NATSO Summary and Analysis of Tax Reform Legislation

Introduction

In late December, 2017, Congress passed the most comprehensive rewrite of the U.S. tax code in more than 20 years. The legislation contains a litany of substantial policy changes that will have direct implications for travel plaza and truckstop businesses.  NATSO has provided for its members this detailed summary and analysis of this legislation and the affect it could have on their businesses.  

NOTE:  This document does not, and is not intended to, provide legal, tax, or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations.

Summary

The final legislation reflects compromises in a host of areas, including a 21% corporate tax rate that will be effective in 2018 – up from 20% in the bills that were originally passed by the House and Senate – and a 37% top individual income tax rate that would apply to joint filers with annual incomes over $600,000.  

The legislation also provides a deduction for pass-through business owners of 20%, lower than the 23% deduction in the Senate-passed bill but, because of the drop in the top individual tax rate, resulting in a slightly better effective tax rate of 29.6% on income from a pass-through business.  The deduction applies to the first $315,000 of joint income (subject to phase-out) earned from businesses organized as S corporations, partnerships, LLCs, and sole proprietorships.  Limitations based on W-2 wages and capital apply above those amounts and for “specified service businesses” such as law and accounting practices.   Trusts and estates are eligible for the deductions.

The changes made to individuals’ taxes are temporary, scheduled to sunset after 2025. These changes will retain seven tax brackets but result in lower taxes for each: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.  This decision to make these changes temporary was designed to limit the legislation’s impact on the deficit over the course of ten years; parliamentary rules would not permit the legislation to add to federal deficits beyond a 10-year budget window.  The bill’s proponents have argued that a future Congress will maintain these lower rates when the time comes, but unless they do individual tax rates will revert back to current law in 2026. 

The legislation doubles the exemption thresholds for estate and gift taxes from $5.6 million to $11.2 million per individual and $22.4 million per couple with portability, effective Jan. 1, 2018.   With respect to the alternative minimum tax, it is left in place for individuals but the exemptions are doubled.  The corporate alternative minimum tax, on the other hand, is repealed.   The standard deduction is roughly doubled.

With respect to expensing, bonus depreciation (allowing businesses to take an immediate first-year deduction on the purchase of eligible business property) is increased under the legislation from 50% to 100% for “qualified property” placed in service after September 17, 2017 and before 2023.  (The increased expensing phases down starting in 2023 by 20% for each of the five following years.)  Section 179 expensing (allowing businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year, i.e., treat it as a current expense rather than a capital expense) is increased from $500,000 to $1 million for “qualified property” (i.e., tangible personal property used in a trade or business) that is placed in service in tax years beginning after 2017, with a phase-out beginning at $2.5 million.

Various changes were made toward the end of the process to appease specific lawmakers whose votes were necessary to pass the bill.  Responding to members from high-tax states, for example, the final legislation allows the state and local tax deduction to apply to property and income or sales taxes up to a new cap of $10,000.  (Earlier iterations of the bill limited the deduction solely to property taxes.)  Additionally, the refundable portion of the child tax credit was increased to $1,400 to win the support of Senator Marco Rubio (R-FL); and the bill includes a provision to permit drilling in a portion of the Arctic National Wildlife Refuge (ANWR) in order to help convince Sen. Lisa Murkowski (R-AK) to vote for it. 

The legislation is also notable for what it does not include.  For instance, last-in first-out (LIFO) accounting, a popular target for lawmakers looking for ways to raise revenue, is left intact.  The Work Opportunity Tax Credit, which many travel plaza businesses utilize when they hire employees from certain target groups of job seekers (such as veterans and the long-term unemployed), was repealed in the original House legislation, but ultimately preserved in the final package.  

The final bill also retains the tax-exempt status of interest earned on “private activity bonds,” which the House bill would have repealed.  State and local governments often utilize these bonds’ favorable tax treatment to undertake infrastructure projects. 

Below is a more detailed summary of these issues.

Corporate Provisions

  • Rate – The legislation reduces the corporate tax rate from 35% to 21%, effective for tax years beginning after 2017, with no sunset. 
  • Repeal Corporate AMT – The corporate alternative minimum tax (AMT) is repealed under the legislation.  Taxpayers with an AMT Credit can use the credit to offset regular tax liability. 
  • Depreciation and Expensing –
    • 100% Expensing – Bonus depreciation would be increased from 50% to 100% for “qualified property” placed in service after September 27, 2017 and before 2023.  The increased expensing phases down starting in 2023 by 20% for each of the following five years.
    • Section 179 Expensing – Section 179 expensing is increased to $1 million for “qualified property” (i.e., tangible personal property used in a trade or business) placed in service in tax years beginning after 2017, with a phase-out beginning at $2.5 million. 
    • Real Property Cost Recovery – The recovery period for real property is maintained.  Specifically, the present law general modified accelerated cost recovery system (“MACRS”) recovery period for nonresidential real property is 39 years.  The provision applies to property placed in service after 2017.  The final legislation eliminates the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property, and instead provides a general 15-year MACRS recovery period for such qualified improvement property. 
    • Employer Deductions – Expenses paid for entertainment activities, and transportation or commuting expenses of employees, is lo longer deductible after 2017.  Expenses for meals and beverages will continue to be deductible at 50% and are expanded temporarily (until 2026) to cover expenses incurred for food and beverages offered for the employer’s convenience.  Employee awards provided in cash or via gift cards would not qualify as an expense eligible for a deduction by the employer. 
    • Family Medical Leave Act Credit – Employers that pay wages to employees on family and medical leave will receive a general business credit equal to 12.5% of those wages.  To be eligible, employers must allow (among other requirements) for at least two weeks of leave and offer the leave to full time and non-full time employees.  The FMLA credit is available for wages paid in 2018 and 2019. 
    • Work Opportunity Tax Credit – The final legislation regains current law with respect to the Work Opportunity Tax Credit, which is currently scheduled to expire after 2019. 

Pass-Through Income

  • Special 20% Deduction – The conference agreement generally follows the Senate bill and provides individuals with a 20% deduction on certain pass-through income.  Special limitations apply to “specified service businesses” based on the income of their owners.
    • General Rule – An individual taxpayer may deduct 20% of domestic “qualified business income” (“QBI”) from a partnership, S corporation, or sole proprietorship (“qualified businesses”), subject to certain limitations and thresholds.  At the top tax rate of 37%, if a taxpayer’s sole income source is domestic QBI and the application of the deduction is not limited, then the effective tax rate on the domestic QBIwould be 29.6%.  The deduction is not allowed against Adjusted Gross Income but rather is a deduction to reduce taxable income.  Trusts and estates are eligible for this deduction
      • “Qualified Business Income” (QBI) – QBI for a taxable year means the net amount of domestic qualified items of income, gain, deduction, and loss with respect to a taxpayer’s qualified businesses, which includes any trade or business other than specified services trades or businesses (defined below).  In determining a taxpayer’s qualified items of income, gain, deduction, and loss, items are taken into account only to the extent included or allowed in the determination of taxable income for the year.  (REIT non-capital gain dividends are considered qualified items of income for this purpose.)  QBI does not include reasonable compensation of an S corporation shareholder, amounts allocated or distributed to a partner who is acting other than in his/her capacity as a partner for services, and guaranteed payments in the nature of remuneration for services.  It also does not include certain investment-related items and contains limitations based on
        “W-2 wages.”  If the computation of QBI results in a loss for a taxable year, the amount of the loss is carried forward and treated as a loss from a qualified business in the next taxable year.
      • Limit Based on Wages and Capital – For taxpayers whose taxable income does not exceed $157,500 ($315,000 if married filing jointly) there are no limitations.  Above those thresholds, the amount of the deduction is limited to the greater of 50% of the W-2 wages, or the sum of 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property.  Only wages that are properly allocable to qualified business income are taken into account.  Qualified property includes depreciable tangible property. 
  • State and Local Tax Deduction – Pass-through entities retain the ability to deduct entity-level state and local taxes.
  • Effective Date and Sunset – The pass-through deduction provision is effective for taxable years beginning after December 31, 2017 and before January 1, 2026.

Individual Taxpayer Provisions  

NOTE: Significantly, all of the individual tax provisions will expire at the end of 2025 under the final legislation, potentially leaving it up to a future Congress to extend them or make them permanent.

  • Individual Rates and Standard Deduction – The legislation reforms individual income tax rates such that:
    • The 10% rate applies to the first $9,525 in taxable income for single filers and the first $19,050 for joint filers;
    • The 15% rate is eliminated and a new 12% rate applies to taxable income in excess of $9,525 for single filers and $19,050 for joint filers;
    • A new 22% rate applies to taxable income in excess of $38,700 for single filers and $77,400 for joint filers;
    • The 25% rate is eliminated and a new 24% rate applies to taxable income in excess of $70,000 for single filers and $165,000 for joint filers;
    • The 28% and 33% rates are eliminated and a new 32% rate applies to taxable income in excess of $160,000 for single filers and $315,000 for joint filers;
    • The 35% rate applies to taxable income in excess of $200,000 for single filers and $400,000 for joint filers;
    • The 39.6% rate is eliminated and a new 37% rate applies to taxable income in excess of $500,000 for single filers and $600,000 for joint filers.
    • Capital Gains and Dividends – Under the final legislation, net capital gains and qualified dividends will continue to be taxed at the current 0%, 15%, and 20% rates, and also will continue to be subject to the 3.8% net investment income tax. 
    • Elimination / Reform of Itemized Deductions  -- For individuals, the final legislation eliminates several itemized deductions, but tax incentives for home mortgage interest and charitable contributions will be retained, albeit in a modified form. 
      • The state and local tax deduction is now subject to a cap of $10,000 in real estate and income (or sales) taxes.
      • The Affordable Care Act’s (aka “Obamacare”) individual mandate tax penalty is reduced to $0 effective beginning in 2019.
      • Standard Deduction – The standard deduction is set at $24,000 for joint returns, and $12,000 for single filers.
      • Alternative Minimum Tax – The AMT is retained for individuals, but the exemption amount is increased from $84,500 to $109,400 for joint returns and from $54,300 to $70,300 for single filers, while the beginning of the phase-out of the exemption is significantly increased from $160,000 to $1,000,000 for joint returns and from $120,700 to $500,000 for single filers.
      • Mortgage Interest Deduction – The final legislation limits the individual deduction of home mortgage interest, lowering it from the current limit of $1 million to $750,000.
      • Child Tax Credit – The child tax credit is increased from $1,000 to $2,000 per child under age 17.  The bill also provides for a $500 nonrefundable credit for qualifying dependents other than qualifying children.  The maximum amount refundable may not exceed $1,400 per qualifying child.  The provision expires for taxable years beginning after December 31, 2025. 
      • Estate, Gift, and Generation-Skipping Transfer (GST) Tax – The final legislation doubles the estate, gift, and GST exemptions from $5.6 million to $11.2 million per individual and $22.4 million per couple with portability, effective Jan. 1, 2018.
        • Under current law, the IRS projects approximately 50,000 families will be subject to the estate tax over the next ten years.  Doubling the estate tax exemption will reduce the number of filers to approximately 4,600 and payers to 1,800 per year.  The gift and GST exemptions will also double starting Jan. 1, 2018.  This means that couples can now gift up to $22.4 million over their lives without triggering a gift tax liability. 
        • All three taxes are indexed to inflation.
        • EXAMPLE:
          • $15 million business, single filer.
            • CURRENT LAW: $15 million - $5.6 million = $9.4 million x 40% = $3.76 million
            • NEW LAW: $15 million - $11.2 million = $3.8 million x 40% = $1.52 million tax bill ($2.24 million savings vs. current law).
            • Charitable Contribution Incentive – The final legislation makes a number of modifications to the charitable contribution incentive.  Most significantly, it temporarily increases the individual percentage-of-income limitation for cash gifts from 50% to 60% (through 2025). 

Miscellaneous Energy Provisions

  • Oil and Gas Energy Tax Incentives – The final legislation does not repeal any conventional energy tax credits; it also leaves untouched the deductibility of intangible drilling costs and oil producers’ ability to take percentage depletion.
  • Electric Plug-In Vehicles – The final legislation does not repeal the tax credit for new 4-wheeled, battery powered electric vehicles (as the original House bill would have done). 
  • Renewable Energy and Biofuel Provisions – The final legislation does not extend expired tax incentives commonly referred to as “extenders”, such as the biodiesel blenders’ tax credit.  Lawmakers have discussed the possibility of clearing up this backlog of expired provisions by moving a separate tax extenders bill attached to a government spending bill in mid-January.
  • ANWR – The bill permits drilling in certain areas of the Arctic National Wildlife Refuge.


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