Effective January 1, 2018, the TCJA establishes a flat 21% federal corporate income tax rate. In addition to the federal tax, most US states impose a state corporate income tax that ranges from 4%– 12% in 2017. The new corporate tax rate also applies to personal service corporations.

The corporate tax rate applies to C corporations, which are taxed separately from its owners under subchapter C of the Internal Revenue Code. Fiscal-year C corporations will need to compute the tax using a pro rata allocation based on days for the tax year that includes January 1, 2018.

Under prior law, C corporations paid graduated federal income tax rates with a maximum rate of 35%.

Prior to the TCJA, the corporate AMT was imposed at a 20% rate. However, corporations with average annual gross receipts of less than $7.5 million for the preceding three tax years were exempt.

For tax years beginning in 2018, the new law repeals the corporate AMT. For corporations that paid the corporate AMT in earlier years, an AMT credit was allowed under prior law. The new law allows corporations to use their AMT credit carryovers in their 2018–2021 tax years to offset regular tax liability with 50% of any remaining unused credits being refundable through 2020. In 2021, 100% of any remaining credits is refundable.

The repeal of the corporate AMT is expected to be a significant benefit, particularly for corporations with business net operating losses (NOLs) and depreciation expenses, which were among the many items that often resulted in AMT.

While the new law generally eliminates AMT concerns for corporations operating at a loss, it’s worth noting that it provides for a haircut to the use of NOLs that arise in tax years beginning after December 31, 2017. Specifically, the maximum amount of taxable income that can be offset with NOL deductions is generally reduced to 80% from 100%. In addition, NOLs incurred in years ending after December 31, 2017, can no longer be carried back to an earlier tax year (except for certain farming losses). Affected NOLs can now be carried forward indefinitely compared to a 20-year limitation under old law.

The elimination of the corporate AMT further ensures that corporations will be able to utilize the new 100% bonus depreciation and the enhancement of other depreciation benefits under the TCJA, which is described below.

For qualified property acquired and placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage is increased to 100%. In addition, the 100% deduction is allowed for both new and used qualifying property.

For property placed in service in later years, the 100% bonus depreciation is scheduled to be reduced in 20% increments each year from 80% in 2023 to 20% in 2026 (and zero % in 2027 and later years). Note that those reductions are delayed by one year for certain property with longer production periods. For example, 80% bonus depreciation will apply to long-production-period property placed in service in 2024.

When the 100% first-year bonus depreciation isn’t available, the Section 179 tax break can provide similar benefits. Section 179 allows eligible businesses to deduct the entire cost of qualifying new or used equipment and software purchased or financed during the tax year, subject to various limitations.

Under pre-TCJA law, the maximum Section 179 depreciation deduction was $510,000 for tax years that began in 2017. The maximum deduction was phased out dollar for dollar to the extent the cost of eligible property placed in service during the tax year exceeded the phase-out threshold of $2.03 million.

The TCJA permanently enhances the Section 179 deduction. Under the new law, the maximum Section 179 deduction is increased to $1 million for qualifying property placed in service in tax years beginning in 2018, and the phase-out threshold amount is increased to $2.5 million. For later tax years, these amounts will be indexed for inflation. For purposes of determining eligibility for these higher limits, property is treated as acquired on the date a written binding contract for the acquisition is signed. Eligible property also now includes certain improvements to real property.

The TCJA introduces certain anti-base erosion measures similar to the ones proposed by the Base Erosion and Profit Shifting (BEPS) initiative of the Organisation for Economic Co-Operation and Development (OECD).

While the expanded depreciation benefits coupled with the repeal of the corporate AMT should help reduce the US tax liability for corporations with significant business and production assets located in the United States, US multinational corporations haven’t completely escaped US minimum tax concerns. The TCJA introduces a base erosion and anti-abuse tax, generally referred to as a BEAT.

Essentially, BEAT functions as a minimum tax to prevent large multinational companies from stripping earnings out of the United States through tax deductible payments to foreign affiliates. The BEAT is generally calculated as 10% of modified taxable income less the regular tax liability (generally reduced by credits allowed under the Internal Revenue Code including foreign tax credits).

The tax rate is only 5% for 2018 during a phase-in of the new regime. It increases to 12.5% for tax years beginning after 2025. These rates are increased by 1% for banks and registered security dealers. The BEAT computations are generally made on a group basis, which means that related-party payments, deductions, and income of affiliated US corporations are taken into account on an aggregate basis.

A corporation’s modified taxable income is determined by adding back to taxable income current year deductions involving:

• Base erosion payments (interest, royalties, and services fees, for example) to certain foreign-related persons
• Depreciation and amortization of property acquired from certain foreign-related persons and other adjustments

If a base erosion payment is subject to US tax in the hands of the foreign related person—in case of US withholding tax on the payment, for example—it isn’t added back for purposes of computing the modified taxable income of the US corporation. If the US withholding tax is reduced under a US income tax treaty, the exclusion from modified taxable income is computed proportionately in comparison with the unmitigated statutory withholding rate.

The BEAT only applies to C corporations (other than regulated investment companies and real estate investment trusts) that:

• Are part of a group with at least $500 million of annual domestic gross receipts over a three-year averaging period
• Make payments to foreign affiliates resulting in deductions equal to 3% or more (2% or more for certain banks and registered security dealers) of their total deductions (base erosion percentage”)

Foreign corporations directly engaged in a US trade or business are also subject to BEAT for purposes of determining their US tax liability on effectively connected income. Generally, when a foreign person engages in a trade or business in the United States, all income from sources within the United States connected with the conduct of that trade or business is considered to be what’s known as effectively connected income, which is subject to US tax at standard tax rates.

The BEAT will require careful planning when financing US acquisitions with debt from a related foreign party and will be an important consideration in the context of cross-border mergers and acquisitions to the extent that post-combination planning would involve payments from the United States to foreign related parties.

In addition to the BEAT, the TCJA imposes other restrictions on the ability of US taxpayers to strip earnings out of the United States, including expanded interest expense disallowance rules. Under these rules, affected corporate and noncorporate businesses generally can’t deduct net interest expenses in excess of 30% of adjusted taxable income (ATI), starting with tax years in 2018.

For S corporations, partnerships, and limited liability companies (LLCs) that are treated as partnerships for tax purposes, this limit is applied at the entity level rather than at the owner level. Interest expense that is disallowed under this new rule can be carried forward indefinitely. (S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. S corporation shareholders report the flow-through of income and losses on their personal income tax returns and are assessed tax at their individual income tax rates, which are reduced to 37% from 39.6% under the TCJA.)

ATI is taxable income computed without regard to:

• Nonbusiness items
• Any NOL deduction
• Certain other deductions

For tax years beginning in 2018 through 2021, ATI also requires adding back allowable deductions for depreciation, depletion, and amortization (DD&A). After 2021, DD&A amounts won’t be added back in calculating ATI, generally resulting in lower ATI and a correspondingly greater limitation on net business interest expense deductions.

Taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the three previous tax years are exempt from the interest deduction limitation. Some other taxpayers are also exempt. For example, certain real property businesses that elect to use a slower depreciation method for their real property with a normal depreciation period of 10 years or more are exempt.

This interest limitation will likely have a significant impact on leveraged buyouts and other debt-intensive deals. Together with the limitation on the use of NOLs to 80% of taxable income for a given year and the new BEAT, multinational groups may choose to issue more of their debt outside of the United States. The use of alternatives to debt financing could also become more frequent.