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Tax Reform Provisions that Affect Businesses

As the IRS implements this major tax legislation, check this page for updates and resources to learn how the Tax Cuts and Jobs Act (TCJA) affects businesses.
 

Income (including Gains and Losses)

Income from the sale of inventory by a domestic corporation generally is sourced based on where title and risk of loss to the property pass to the buyer.

Income from the sale of inventory where title passes outside the U.S. generally would be foreign source income. If a domestic corporation manufactures inventory in the U.S. and passes title and risk of loss outside the U.S., prior law provided that 50% of the income would be U.S. source and 50% would be foreign source. The Tax Cuts and Jobs Act, or tax reform, modified this rule to provide that 100% of the income from the sale of property manufactured by the corporation in the U.S. is U.S. source, regardless of where the title passes.

If a domestic corporation manufactures inventory outside the U.S., 100% of the income from its sale would be foreign source, regardless of where title passes and regardless of whether the inventory is sold to U.S. or foreign customers. If, instead, the domestic corporation purchases inventory that it sells, the sales income would be sourced based on where title and risk of loss pass to buyers.

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The new law enacts a participation exemption system for the taxation of certain foreign income. New proposed regulations are intended to ensure the application of section 956 is consistent with this new system and reduce the amount determined under section 956 with respect to certain domestic corporations and stock they own (or are treated as owning) in controlled foreign corporations (CFCs).

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Under the law, a U.S. person that owns at least 10 percent of the value or voting rights in one or more controlled foreign corporations will be required to include its global intangible low-taxed income as currently taxable income, regardless of whether any amount is distributed to the shareholder.

Notice 2019-46 PDF announces that the Department of the Treasury and the Internal Revenue Service intend to issue regulations that will permit a domestic partnership or S corporation that is a U.S. shareholder of a controlled foreign corporation to apply proposed §1.951A-5, related to the treatment of domestic partnerships and S corporations for determining the amount of the global intangible low-taxed income inclusion, for taxable years ending before June 22, 2019.  The notice also addresses the applicability of penalties for a domestic partnership or S corporation that acted consistently with proposed §1.951A-5 on or before June 21, 2019, but files a tax return consistent with the final regulations under §1.951A-1(e).  In order to apply the rules in proposed §1.951A-5 or for penalties not to apply under the notice, a domestic partnership or S corporation must satisfy certain notification and reporting requirements described in the notice.  Prior to the issuance of the regulations described in the notice, domestic partnerships and S corporations may rely on the notice, provided they satisfy the requirements described therein.

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The law extended the holding period with respect to certain carried interests (i.e. applicable partnership interests) to three years.

Carried interests are ownership interests in a partnership that share in the partnership’s net profits. Carried interests often are issued to investment managers in connection with the investment manager’s services. These interests often result in the holder receiving capital gains which are taxed at a lower rate, rather than ordinary income.

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The law, Section 1031 changed like-kind exchanges and now it applies only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange.

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The new law put a new limit on deductible business losses incurred by non-corporate taxpayers.

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Deductions and Depreciation

In connection with guidance that Treasury and the IRS have provided about the TCJA’s $10,000 cap on state and local tax deductions, a revenue procedure has been released providing a safe harbor under section 162 that applies to payments made by a C corp or specified pass-through entity to a 170(c) organization in return for a state or local tax credit.

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Newly amended section 163(j) of the Internal Revenue Code imposes a limitation on deductions for business interest incurred by certain large businesses. For most large businesses, business interest expense is limited to any business interest income plus 30 percent of the business’ adjusted taxable income.

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Owners of sole proprietorships, partnerships, corporations and some trusts and estates may be eligible for a new deduction – referred to as Qualified Business Income Deduction - allowing them to deduct up to 20 percent of their qualified business income, plus 20% of the aggregate amount of qualified real estate investment trust dividends and qualified publicly traded partnership income. A corrected draft of section 199A final regulations PDF has been released. These corrections include corrections to the definition and computation of excess section 743(b) basis adjustments for purposes of determining the unadjusted basis immediately after an acquisition of qualified property, as well as corrections to the description of an entity disregarded as separate from its owner for purposes of section 199A and §§1.199A-1 through 1.199A-6.

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Businesses can immediately expense more under the new law

Businesses can immediately expense more under the new law. A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million.

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New 100-percent depreciation deduction 

Proposed regulations have been issued on the new 100-percent depreciation deduction that allows businesses to write off most depreciable business assets in the year they are placed in service by the business.

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Recovery period for residential rental property

The general recovery period for residential rental property is 27.5 years. The law changed the alternative depreciation system recovery period for residential rental property from 40 years to 30 years.

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Utilities

In general, normalization is a system of accounting used by regulated public utilities to reconcile the tax treatment of accelerated depreciation of public utility assets with their regulatory treatment.  Under normalization, a utility receives the tax benefit of accelerated depreciation in the early years of an asset’s regulatory useful life and passes that benefit through to ratepayers ratably over the regulatory useful life of the asset in the form of reduced rates.

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The new law disallows employer deductions for (1) activities generally considered to be entertainment, amusement, or recreation; (2) membership dues for clubs organized for business, pleasure, recreation, or other social purposes; or (3) a facility used in connection with the above items, even if the activity is related to the active conduct of trade or business.

It also disallows deductions for expenses associated with transportation fringe benefits or expenses incurred providing transportation for commuting (except as necessary for employee safety).

Under the new law, there is now a prohibition on cash, gift cards and other non-tangible personal property as employee achievement awards. Special rules allow an employee to exclude certain achievement awards from their wages if the awards are tangible personal property.

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TCJA eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation.

Taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.

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The deduction for moving expenses has been suspended for most taxpayers for tax years beginning after Dec. 31, 2017 through Jan. 1, 2026. This suspension does not apply to members of the Armed Forces of the United States on active duty who move pursuant to a military order related to a permanent change of station.

However, employers may exclude from wages any 2018 reimbursements to or payments on behalf of employees for moving expenses incurred for a move that took place prior to January 1, 2018, and which would have been deductible had they been paid prior to that date. See Notice 2018-75 PDF for more information.

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The new law imposes dollar limitations PDF on the depreciation deduction for the year the taxpayer places  the passenger automobile in service and for each succeeding year.

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No ​​​​​​deduction for certain payments made in sexual harassment or sexual abuse cases.

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The law suspends all miscellaneous itemized deductions that are subject to the 2 percent of adjusted gross income floor. 

Therefore, the business standard mileage rate listed in Notice 2018-03, which was issued before the Tax Cuts and Jobs Act passed, cannot be used to claim an itemized deduction for un-reimbursed employee travel expenses in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2026. 

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Certain fines and penalties for violation of the law cannot be deducted. 

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Credits

A general business credit employers may claim, based on wages paid to qualifying employees while they are on family and medical leave, subject to certain conditions.

The employer credit for paid family and medical leave was extended to Dec. 31, 2020, from Dec. 31, 2019, under the Further Consolidated Appropriations Act, 2020 H.R. 1865 (Pub.L.116-94).

Eligible employers who set up qualifying paid family leave programs or amend existing programs by Dec. 31, 2020 will be eligible to claim the employer credit for paid family and medical leave, retroactive to the beginning of the employer’s 2018 tax year, for qualifying leave already provided. Notice 2018-71 provides detailed guidance on the new credit in a question and answer format.

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The legislation requires taxpayers take the 20-percent credit ratably over five years instead of in the year they placed the building into service and eliminates the 10 percent rehabilitation credit for the pre-1936 buildings. This provision is effective for amounts that taxpayers pay or incur for qualified expenditures after December 31, 2017.

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International

Learn more about how international businesses will be impacted by the Tax Cuts and Jobs Act (TCJA).

Passthrough Entities

These FAQs provide more information about the substantial built-in loss rules which prevent a double benefit of built-in losses that may result from the transfer of a partnership interest.

These FAQs provide more information about the elimination of the rule for technical terminations for partnerships or entities treated as partnerships for tax years beginning after December 31, 2017.

These FAQs provide information on the loss limitation rule of § 704(d) that was amended to take into account deductions for charitable contributions and foreign taxes. A special rule is provided for charitable contributions where the fair market value of the property contributed exceeds its tax basis.

Taxes

The new law repealed section 847 for taxable years beginning after December 31, 2017.  Under section 847, an insurance company that was required to discount its reserves could elect to take an additional deduction equal to the difference between the amount of unpaid loss reserves computed on a discounted basis and the amount computed on an undiscounted basis.

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Many U.S. corporations elect to use a fiscal year end and not a calendar year end for federal income tax reporting purposes. Due to a provision in the TCJA, a corporation with a fiscal year that includes Jan. 1, 2018 will pay federal income tax using a blended tax rate and not the flat 21 percent tax rate under the TCJA that would generally apply to taxable years beginning after Dec. 31, 2017.

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Newly enacted section 965 of the Internal Revenue Code imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an 8 percent rate. The transition tax generally may be paid in installments over an eight-year period.

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The new law treats a foreign taxpayer’s gain or loss on the sale or exchange of a partnership interest as effectively connected with the conduct of a trade or business in the United States to the extent that gain or loss would be treated as effectively connected with the conduct of a trade or business in the United States if the partnership sold all of its assets.

In this circumstance, the new law also imposes a withholding tax on the disposition of a partnership interest by a foreign taxpayer.

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The Treasury Department and the Internal Revenue Service issued Notice 2018-14 PDF and Publication 15, Employer's Tax Guide to help businesses apply law changes to withholding. These materials are designed to help employers and employees with a variety of withholding matters during and after the transition to new, reduced tax rates and updated withholding tables.

More information is available in Notice 1036 PDF and the IRS Tax Withholding Estimator Tables Frequently Asked Questions.

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Accounting Method Changes

This notice of proposed rulemaking provides guidance on the timing of income inclusion under section 451(b). Section 451 was amended by section 13221 of the Tax Cuts and Jobs Act.  These proposed rules affect accrual method taxpayers with an applicable financial statement.

Under § 451(b), as amended, for an accrual method taxpayer with an applicable financial statement, the “all events” test with respect to any item of gross income, or portion thereof, is deemed to be met no later than when such item, or portion thereof, is taken into account as revenue in the taxpayer’s applicable financial statement.  

These proposed regulations clarify the general rule for how the all events test applies to taxpayers with an applicable financial statement.  The proposed regulations also detail exceptions and clarify that this general rule does not change the applicability of any exclusion provision, or the treatment of non-recognition transactions of the Code. 

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This notice of proposed rulemaking provides guidance on the timing of income inclusion for advanced payments under section 451(c).  Section 451 was amended by section 13221 of the Tax Cuts and Jobs Act.  These proposed rules affect accrual method taxpayers that receive advance payments that elect to use the deferral method.

Under section 451(c), as amended, an accrual method taxpayer that receives an advance payment is required to include the amount in income in the taxable year of receipt.  Section 451(c) also provides a deferral method for certain advance payments for goods, services, and other specified items by allowing an accrual method taxpayer to elect to defer the inclusion of income associated with certain advance payments to the taxable year following the year of receipt if such income is also deferred for AFS purposes. 

These proposed regulations provide guidance on the use of the deferral method of accounting under section 451(c) for all accrual method taxpayers that receive advance payments, including defining the term advance payment, and that the deferral method is a method of accounting under section 446 and the accompanying regulations.

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Eligible terminated S corporations are required to change from the overall cash method to an overall accrual method of accounting because of a revocation of its S corporation election, and they should make this method change for the C corporation’s first taxable year after such revocation.

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Opportunity Zones

Opportunity Zones are an economic development tool—that is, they are designed to spur economic development and job creation in distressed communities. Opportunity Zones are designed to spur economic development by providing tax benefits to investors.

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Specific Industries

The TCJA made the following change: - certain payments made by an aircraft owner (or, in certain cases, a lessee) related to the management of private aircraft are exempt from the excise taxes imposed on taxable transportation by air.

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Alaska Native Corporations and Alaska Native Settlement Trusts may be able to take advantage of certain benefits in the recently enacted tax reform legislation. The new law also requires that certain contributions made by Native Corporations to Settlement Trusts in 2017 be reported to the Settlement Trusts by January 31, 2018.

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Many farmers and ranchers will benefit from tax law changes that affect net operating losses, pass-through entities and accounting method changes.

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Regulations provide guidance on new discounting rules for unpaid losses and estimated salvage recoverable of insurance companies for Federal income tax purposes. The regulations implement legislative changes to the Internal Revenue Code (Code) and make other technical improvements to the derivation and use of discount factors. The regulations affect entities taxable as insurance companies.

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The Production Period for Beer, Wine, and Distilled Spirits provision provides an opportunity to deduct the interest expenses occurred during the “aging period” for these beverages (subject to other possible interest deduction limitations included in TCJA).

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Other Information

Individuals and businesses have additional time to file an administrative claim or to bring a civil action for wrongful levy or seizure. The TCJA extended the time limit for filing an administrative claim and for bringing a suit for wrongful levy from nine months to two years.

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The law made some changes affecting Health Savings Accounts, Pension Plans and Employee Stock Options. 

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The tax year 2018 annual inflation adjustments have been updated to reflect changes from the Tax Cuts and Jobs Act (TCJA).

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Page Last Reviewed or Updated: 05-Nov-2020