The most significant change resulting from the Tax Cuts and Jobs Act may be the reduction in corporate taxes. In an effort to make U.S. companies more competitive, the tax law reduces the marginal tax rate to a flat rate of 21% from 35%.
Chris Hennessey explains how the tax law affects corporations, including:
- Corporations have enhanced expensing of equipment over the next five years
- New limits on deducting interest expense
- The corporate alternative minimum tax is eliminated
The law also addresses the estimated $2.6 trillion in profits held overseas by multinational companies. Companies will pay a tax on these assets, whether they are repatriated or not. The tax rate for cash is $15.5% and 8.0% for non-liquid assets.
Domestic companies that were not holding assets overseas were already paying a higher effective tax rate, estimated at roughly 33%, while multinationals were paying an effective rate of 27%. Large domestic companies may see a more significant reduction with the new tax law.
The corporate tax cut was also made permanent. That is, unlike the provisions for individual taxes, which are set to expire after 2025, there is no sunset provision for the provisions for corporations.