Love it or hate it, tax reform has arrived.
On Dec. 22, President Donald Trump delivered on his promise to overhaul the nation’s Internal Revenue Code when he signed into law H.R.1, known as the Tax Cuts and Jobs Act of 2017.
The Republican-led legislation is the first comprehensive rewrite of the code since 1986 under President Ronald Reagan.
While its passage has polarized the public, the bill features provisions Republican leaders believe will give Americans a boost and help businesses of all sizes grow, invest, and create jobs.
And it’s the latter that has Upstate business leaders enthused about its potential to ignite economic development across the region and South Carolina.
For instance, the bill reduces the federal corporate tax rate for businesses from 35 percent to 21 percent.
When coupled with the average corporate income taxes levied by individual states, U.S. businesses were previously taxed at 38.91 percent, according to the Tax Foundation, a nonprofit, independent tax-policy organization.
That is the fourth-highest rate in the world behind the United Arab Emirates (55 percent), Comoros (50 percent), and Puerto Rico (39 percent).
The Tax Foundation said it expects that the new legislation, during the next decade, will boost the nation’s gross domestic product by 1.7 percent and wages by 1.5 percent, while creating 339,000 jobs.
“This is positive news for a number of industries,” said Brian Gallagher, vice president of marketing for Greenville-based O’Neal Inc., an integrated planning, design, and construction firm.
“The lower corporate tax rate means there’s more money for [companies] to invest in their businesses,” added Gallagher, who is also the outgoing chairman for the Associated Builders and Contractors of the Carolinas, an organization that represents more than 500 members in North Carolina and South Carolina. “For manufacturing, which is a big industry here in the Upstate, it’s really vital for companies to have the capital to invest in new facilities, expansions, equipment, and to hire new people.”
For individuals, the bill ushers in a number of changes, such as increasing the standard deduction, increasing the child tax credit and creating a new family tax credit, and establishing a 25 percent maximum rate on the business income of individuals.
In addition to slashing the corporate tax rate, the bill has some provisions for businesses that include the following:
-Allowing increased expensing of the costs of certain property
-Limiting the deductibility of net interest expenses to 30 percent of the business’s adjusted taxable income
-Modifying the taxation of foreign income
-Imposing an excise tax on certain payments from domestic corporations to related foreign corporations
Most of the provisions went into effect Jan. 1.
Gallagher said it’s most likely that large public companies will use tax savings to repurchase shares of their own stock, which he said probably won’t have a big impact on the Upstate.
But he added that there’s a high probability that small to midsize companies, manufacturers in particular, will use the additional capital to invest immediately.
That could translate into Upstate companies expanding, purchasing equipment, and hiring.
The bill also allows businesses to write off capital investments as deductions the year in which they are incurred, instead of depreciating them over several years.
Gallagher said another provision of the bill that could generate growth in the Upstate is one that allows businesses a one-time opportunity to repatriate corporate profits earned and held overseas at a 10 percent tax rate.
With the deduction of state and local property taxes capped at $10,000 under the new plan, Gallagher said South Carolina could become an even more attractive place for businesses to open new facilities or relocate their operations and employees.
“We’re moving in the right direction,” he said. “It’s certainly going to make us more attractive as a destination — a place where companies want to come and invest. … We’re a business-friendly state with local communities that like to partner with international companies. I think it all bodes well.”
Robert Maynard, founder and CEO of the Charlotte, N.C.-based breakfast-and-brunch concept Famous Toastery, which opened its first Upstate location in Greenville earlier this year and plans to open more in the region, said he is in favor of the new tax plan.
“For small-business owners, the market going to 25,000 means nothing,” Maynard said. “They don’t own shares of McDonald’s. … [Tax reform] can be the change we’ve all been looking for. We need momentum. Small business is the backbone of this country. Apple, Starbucks, and McDonald’s were all small businesses. Small businesses need more incentives to take risks.”
Maynard said the restaurant industry has been under immense pressure for the past few years from new National Labor Relations Board rules, Department of Labor overtime rules, the Affordable Care Act (also known as Obamacare), and the ongoing battle to increase the minimum wage.
“I look at it this way: If it doesn’t pass and there isn’t a major change, business is screwed,” he said. “There is a relief that there’s not more regulation coming. For a small business, every dollar counts. This puts a cork in the drain of regulation. Is it the end-all, be-all? I don’t think so. There’s still work to be done. But it doesn’t matter what side of the aisle you’re on. The reality is if you have more money in your pocket, you have more money to invest in growth and creating new jobs.”
Maynard said he believes tax relief for individuals could boost consumer optimism and sales that will also benefit small businesses.
“I think it’s a farce to say that something like this happens and it changes everything,” he said. “What I’m seeing is a cautious optimism. It will help in the short term. It will help businesses reinvest, pay extra bonuses. You’ll see more of that.”
The franchise industry is another sector in the Upstate that could benefit from the tax reform.
“Anytime you can lower taxes for business, it’s going to increase not only the bottom lines for owners but their ability to do things with that capital,” said Sean Fitzgerald, chief development strategist for 1851, a content marketing and franchise development solutions provider.
“It will be great to see how [tax reform] impacts the franchising industry and with people starting businesses,” Fitzgerald added. “Under the previous administration, the franchise industry saw a lot of pressure. The perception was that franchises are large corporations. In fact, these are local small-business owners who are impacted tremendously. … I think this will help tip the scales a little bit.”
Fitzgerald said new franchisees could be attracted to the market if they believe their businesses will succeed.
“Anytime any party can do something that helps small businesses, it’s going to help the economy,” he said. “So much job creation is through small business. … For a franchise owner, if their business succeeds and grows, they’re going to hire more people and elevate existing employees, which creates opportunities for people to advance. … I’m optimistic this will be a nice shot in the arm for business owners across the country.”
Standard deduction (expires after Dec. 31, 2025)
- Increased to $12,000/$24,000, indexed for inflation after Dec. 31, 2018 (additional standard deduction for the elderly and blind is maintained)
- Up to $10,000 annual 529 distributions for use in connection with public, private, or religious elementary or secondary school. Home school expenses not eligible for 529 distributions.
Child tax credit (expires after Dec. 31, 2025)
- $2,000 per child under age 18 (under 17 for 2025 tax year), not indexed, refundable portion begins at $1,400 in 2018, income phase-out thresholds are reduced to $200,000/$400,000, and present-law age limit of 17 and under is maintained
- Requires valid SSN for each child to claim refundable portion, otherwise eligible for $500 nonrefundable credit
Mortgage interest deduction
- Reduces limit on deductible mortgage debt to $750,000 for new purchases and refinancings (principal residence or otherwise) entered into after Dec. 15, 2017, and repeals deduction for interest paid on home equity debt, through Dec. 31, 2025.
- Keeps deduction for second home
Charitable deductions (provisions expire after Dec. 31, 2025)
- Increases limit on cash contributions to qualified organizations from 50 percent to 60 percent of taxable income
- Denies deduction for purchases of college athletic seating rights
Estate, gift, and generation-skipping transfer taxes
- Doubles estate, gift, and GST tax exemption after Dec. 31, 2017 through Dec. 31, 2025.
IN BRIEF: What changed (was repealed) and what didn’t
No change from current law
Dependent care flexible spending accounts
Capital gains tax on home sales
Nonrefundable personal credits
ACA “individual shared responsibility” payment
Pease limitation on itemized deductions, applicable to taxable income above $261,500/$313,800 (indexed) (repealed through Dec. 31, 2025)
Personal exemptions (repealed through Dec. 31, 2025)
State and local deductions (repealed except for property and sales taxes incurred in operating a trade or business, and for up to $10,000 in other property taxes (not indexed). Limit of up to $10,000 in income, sales, and/or property taxes prior to Dec. 31, 2025.
Corporate tax rate
- Reduced to 21 percent, effective after Dec. 31, 2017, with adjustment for excess tax reserves
Family and medical leave credit (expires after Dec. 31, 2019)
- Provides credit equal to 12.5 percent of wages paid during period in which employees are on family or medical leave if payment rate is at least 50 percent of normal wages
- Credit is increased by 0.25 percentage points for each percentage point payment rate rises above 50 percent
- Requires substantiation by Treasury for certain employers claiming credit
Pass-through businesses (all provisions effective through Dec. 31, 2025)
- 20 percent deduction for domestic nonservice income, capped at 50 percent of taxpayer’s total share of W-2 wages paid by the business.
- Limitation on services-related income and wage cap is phased in beginning at $157,500/$315,000 (20 percent deduction is scheduled to expire after 2025 under the Act, unless renewed before then).
- Wage cap is modified to equal the greater of 50 percent of W-2 wages paid or 25 percent of W-2 wages plus 2.5 percent of the taxpayers’ basis of depreciable property purchases.
- Full deduction allowed for services-related income if taxable income does not exceed $250,000/$500,000, phased out over the next $50,000/$100,000. Definition of services is modified to exclude engineering and architecture, and deduction is made available to trusts and estates.
- Active pass-through losses disallowed in excess of $250,000/$500,000.
- Publicly traded partnership distributions, agricultural and horticultural cooperatives, and qualified Real Estate Investment Trust and cooperative dividends are eligible for deduction.
Aircraft management services
- Exempts certain payments by aircraft owners for maintenance and support services from air transportation excise taxes.
Contributions to capital
- Removes from definition of contribution to capital any contribution in aid of construction or by customer/potential customer, as well as contributions by governmental entities or civic groups.
Net operating loss deductions
- Limited to 90 percent of taxable income, declining to 80 percent beginning after Dec. 31, 2017, with unlimited carryovers permitted, except for property and casualty insurance losses for which 20-year carryforwards are maintained
- Special carryback provisions are repealed, other than two-year carryback for certain farm or property and casualty insurance losses
S corporation conversions to C corporation
- Allows converting S corporation to spread tax impact of switching from cash accounting to accrual accounting method over six years in equal installments (applicable to corporations with greater than $25 million three-year average gross receipts)
Tax credit bonds
- Authority to issue New Clean Renewable Energy Bonds, qualified energy conservation bonds, qualified zone academy bonds and qualified school construction bonds repealed
“Territorial” tax regime
- 100 percent deduction for foreign-source dividends received by domestic corporations
Treatment of deferred foreign income upon transition to territorial regime
- “Deemed” taxes are imposed at rates of 15.5 percent and 8 percent, respectively
- For companies electing installment payments, 8 percent of tax liability is required for first five years, rising to 15 percent in year six, 20 percent in year seven, and 25 percent in final year
- Imposes 35 percent “recapture” tax on dividends received by companies that enter into inversion transactions within 10 years after date of enactment
IN BRIEF: What changed (was repealed) and what didn’t
Corporate Alternative Minimum Tax
Like-kind exchanges (repealed other than for real property not held primarily for sale)
Tax-free rollover of capital gain into Small Business Investment Company
Capital gains on self-created intangible property (repeals preferential rates)
Deduction for local lobbying expenses
No change from present law
Work Opportunity Tax Credit
New Markets Tax Credit
Credit for disabled employee access
FICA tax credit for tipped workers
Employer-provided child care credit
Source: CQ Roll Call, an Economist Group business, that connects advocacy, legislative tracking, and news and analysis for access to all parts of the policy process.
What’s the Difference?
Tax Credit vs. Tax Deduction
Tax credits provide a dollar-for-dollar reduction of your income tax liability. That means that a $1,000 tax credit saves you $1,000 in taxes. Tax deductions lower your taxable income and they are equal to the percentage of your marginal tax bracket. For instance, if you are in the 25 percent tax bracket, a $1,000 deduction saves you $250 in tax (0.25 x $1,000 = $250).
Source: Internal Revenue Service