Preparing for change
The scope of the new US tax legislation will have far reaching impact to financial services companies. Below are some of the most significant provision changes and impacted areas companies should start considering. The impact will range across growth and strategy, operating model, technology, capital, liquidity and investments, and more.
Top business provisions
- Corporate rate reduced to 21% from 35%, beginning in 2018; AMT repealed1
- New provisions:
- Exemption for certain dividends received by US corporations from 10%-owned foreign corporations2
- Transition tax on deferred foreign earnings:15.5% (cash), 8% (noncash)3
- Broad-based anti-deferral provision taxes global intangible low-taxed income (GILTI) on a current basis at 10.5% effective tax rate (some foreign tax credits available)
- 20% deduction for domestic “qualified business income” from a partnership, an S corporation or a sole proprietorship4
- Base erosion anti-abuse tax (BEAT) provision; minimum tax of 10% (5% transition rate in 2018) applied on income determined after adding back deductible payments made to related foreign persons, if certain thresholds are met. Note that rates are 11% and 6% for banks and broker dealers5
- Significantly amends limitation of interest deduction to 30% of earnings before interest, tax, depreciation and amortization (EBITDA) for four years; thereafter, 30% of earning before interest and tax (EBIT); worldwide debt limit removed6
- Bonus depreciation increased to 100% from 50% for “qualified property” placed in service after 9/27/17; starting in 2023, phase down of 20% for five years
- Expands definition of covered employee for purpose of compensation deduction limits (§162m) to include the CEO, CFO and the three most-highly compensated officers for the taxable year
Top individual provisions
- Seven brackets: 10%, 12%, 22%, 24%, 32%, 35%, 37% (rates reduced, bracket thresholds adjusted )
- Standard deduction increased to $24k for joint returns, $12k for single filers; personal exemptions repealed
- Net capital gains and qualified dividends retain current law; subject to the existing 3.8% net investment income tax
- Individual alternative minimum tax (AMT) retained; exemption amount increased; phase-out of exemption increased7
- Estate tax exclusion increased to $10m from $5m and adjusted for inflation8
- Child tax credit increased to $2k, $1.4k refundable; phase out increased to $200k (single) and $400k (married filing jointly)
- Principal cap on deductible home mortgage interest for new mortgages (after 12/15/17) reduced to $750k from $1m; deduction retained for second homes, but no longer available for home equity lines
- State and local deduction capped at $10k of property and income (or sales) taxes (previously permitted subject to AMT)
- Itemized deductions subject to 2% floor repealed
- Medical expense deduction would apply to expenses that exceed 7.5% of adjusted gross income (AGI) in 2017 and 2018 and expenses that exceed 10% of AGI thereafter
- AGI limitation for charitable contributions increased to 60% from 50% for gifts of cash to specified organizations
- Affordable Care Act (ACA) “shared responsibility payment” reduced to $0
Visit ey.com/taxreform or contact your EY Advisor for more information.
1 Notice 2018-18 announces that S corporations will be subject to new carried interest holding period rule
2 US tax reform enacted — Key provisions for private equity and alternative asset management industry
3 Senate Finance Committee Chairman's Mark of the "Tax Cuts and Jobs Act": Key provisions for private equity and alternative asset management industry
4 Tax Cuts and Jobs Act significantly affects US private companies with outbound investments
5 US tax reform enacted — Key provisions for private equity and alternative asset management industry
6 Tax Cuts and Jobs Act contains provisions that may affect RICs
7 Tax reform framework has implications for alternative asset management funds
8 House tax reform bill would affect banking and capital markets
9 Final federal tax reform bill has state tax implications
Notice 2018-18 announces that S corporations will be subject to new carried interest holding period rule
FATCA and CRS: challenges and considerations for effective reporting
US tax reform: domestic tax issues on the banking and capital markets industry
The impact of US tax reform on alternative asset management, Session 4
Impact of US tax reform on the captive insurance market
A reminder of certain changes that took effect in late 2017, as well as those that will take effect in 2018.
A number of provisions in the Act may affect regulated investment companies (RICs). Read more to learn about the impact of the new legislation as quickly as possible.
The final bill contains the most significant changes to the federal income tax laws since 1986 and will affect individuals, pass-through entities (PTEs) and corporations.
The law contains several provisions affecting funds, transactions, portfolio companies, and fund principals/investment professionals.
All of the insurance-specific provisions in the final bill were scored as revenue raisers.