United States: President Signs Federal Tax Bill into Law – What You Need to Know Before the End of 2017

At a Glance...

On December 22, 2017, President Trump signed into law H.R. 1, the "Tax Cuts and Jobs Act." The Act, which the House and Senate both passed two days earlier, heralds the most expansive and significant tax legislation enacted in the United States since 1986. The wide-reaching legislation – which generally will apply to taxable years beginning after December 31, 2017 – permanently reduces the U.S. corporate income tax rate to 21 percent; creates a new – albeit temporary – schedule of lower individual marginal tax rates; eliminates, limits and/or modifies many corporate, pass-through and individual tax deductions, credits and expenses; dramatically expands the estate and gift tax exemptions; converts the United States to a territorial tax system with significant new barriers to moving operations and payments out of the United States; and imposes a one-time toll charge on offshore earnings, among its many changes.

All individuals, pass-through entities (such as partnerships, LLCs, and S corporations) and corporations will be affected by this new tax legislation: the timing of income recognition, the ability to claim many deductions, and the treatment of certain expenses are just some of the many, and often complex, changes that taxpayers will face starting January 1, 2018.

This Alert provides a high-level overview of the most significant changes for corporations, partnerships, taxpayers with international operations, and individual taxpayers (including changes to estate and gift taxes). The Alert also highlights some key planning opportunities available only until December 31, 2017.

Mark Your Calendars! January 1, 2018 will mark a new era in U.S. tax planning and compliance. Because of the historical nature of this legislation, Reed Smith in the coming weeks will be hosting a series of programs to explain key provisions in the new U.S. tax code, and how all taxpayers can best plan for these changes.

Individual Taxpayers

Most of the changes that affect individual taxpayers will sunset after 2025, at which time the tax law will revert to the law in effect December 31, 2017. This should be contrasted with the changes that affect corporations and businesses, which are permanent.

The following is a brief list of some of the changes that will be in effect during this eight-year period:

  • Tax brackets have been lowered to 10, 12, 22, 24, 32, 35 and 37%.
  • The standard deduction is expanded to $24,000 from $12,700 for joint filers, while the personal exemption (currently $4,050 per person) is suspended.
  • The alternative minimum tax is retained, but the exemption applies to income beginning with $109,400 for joint filers in 2018; the exemption phases out at $1 million for joint filers.
  • The deduction for state and local taxes is limited to $10,000; note that individuals cannot deduct prepayments of 2018 state or local taxes on their 2017 tax returns.
  • The cap on the deduction for home mortgage interest is reduced from $1 million to $750,000 of mortgage debt, and the interest deduction on $100,000 of home equity loans is suspended. The cap continues to apply to both a taxpayer's primary residence and a second home.
  • All miscellaneous itemized deductions that are subject to the 2% floor, including expenses for the production or collection of income, tax preparation fees and unreimbursed employee business expenses, are suspended.

Individual Taxpayers - Wealth Transfers (Estate & Gift Taxes)

The most significant change in the new legislation is the doubling of the estate and gift tax exemption from the existing per-person exemption ($5.5 million) to $11.2 million, or $22.4 million for married couples. The new exemption amounts apply for estates of decedents dying and gifts made after December 31, 2017, but before January 1, 2026. Under the new legislation, the unified tax credit (i.e., the current tax shelter amount for gifting during one's lifetime and at death) under section 2010(c)(3) of the Internal Revenue Code is now $10 million, and will be indexed for inflation occurring after 2011.


Unlike many of the changes that affect partnerships, individuals, and both lifetime and post-mortem wealth transfers, the provisions in the new tax law affecting corporations do not sunset on December 31, 2025. The key corporate tax provisions in the legislation include:

  • Corporate Tax Rate Reduction
    A reduction in the corporate income tax rate to 21% effective for tax years beginning after December 31, 2017.
  • Increase in Limits for Expensing under Section 179
    • An increase in the limits for expensing under section 179 of the Internal Revenue Code. Specifically, corporate taxpayers may use 100% expensing for assets other than structures for five years and then, phased out over successive years, beginning January 1, 2018.
  • Limitations on Deductions for Interest and Net Operating Losses
  • There are new limits on deductions of net business interest. Specifically, corporate business interest deductions are now limited to 30% of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) until December 31, 2020, and then, to 30% of EBIT (Earnings Before Interest and Tax) after January 1, 2021.
  • New limits on net operating losses. Specifically, net operating loss deductions are now limited to 80% of taxable income, and net operating loss carrybacks are eliminated.

  • Other Notable Changes
  • New allowances for corporations to deduct a greater portion of the compensation they pay to the CEO and three of their most highly compensated employees. Specifically, the former limits on the amounts corporate taxpayers could deduct for compensation to executive employees when they earn more than $1 million annually in performance-based compensation no longer apply.
  • Elimination of the domestic production activities deduction under section 199, and elimination of section 1031 like-kind exchanges (with the exception of real property).
  • Corporations must amortize research and experimental costs under section 174 starting January 1, 2022.
  • Repeal of the Corporate Alternative Minimum Tax


Some of the changes that affect partnerships will sunset December 31, 2025, at which time the tax law (if unchanged) will revert to the law in effect December 31, 2017. Some of the key provisions in the legislation are as follows:

  • From January 1, 2018 through December 31, 2025, individuals may deduct 20% of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. This change effectively causes an effective tax rate reduction for partnership (LLC and S-corporation) owners who, prior to January 1, 2018, pay tax on partnership income at the applicable individual rates.
  • The 20% qualified business income deduction is limited for taxpayers with adjusted gross income of more than $157,500 (single filers)/$315,000 (joint filers) who earn income from service businesses; these taxpayers are also subject to additional tests based on the business's W-2 wages. Notably, the limitation applies to partnerships that engage in specified service trades or businesses, including: accounting, health, law, consulting, athletics, financial services, brokerage services, or any business where the principal asset of the business is the reputation or skill of one or more of its employees..
  • For purposes of quantifying the 20% deduction, qualified business income will include the net amount of qualified items of income, gain, deduction, and loss with respect to a qualified trade or business of the taxpayer. Specifically, these items must be effectively connected with the conduct of a trade or business within the United States. These items will not include: specified investment-related income, deductions, or losses; an S corporation shareholder's reasonable compensation; guaranteed payments; or, under certain circumstances, payments to a partner who is acting in a capacity other than his or her capacity as a partner.
  • In addition to the 20% deduction, the legislation provides for new rules on the amount of losses that may be carried-forward, and expands the definition of a "substantial built-in loss."

International Tax

No area of U.S. tax law will undergo as much fundamental structural change as will the system applicable to cross-border business operations, particularly those conducted by U.S. corporations, as a result of the Tax Cuts and Jobs Act. The playing field has been dramatically changed from that which has prevailed almost since the inception of the U.S. income tax. Specific changes include:

  • Establishment of a Participation Exemption System for Taxation of the Foreign Income of U.S. Corporations. For tax years that begin after December 31, 2017, U.S. C corporations that are not regulated investment companies (RICs) or real estate investment trusts (REITs) will be entitled to a 100% deduction for the "foreign-source portion" of dividends received from specified 10% owned foreign corporations. This is a dramatic change that will bring the U.S. system into line with that of many of its trade partners.
    • Parallel rules will impact the consequences of selling or exchanging shares in foreign corporations, and will also significantly modify the U.S. foreign tax credit system.
  • One-Time Toll Charge on Foreign Earnings. To facilitate the transition to the Participation Exemption system, U.S. shareholders owning at least 10% of a foreign subsidiary generally must include in income, for the subsidiary's last tax year beginning before 2018, the shareholder's pro rata share of the foreign subsidiary's earnings. The portion of the earnings comprising "cash or cash equivalents" is taxed at a reduced rate of 15.5%, while any remaining earnings are taxed at a reduced rate of 8%. To alleviate the burden of this tax on "phantom income," the tax liability is payable over a period of up to eight years.
    • Some taxpayers may be able to act prior to January 1, 2108, to reduce the "cash or cash equivalents" portion of their earnings, although not their overall earnings (i.e., they may be able to subject less of their earnings to the 15.5% tax in favor of the 8% tax).
  • New Rules Related to Foreign Intangibles Income. The Tax Cuts and Jobs Act will introduce a "carrot and stick" approach to encourage U.S. taxpayers to hold intangibles (the definition of which has been significantly expanded under the Act) that generate "foreign" income in the United States and not in foreign corporate subsidiaries.
    • The "stick" portion of the rules imposes the potential for U.S. shareholders of such foreign corporations to suffer a deemed dividend inclusion on "global intangible low-taxed income" (GILTI) generated by such corporations.
    • An additional "stick" appears in the form of significantly tighter rules applicable to would-be transfers of intangible property and other value by U.S. taxpayers to foreign affiliates. These rules will make it harder both to execute and sustain the transfer of assets outside of the United States without incurring significant U.S. taxation.
    • The "carrot" aspect of the Act will allow domestic corporations to enjoy a tax rate of only 13.5% on "foreign-derived intangible income" (FDII) that they generate in tax years that begin after December 31, 2017 and before January 1, 2026. The concessionary rate will increase, but will still provide a benefit to domestic corporations for years thereafter.
  • New Base Erosion Rules and Expanded Anti-Deferral Rules. The Act will introduce rules that both will make it more difficult for U.S. taxpayers to operate outside of the United States without incurring current U.S. income taxation, and that will prevent foreign taxpayers from engaging in practices that "erode" the U.S. tax base of their investments and affiliates by means of deductible payments.
    • The long-standing U.S. anti-deferral or "controlled foreign corporation" rules, which seek to treat passive income generated by foreign corporate subsidiaries as includible in the gross income of the U.S. shareholders of such subsidiaries, have generally been broadened (although certain oil-related income will now be treated more liberally).
    • Certain domestic corporations with average annual gross receipts of at least $500 million will be required to pay a new tax, the "base erosion anti-abuse tax" (BEAT), with respect to "base erosion payments" paid or accrued in tax years that begin after December 31, 2017, to a foreign person that is a related party of the corporate payor. This tax, which will be in addition to the new 21% corporate tax rate, will be of particular interest to foreign corporate investors into the United States.

Tax Planning Opportunities to Consider Before the End of 2017

  • Consider prepaying any remaining 2017 state and local taxes on or before December 31, 2017. While the final version of the tax overhaul specifically prohibits taxpayers from taking a deduction in 2017 for prepayment of 2018 state and local income taxes, if you pay quarterly estimated taxes, you should consider making your fourth-quarter payments by December 31, 2017 (instead of the January 16, 2018, deadline), and include those taxes paid as part of your 2017 deductions. Some taxpayers, however, could lose this deduction if subject to the alternative minimum tax ("AMT") – therefore, you should consult your tax advisor before making any prepayment.
  • The elimination of many deductions and the increase in the standard deduction is expected to reduce the number of filers who will itemize deductions. If you won't be itemizing in 2018, consider:
    • Making additional mortgage payments before the end of 2017.
    • Making additional charitable contributions before the end of 2017 and prepaying any outstanding pledges.
    • Paying unreimbursed employee business expenses before the end of 2017, such as professional dues and subscriptions for 2018.
    • Explore payment of travel and entertainment expenses (e.g., conference registrations; ticket licenses) before the end of 2017 for 2018.
    • Paying all expenses for the production or collection of income (such as investment advisory fees and safety deposit box rent) before the end of 2017, to the extent these expenses are known.
  • For corporations, consider the effect of the new expensing and depreciation rules on any remaining 2017 infrastructure expenses. Consult with your trusted tax advisor as to how the changes in the new tax law could affect these investments.
  • All taxpayers—both individual taxpayers and entities—should consult their tax advisors regarding whether to accelerate for 2017 or defer into tax year 2018.
  • For individual taxpayers, while the final tax bill retains seven tax brackets, changes have been made to the applicable rates for each of these brackets. Some taxpayers will find themselves in a lower bracket in 2018; therefore taxpayers should consider where they may fall within these brackets in 2018 and, especially to the extent that a taxpayer may have commission-based earnings or is self-employed, they should consider whether to defer such earnings until 2018. These same questions apply to entities as well—corporations and partners should consider whether income acceleration or deferral might be an effective end-of-2017 tax strategy.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions