Last month, President Trump signed a major US tax overhaul into law. The new law has serious ramifications for businesses.
This post outlines some important considerations that all companies operating in the US should account for when reviewing their tax strategies in light of the new law. It also includes some considerations specific to foreign companies operating in the US and to US companies with foreign subsidiaries.
Needless to say, these considerations are just the tip of the US corporate tax iceberg, and all companies operating in the US should consult with an expert to ensure they comply with the new law and maximize their advantages under it.
Considerations for All Businesses Operating in the US
- Tax provisions. Since US corporate tax rates have changed for the quarter that ended December 31, 2017, companies will need to revalue their deferred tax assets and liabilities to the new rate. Most companies will have been using an effective rate of 40 percent under the former tax code, while the new rate is generally to be 28 percent, based on a 21 percent federal rate and a state-blended rate. The rate change will affect the profit and loss statement on the tax expense line.
- Net operating losses. Losses under prior US law were allowed to be carried back two years and carried forward 20 years. Starting in 2018 — and for losses generated in 2018 and beyond — losses are not to be carried back, but may be carried forward indefinitely. Losses may only be used to offset 80 percent of a company’s taxable income. Note that losses prior to 2018 are not subject to this 80 percent limitation, so losses must be recorded in layers.
- Interest expenses. For tax years beginning after December 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30 percent of the business’s adjusted taxable income.
- Corporate alternative minimum tax. The new tax act did away with the corporate alternative minimum tax (AMT). The AMT was a significant benefit to most taxpayers in terms of tracking and calculations on provisions and tax filings.
Considerations for US Companies With Foreign Subsidiaries
- Dividends of earnings and profits. A dividend is required to be picked up for the subsidiary’s last tax year beginning before 2018 (i.e., for calendar-year companies on December 31, 2017). This dividend is then taxed to the US company at rates associated with either the cash balance (15.5 percent) of the foreign subsidiary or a lower rate (8 percent) on the other assets held. There is no foreign tax credit provided on this dividend. (Note that S corporations are not required to pick up this dividend.)
- Foreign tax credits and dividends. After 2018, no foreign tax credit on dividends from foreign subsidiaries will be permitted, but a full tax deduction for the dividends will be allowed.
Considerations for US Companies With Foreign Subsidiaries or That Are Owned by Foreign Companies
- Base erosion tax. After 2017, an 11 percent add-on tax for related-party payments will be charged to corporations (other than S corporations) with average annual gross receipts of at least $500 million. The additional tax is applicable to management services, royalties, cost-plus agreements and all other cross-border payments. Services at cost are excluded from the additional tax.