2 minute read 30 Apr 2019
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How prepared is your enterprise to manage the impacts of US tax reform?

By

US Americas

Multidisciplinary professional services organization

2 minute read 30 Apr 2019

Changes in US tax legislation have necessitated financial services companies to consider key provisions and the impacted areas.

Top business provisions

  • Corporate rate reduced to 21% from 35%, beginning in 2018; AMT repealed
  • New provisions:
    • Exemption for certain dividends received by US corporations from 10%-owned foreign corporations
    • Transition tax on deferred foreign earnings:15.5% (cash), 8% (noncash)
    • 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 proprietorship
    • 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 dealers
  • 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 removed
  • 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  • Standard deduction increased to $24k for joint returns, $12k for single filers; personal exemptions repealed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

Summary

Changes in US tax legislation have vast business implications for financial services companies. The impact ranges across growth and strategy, operating models, technology, capital, liquidity and investments and more. By understanding and implementing the key provisions, firms can be better prepared to manage large-scale transformation.

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By

US Americas

Multidisciplinary professional services organization