The Tax Cuts and Jobs Act (TCJA) went into effect on January 1, 2018, and it significantly cut the top corporate income tax rate from 35% to 21%. The TCJA also gave a 20% deduction for owners of pass-through entities, increased alternative minimum tax and estate tax exemptions, and changed the taxation of foreign income. Business owners should also be aware that the TCJA changed the net operating loss (NOL) rules for carrybacks and carry-forwards and how these changes affect the tax rate reduction and/or other tax deductions. 

What Is an NOL?

A net operating loss is a loss taken in a period where a company’s tax deductions are larger than its taxable income. When the expense amount outweighs the company’s revenues, the NOL can typically be used to recover past tax payments. The idea is that when a business loses money, they should be given tax relief so that they can apply the NOL to future income taxes and reduce the amount of these payments.

Reporting income and paying taxes can be a complicated process for every taxpayer. Regardless of your income level, improperly reporting your earnings to the IRS is considered a crime, which is why it is crucial to have a good understanding of the requirements that must be met and the taxes that must be paid. Tax calculations and reporting can be especially complex for U.S. taxpayers that earn an income from sources outside of the United States. Foreign income can fall into several categories, and one of these is known as global intangible low-taxed income (GILTI). GILTI includes the income earned from intangible assets owned by foreign affiliates of U.S. companies. Examples of intangible assets include patents, trademarks, and copyrights.

How is GILTI Taxed?

The way in which GILTI is taxed changed when the 2017 Tax Cuts and Jobs Act (TCJA) was passed. Before the TCJA, the United States taxed its firms and citizens on their global income, but U.S. firms were allowed to defer these taxes until their earnings were repatriated to the United States as dividends. In other words, foreign income typically had to return to the U.S. before it could be taxed.

The Tax Cuts and Jobs Act of 2017 (TCJA) implemented many changes that have affected taxpayers, including the deductions that are allowed on federal tax returns. Tax deductions can be used to lower the amount of a person’s income that is subject to taxes, and when used correctly, they can help minimize one’s tax obligations. One area that was affected by the TCJA is the deduction for state and local taxes, which is commonly known as the SALT deduction.

New Limits on SALT Deductions

The TCJA has put a new limit in place for the SALT deduction, and it applies to all homeowners. Previously, SALT deduction limits only applied to those filing as single with a gross income of more than $150,000 or $300,000 to those filing as married filing jointly. Now, the itemized deduction is limited to $10,000 for all taxpayers. According to the White House Office of Management and Budget, this new tax deduction limit will result in $57 billion more in taxes received by the federal government.

The qualified business income (QBI) deduction was created by Section 199A of the Tax Cuts and Jobs Act of 2017 and since then, the IRS has issued additional rules and guidelines on how taxpayers can take this deduction. Because it could significantly reduce a person’s tax burden, qualifying taxpayers should understand how this deduction operates and the limitations of the deduction.

Details of the QBI Deduction

A Section 199A QBI deduction can be taken by owners of pass-through entities engaged in qualified businesses. Such taxpayers can claim up to a 20 percent deduction on all qualified business income.

If you have foreign bank or financial accounts, you should be aware that there appears to be a change in the way penalties are calculated in instances of an unintentional breach of tax law. The change could mean significantly higher financial penalties for those who are not in compliance.

This change was signaled in an opinion rendered by the U.S. District Court for the Central District of California in the case of United States of America v. Jane Boyd. The court ruled that a breach of the filing obligations of the reports of foreign bank and financial accounts, or FBAR, could incur a penalty of up to $10,000 per foreign financial account.