Cleveland State University
Public Sector Economics WAC Paper
The Reform of Corporate Tax System
Key Features of the 2017 Tax Cuts and Jobs Act
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Introduction
As a nation raised in capitalism, corporations – both large and small – play a
pivotal role in the United State’s economy and citizens lives. Corporations provide jobs,
effectively creating a larger middle class that possesses higher purchasing power. With
this newly acquired purchasing power, people are inclined to buy more goods and
services, which helps businesses make money and expand. These expanded
businesses could then hire more employees, restarting this cycle. This is obviously an
extremely simplified version of our economy and how businesses grow, and one pivotal
part of businesses that went unmentioned was corporate taxes. Recently, in 2017,
President Donald Trump made significant changes to corporate tax policies in the
United States. We will take an in-depth look at what corporate taxes are, reforms and
their potential benefits or pitfalls, and workarounds many companies use to lower their
tax rates.
Corporate tax rates are exactly what they sound like – a tax on the profits of
United State’s based or owned corporations. The Tax Policy Center states, “taxable
corporate profits are equal to a corporation’s receipts less allowable deductions.” This
includes the “cost of goods sold, wages and other employee compensation expenses,
interest, non federal taxes, depreciation, and advertising.” The Tax Policy Center also
notes that corporate profits will sometimes be taxed at an individual shareholder level.
This means that dividends paid out and capital gain on shares of a company are both
subject to corporate taxes. Also, many corporations in the United States aren’t subject
to corporate taxes, as they are “pass-through entities.” This essentially means that all of
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the corporations profits are considered the owners’ “net income,” and taxed as an
individual income tax, instead of as a corporate tax. This eliminates the issue of double
taxation at the corporate and shareholder level.
On December 22, 2017 President Donald Trump signed the Tax Cuts and Jobs
Act. This plan reduced the corporate income tax from 35 percent to 21 percent – the
lowest the US corporate tax rate has been since 1939 (Amadeo). This tax also does not
have an expiration date, so it will remain the United States corporate tax rate until the
President, House of Representatives, and Senate pass new legislation overriding it. The
income tax cut is just the tip of the iceberg, and while the corporate income tax dropped
by 14%, companies will actually be paying more in taxes annually. Below are the key
components of this new legislation and help highlight why companies will actually be
paying more in taxes after the income tax reduction. According to Charles Kennedy and
Giuseppe Femia, this new policy will also: ( I ) Repeal the alternative minimum tax (AMT)
and allow corporations that used this tax in the past to use their AMT credits or receive
a refund for them; ( II ) Increase the bonus depreciation percentage to 100% on property
acquired between September 28, 2017 and December 31, 2022 and drop by 20% each
year until 2026; ( III ) Limit business interest deductions to less than 30% (if a business’
average annual revenue is less than $25 million, they are exempt from this limitation);
( IV ) Reduce business meals and entertainment deductions to 50% on meals (both on-
and off-site), 0% for entertainment, and starting in 2026 0% on meals (on-site); ( V )
Change the Research and Development (R&D) taxes from being expensed when they
occur to being “capitalized and amortized” over 5 years (domestic) and 15 years
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(abroad); ( VI ) Eliminate the Domestic Production Activities Deduction (DPAD) taking
away around a 9% tax reduction for qualifying companies; ( VII ) Eliminate like-kind
exchanges; ( VIII ) Net Operating Loss “may no longer be carried back” and can be
carried forward indefinitely with an annual limitation of 80% of taxable income (there is
no small business exception).
Examining the Tax Cuts and Jobs Act
I: Repeal the AMT
The corporate alternative minimum tax (AMT) is separate from normal corporate
taxes, and make you calculate your taxes twice: once for the standard income tax and
once for the alternative minimum tax. The corporate AMT was 20% and could be
