On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017-2018 (“TCJA” or “Act”). The Act contains some of the most significant tax reform the U.S. has seen in the last 20 years.
Included in this tax reform are the following changes that could have a significant impact on Canadian Companies doing business in the U.S.
1. Reduction in Corporate income tax rate
For tax years beginning after December 31, 2017 the U.S. Federal corporate tax rate is a flat 21% rate.
2. Corporate alternative minimum tax repealed
For tax years beginning after Dec. 31, 2017, the corporate AMT is repealed.
3. Gain on sale of partnership interest
After Nov. 26, 2017, the gain or loss from the sale or exchange of a partnership interest will be effectively connected with a U.S. trade or business (“effectively connected”) to the extent that the transferor would have had effectively connected gain or loss had the partnership sold all of its assets at fair market value as of the date of the sale or exchange. Any gain or loss from this hypothetical asset sale by the partnership must be allocated to interests in the partnership in the same manner as non-separately stated income and loss.
For sales, exchanges, and dispositions after Dec. 31, 2017, if any gain on the disposition of a partnership interest is treated as “effectively connected” under the above rule, the transferee must withhold 10% of the amount realized on the disposition, unless the transferor certifies that it’s not a foreign person.
4. Business deductions
Some of the relevant changes to business deductions applicable to Canadians doing business in the U.S. include the following:
a. Increased expensing of certain capital assets (Code Section 179)
For certain property placed in service in tax years beginning after Dec. 31, 2017, the maximum amount a taxpayer may expense is increased to US $1 million, and the phase-out threshold amount is increased to US $2.5 million. For tax years beginning after 2018, these amounts are indexed for inflation.
b. Temporary 100% cost recovery of qualifying business assets
A 100% first-year deduction is allowed for certain qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The additional first-year depreciation deduction is allowed for new and used property.
The phase-down of the 50% allowance to zero that occurs for property placed in service during 2018, 2019 and 2020 has been repealed.
c. Limits on deduction of business interest
For tax years beginning after Dec. 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income.
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2022, adjusted taxable income is computed without regard to deductions allowable for depreciation, amortization, or depletion and without the former Code Sec. 199 domestic production activities deduction (which is repealed effective Dec. 31, 2017).
The business interest limitation doesn’t apply to taxpayers for a tax year if the taxpayer’s average annual gross receipts for the three-tax year period ending with the prior tax year don’t exceed $25 million.
d. Modification of net operating loss (NOL) deduction
For NOLs arising in tax years ending after Dec. 31, 2017, the two-year carryback and the special carryback provisions are repealed. NOLs generally can be carried forward indefinitely.
For losses arising in tax years beginning after Dec. 31, 2017, the NOL deduction is generally limited to 80% of taxable income (determined without regard to the NOL deduction). Carryovers to other years are adjusted to take account of this limitation.
The TCJA includes some significant changes that will impact Canadian companies doing business in the U.S.
Consideration should be given to the structure through which your business in the U.S. is carried on in order to, potentially, take advantage of some of the above tax changes and optimize your overall effective tax rate.
By: Dan Roberts, US Tax Partner, Wolrige Mahon