On December 22, 2017, the U.S. passed the Tax Cuts and Jobs Act which is the most significant tax legislation to be passed in over 30 years. Over the course of this web series, we will discuss the various aspects of tax reform and its impact on the German Mittelstand.

Base Erosion and Anti-Abuse Tax

Under the Tax Cuts and Jobs Act of 2017, Congress created a mechanism to deter U.S. corporations from eroding the U.S. tax base by paying tax-deductible expenses to foreign affiliates and then distributing profits tax-free. The deterrent is essentially a new form of an alternative minimum tax that applies to large multinational corporations and was quickly given the acronym “BEAT.”

Interest Deductibility

While the rest of the world has moved to a BEPS (“Base Erosion and Profit Shifting” under OECD guidelines) model for determining the limitation of interest expense, the U.S. has imposed a related party debt limitation based on adjusted income and debt to equity ratios. The Tax Cuts and Jobs Act of 2017 revised the U.S. rules with a new limitation on deductions for interest expense effective for tax years beginning on or after January 1, 2018.

Net Operating Losses

The Tax Cuts and Jobs Act of 2017 created new limitations on the utilization of Net Operating Losses (“NOLs”) in the U.S.

Full Expensing of Fixed Assets

The Tax Cuts and Jobs Act of 2017 brought about favorable changes for taxpayers when it comes to recovering their costs of capital expenses for business purposes. 

Qualified Business Income Deduction

One of the most talked about provisions of the Tax Cuts and Jobs Act of 2017 is the tax deduction for qualified business income for non-corporate taxpayers. While often referred to as the pass-through deduction, the new law will likely provide significant benefits to a broad base of taxpayers including partners in partnerships, members of LLCs taxed as partnerships, shareholders of S corporations, owners of single-member LLCs and sole proprietors not operating through any legal entity.

Sale of Partnership Interests

Under the Tax Cuts and Jobs Act of 2017, for sales and exchanges occurring on or after November 27, 2017, gain or loss from the sale or exchange of a partnership interest by a non-resident alien is subject to income tax in the U.S.

Repatriation tax

Perhaps one of the most significant items in the 2017 Tax Cuts and Jobs Act, the repatriation toll tax, has been touted as the mechanism by which the U.S. will move to a modified territorial system of taxation. One significant change to the attribution rules will result in many more taxpayers being subject to this one-time tax than previously anticipated. Because the tax applies in 2017, individuals and corporations will need to understand the impact on cash flows and financial statements. 

Impact of Tax Reform on Individuals

The Tax Cuts and Jobs Act of 2017 created many changes for individual taxpayers including increased exemptions and loss of many deductions. 

Impact of Tax Reform on State Taxes

The Tax Cuts and Jobs Act of 2017 will have a significant impact on state income taxes and taxpayers will likely see an increased compliance burden. 

Unanswered Questions

The Tax Cuts and Jobs Act of 2017 leaves many unanswered questions as taxpayers are waiting for future guidance.