing itemizee deductions; limiting deductions for state and local income taxes and property taxes; limiting the mortgage interest deduction; reducing the alternative minimum tax for individuals and eliminating it for corporations; reducing the number of estates impacted by the estate tax and repealing the individual mandate of the Affordable Care Act.
The threshold for estate taxes will be increased under the TCJA. Under current law, estates over $5.6 million are subject to a 40% tax. The TCJA increases the taxable threshold to $11.2 million and $22 million if married filing jointly.
For pass-through entities such as LLCs and S-corporations, TCJA reduces tax by virtue of a 20% deduction, after which a lower rate of 29.6% will be applied. This benefit phases out starting at $315,000.
The corporate tax rate is reduced from 35% to 21%, with some deductions and credits either reduced or eliminated. The alternative minimum tax for corporations is eliminated.
The TCJA changes calculation of American corporate income tax on overseas earnings from a global to a territorial method. Rather than a corporation paying the U.S. tax rate (35%) for income earned in any country (less a credit for taxes paid to that country), each subsidiary would pay the tax rate of the country in which it is legally established. In other words, under a territorial tax system, the corporation saves the difference between the generally higher U.S. tax rate and the lower rate of the country in which the subsidiary is legally established.
There is a one time repatriation tax of profits in overseas subsidiaries of 7.5%, 14.5% for cash. This is an attempt to have U.S. multinationals bring nearly $3 trillion that has been accumulated offshore, much of it in tax haven countries.