David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Worldwide Tax Daily. This week: Tax cut, tax hikes. While much of the discussion about the Tax Cuts and Jobs Act has been about rate reductions, my guest this week is here to talk to us about some of the coming rate increases. Joining me now in the studio is Tax Notes International contributing editor Carrie Elliot. Carrie, welcome to the podcast.
Carrie Elliot: Thanks, David.
David Stewart: What sort of changes are we looking for in the Tax Cuts and Jobs Act in the near future?
Carrie Elliot: Well, one of the more obvious changes, and also the soonest change, is the fact that the one-time transition tax goes away. So, taxpayers that did all of the work and the calculations last year for the transition tax won't have to do that again this year. However, to the extent that they took advantage of the ability to either record provisional numbers and finalize them at the end of 2018 or pay the tax in eight installments, they'll still be wrestling with the transition tax this year and a few years down the road. So that's the most immediate change in the Tax Cuts and Jobs Act.
David Stewart: Alright, so that's one less tax that you'll be having to pay, but I understand that a lot of the changes coming will be increases.
Carrie Elliot: That's exactly right. Tax reform doesn't stand still even in the near future. Even for folks that had no transition tax, the base erosion and antiabuse tax changed on the first day of January 2019. It doubled from 5 percent to 10 percent right after we rang in the new year. And it will go up again in a few more years to 12.5 percent.
David Stewart: Alright, so looking forward, what other changes are we expecting?
Carrie Elliot: Well, after 2019, taxpayers won't be able to rely on the favorable lookthrough subpart F treatment for related-party passive income. So that benefit goes away. Three years from now, at the end of 2021, the interest deduction limitation becomes even more unfavorable than it already is because the 30 percent limitation is calculated on a smaller base. R&D expense is no longer immediately deductible. It's gotta be amortized over five years in 2021. And after that, the full expensing of business investment starts to phase out in 2022 and it will be gone by 2027 because it's reduced in 20 percent increments each year over the next five years.
David Stewart: The TCJA had a couple of provisions on intangible income. What's happening there?
Carrie Elliot: Well, the tax rate on foreign-derived intangible income goes up 3 percent in 2026. Similarly, global intangible low-taxed income also goes up 3 percent.
David Stewart: Do we have a sense of what type of taxpayers would be most affected by all these changes?
Carrie Elliot: Well, in addition to the BEAT tax going up, and then when you have the GILTI and the FDII tax increases of 3 percent, you're basically talking about large companies with investments overseas that have cross-border money coming in and going out.
David Stewart: Okay, well let's turn to another major portion of the Tax Cuts and Jobs Act, the passthrough deduction.
Carrie Elliot: The passthrough deduction is set to expire after 2025, which is a considerable tax increase. And that's supposed to happen right around the same time both GILTI and FDII increased under 3 percent. Some people have estimated that that tax increase could amount to somewhere in the neighborhood of $300 billion.
David Stewart: Okay, turning to the individual taxpayers, what's happening with rates there?
Carrie Elliot: By 2025, most individual income tax rules basically return to their pre-Tax Cuts and Jobs Act status. Although inflation adjustments will still be determined by the chained consumer price index. So, there's some good news and some bad news for individuals after 2025. The bad news is that individuals will lose the income tax rate and AMT reductions. And the increase in the standard deduction and the double child tax credit will also go away. The good news is that the personal exemptions will come back, and the state and local tax and mortgage interest deduction limits will go away. So in other words, the picture for individuals will look a lot like pre-2017.
David Stewart: Right, so that's a lot of the big issues that we're looking out for. Are there any little small things that we should be keeping an eye on the next couple of years?
Carrie Elliot: Well, there's bad news for hungry employees. After 2025, there's no deduction at all for employer provided meals. Tax reform reduced the full deduction to 50 percent deduction. And then that goes away completely after 2025. Also, a deferral of capital gains tax on qualified opportunity funds gets called in in 2026. So those are two additional tax cuts that expire, or go away, in 2025 and 2026.
David Stewart: So what's the point of all of these expiring provisions in this major tax bill?
Carrie Elliot: Well, in a nutshell, the tax bill front loaded most of the tax relief during the 2018 to 2022 period. And then the later years are a combination of dialed back corporate and individual benefits and increased rates on cross-border income. The reason why these were temporary provisions is because the budget resolution for 2018 required or limited deficits to $1.5 trillion over 10 years.
David Stewart: Are we expecting that some of these may survive and either made permanent or get stuffed into that semi-permanent world of extenders that we see every year?
Carrie Elliot: Well, future lawmakers are gonna have to decide whether to extend tax relief or let it expire. History says they may continue to extend it, like you suggested. For example, in 2002 and 2003, the tax cuts were also enacted through budget reconciliation and contained these sunset provisions. Absent any action, we faced what everyone called back then the fiscal cliff, which was a combination of tax increases and government spending decreases in 2013, yes, 10 years later. That result was avoided by making the tax cuts permanent. So we could see similar pressure in 2025 to head off the more drastic changes coming in 2026.
David Stewart: Do you see, potentially, budget deficits factoring in where these might just be allowed to expire?
Carrie Elliot: I think that's a real possibility. I think what happens will depend on the public sentiment about the economy at that point and whether or not they believe that tax reform had a contribution to the economy.
David Stewart: I guess we'll be keeping an eye on this for a really long time. Carrie, thank you for being here.
Carrie Elliot: Thank you for having me.
David Stewart: And now, Coming Attractions. Each week we preview commentary that will be appearing in the next issue of the Tax Notes magazines. We're joined by executive editor for commentary, Jasper Smith. Jasper, what will you have for us?
Jasper Smith: In Tax Notes, Jeffrey Kroh and William Fogleman examine the TCJA's excise tax on executive compensation paid by some tax-exempt organizations. And a trio of tax professors explain how the TCJA's higher estate tax exemption is causing decreased federal revenue.
In State Tax Notes, Eric Coffill interviews the director of the California Office of Tax Appeals. And Roxanne Bland discusses the collection of taxes on illegal money, both historically, and in light of a current Oregon Supreme Court case.
And in Tax Notes International, Martins Arogie discusses Nigeria's value added tax and how it affects companies in the oil and gas industry. While Aleksandra Bal examines the push to digitalize VAT compliance.
David Stewart: You can read all that and a lot more in the February 18th editions of Tax Notes, State Tax Notes, and Tax Notes International.
That's it for this week. You can follow me on Twitter @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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