The most significant federal tax reform and relief bill since 1986 was passed today and is on the way to President Trump for his expected signature. The bill will greatly reduce taxes for most individuals and businesses. Click here for the bill summary and bill text.
Among the key business tax provisions:
- Corporations will benefit from: a permanent corporate rate of 21% down from the current 35% top rate; repeal of the corporate alternative minimum tax; and adoption of a territorial taxation system (taxing income where it is earned versus the current worldwide taxation system). For multinational companies, new anti-abuse rules and a base erosion anti-abuse tax will limit the ability to reduce their U.S. tax liability when making cross-border payments to their affiliates.
- Companies with deferred foreign profits will have those profits deemed repatriated with a tax rate of 15.5% for cash and 8% for illiquid assets. “Deemed” means the companies will be taxed regardless of whether they pay dividends on their deferred foreign earnings.
- Pass-through entities reporting business income on personal income taxes will benefit from lower individual income tax rates and bracket expansions; reduction in the top individual rate from 39.6% to 37%; and a 20% deduction for business income. This 20% deduction is subject to a limit based on the greater of 50 percent of W-2 wages paid in your business or the sum of 25 percent of W-2 wages plus 2.5 percent of the basis of your depreciable property.
- Full expensing for property acquired between September 28, 2017, and December 31, 2022. Thereafter, the bonus depreciation percentage decreases by 20 points per year, phasing out entirely by 2027. The final bill no longer requires property eligible for bonus depreciation to be new; it extends this benefit to used property as well. In addition, interest deductibility is capped at 30% of earnings before interest, taxes, depreciation and amortization (EBIDTA). The final bill only allows EBITDA through 2021, so there will be an effort in the future to make this change permanent.
- Estate tax threshold is doubled from current $5.6 million to $11 million.
- Individual health insurance mandate is effectively repealed in 2019 by reducing the penalty to $0. Current law has a penalty of $695 or 2.5% of income, whichever is higher.
Federal tax changes will provide an important opportunity to reform and make more competitive Minnesota’s tax system. Minnesota’s income tax system is based on many federal tax definitions, and state policymakers will need to proactively pass legislation in response the federal changes. The Minnesota Chamber will be advocating in the 2018 session for tax reforms to encourage investment, innovation and growth within our state.
For questions, contact Beth Kadoun, the Minnesota Chamber’s vice president of tax and fiscal policy, at email@example.com.