IIAR

Tax reform has emerged as the top priority in Washington, DC as President Trump and Congressional Republicans set the goal for passing legislation before the end of 2017. Republican leaders are feeling pressure to secure a signature legislative victory following the failure to repeal and replace Obamacare. As a result, the House of Representatives and Senate have worked during the fall of 2017 to develop and advance a package of tax reforms. These efforts culminated during the week of December 18, 2017, when a final tax reform package was approved.

The new tax policies will have a major impact on businesses operating in the United States, as well as all individuals living in the United States. Below is a comparison of the major business tax provisions and an analysis of how they would impact industry:

CORPORATE TAX RATES

Under the final package, rate for “c” corporations would drop from the current level of 35 percent to 21 percent. The new rate goes into effect on January 1, 2018. This is arguably the most positive policy change for companies in the industrial refrigeration industry. Before the reduction, corporations in the United States faced the highest corporate tax rate of industrialized nations. A permanent reduction in the corporate tax rate will help reduce the tax burden on U.S. corporations and make them more competitive on the global stage.

PASS-THROUGH BUSINESS TAX RATES

Provisions related to pass-through businesses were hotly contested during consideration of the bill. The House established a very complex system for calculating taxes for pass-through businesses, while the Senate took a relatively simpler approach. The final package follows the Senate approach, with some modifications. Individual taxpayers would be eligible to take a 20 percent deduction on qualified business income from a partnership, “s” corporation or sole proprietorship. This applies for up to 50 percent of the W-2 wages of the taxpayer who has qualified business income from a partnership or “s” corporation (with some exclusions and phase in for couples earning less than, or slightly more than, $350,000 or individuals making less than, or slightly more than, $157,500). The bill would also allow specified service businesses to utilize the 20 percent deduction in cases where taxable income is less than $350,000 for married couples and less than $157,500 for individuals.

Pass-through provisions had the potential to derail the bill in both the House and Senate, as many small businesses advocated raised concerns that they would be disadvantaged compared with “C” corporations. Some policy makers were reluctant to make the pass-through provisions more generous, because they could incentivize high-income taxpayers to attempt to convert wages or other compensation for personal services to income eligible for the 20-percent deduction under the provision. The final bill is intended to strike a balance between these concerns, recognizing the importance of giving tax relief to small pass-through businesses, while deterring larger pass-throughs from converting wages to business income eligible for the 20-percent rate.

CORPORATE ALTERNATIVE MINIMUM TAX

The final agreement repeals the corporate alternative minimum tax. In the case of a corporation, the agreement allows the AMT credit to offset the regular tax liability for any taxable year. In addition, the AMT credit is refundable for any taxable year beginning after 2017 and before 2022 in an amount equal to 50 percent (100 percent in the case of taxable years beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. The full amount of the minimum tax credit will be allowed in taxable years beginning before 2022.

ESTATE TAX

The legislation retains the estate tax, but significantly increases the exemption thresholds. Starting in 2018, the estate tax exemption starting for single individuals doubles from $5 million to $10 million and for married couples from $10 million to $20 million. The amounts will be indexed to inflation occurring after 2011. The new thresholds go into effect on January 1, 2018 and expire at the end of 2025.

The doubling of the exemption levels will help many small businesses who have a larger estate than the current exemption levels. However, much effort in Washington has been placed on repealing the estate tax and many are disappointed that the final package does not include a full repeal. It is also concerning that the increased thresholds expire at the end of 2025, setting up the potential return to lower levels if Congress does not take action.

INCREASED BONUS DEPRECIATION

Companies will be able to immediately write off the full cost of investments in their businesses, starting with assets purchased and placed in service after September 27, 2017 and before January 1, 2023. The write off percentage would then phase out between 2023 and 2027, going down by 20 percent each year.

Companies with plans for investment during the five-year window can take advantage of the 100 percent depreciation allowance. This can be a useful tool for companies to realize the available depreciation benefits of capital expenditures fully in the first year. However, the restricted time window limits the scope of the benefits. RESEARCH AND DEVELOPMENT CREDIT The Research and Development Credit is retained.

EXPANDED AVAILABILITY OF CASH METHOD OF ACCOUNTING

The ceiling for cash method of accounting is increased from $5 million average gross receipts to $25 million.

NEW EMPLOYER CREDIT FOR PAID FAMILY AND MEDICAL LEAVE

Creates a new credit for wages paid to employees on FMLA if certain conditions are met. However, this credit is only effective for 2018 and 2019. An eligible employer is one who has in place a written policy that allows all qualifying full-time employees not less than two weeks of annual paid family and medical leave, and who allows all less-than-full-time qualifying employees a commensurate amount of leave on a pro rata basis.

DEDUCTION FOR BUSINESS INTEREST

Effective in 2018, businesses would only be able to deduct net interest expenses incurred by a business up to 30 percent of the business’s adjusted taxable income.

SMALL BUSINESS EXCEPTION FROM LIMITATION ON DEDUCTION OF BUSINESS INTEREST

Effective in 2018, companies with average annual gross receipts of $25 million or less would be able to continue to deduct business interest.

SUMMARY

Congress and the Administration successfully raced to complete tax reform by the end of 2017, handing Trump and Congressional Republicans a muchneeded legislative win. Many industrial refrigeration companies operating in the United States will stand to benefit under the news tax structure. The lowering of the corporate rate to 20 percent will be an automatic benefit to “c” corporations. For pass-through businesses, the calculation of impacts is more complicated, but still an improvement over the current rates these companies face. In addition to the lowering of tax rates, the increased exemptions of the estate tax, along with several other favorable business tax policies should provide benefits across the industry.