On December 22, 2017, the U.S. Administration enacted the Tax Cuts and Jobs Act (TCJA), which introduced broad based and sweeping changes to U.S. corporate, and U.S. personal tax changes. It is important to keep in mind that these changes pertain to federal income tax, as administered by the Internal Revenue Service (IRS). Each U.S. state has its own separate income tax regime.
This article provides an overview of how the U.S. corporate income tax changes impact Canadian businesses operating in the U.S. in 2018 and beyond. It does not include U.S. corporations owned by U.S. shareholders.
Disclaimer – This article is about the 2018 U.S. corporate tax consequences of Canadian corporations doing business in the U.S. Readers are cautioned that information in this article is for general purposes only and does not purport to provide specific advice. Individuals should consult with a tax professional. The author bears no responsibility for the use or dissemination of this information.
Canadian companies conducting business operations in the U.S., could be liable for a wide array of different taxes. And there are a number of considerations to make in order to determine the appropriate filing requirements. Liability for U.S. federal income taxes depends upon whether the Canadian business is carrying on a trade or business in the U.S. through a U.S. permanent establishment. Even without a liability for U.S. federal income taxes, Canadian companies may still have U.S. filing obligations. Keep in mind state income taxes, which may be determined on a different basis, and filing requirements can vary depending on the state.
Summary of changes to U.S. Federal Corporate income tax
The Tax Cuts and Jobs Act impacts tax years beginning after January 1, 2018.
1. U.S. Federal Corporate income tax RATE
The Tax Cuts and Jobs Act changed the U.S. federal corporate tax rate to a flat 21% of taxable income. The bill makes the new rate permanent.
The 21% U.S. federal corporate tax rate replaces a graduated tax rate that varied between 15% and 39% depending on taxable income. The new U.S. corporate tax rate of 21% dramatically changes the landscape for corporations doing business, or planning to do business in the U.S. Tax planning, including corporate tax structures must take these changes into consideration. In a nutshell, the U.S. corporate tax rates are now very comparable to Canadian corporate tax rates.
2. Net Operating Loss (NOL)
New losses incurred in tax years beginning after January 1, 2018 cannot be carried back, however they can now be carried forward indefinitely. Furthermore, these new losses being carried forward, are limited to 80% of taxable income, computed without regard to the NOL deduction. It should be noted that NOL created prior to 2017, will be allowed to be carried forward, and are not subject to the 80% limit on taxable income.
The NOL rules replace previous rules that NOL to be carried back 2 years or forward 20 years to fully offset taxable income.
3. Alternative Minimum Tax (AMT)
Alternative Minimum Tax for corporations has been repealed. Previously, AMT was triggered on certain tax preference items such as excess depreciation.
There are several depreciation methods available for U.S. tax purposes, and the Tax Cuts and Jobs Act provides for changes in two of the accelerated depreciation options, designed to encourage investment in capital assets located in the U.S.
• Bonus Depreciation – has increased from 50% to 100% for property placed into service after September 27, 2017 and before January 1, 2023 (January 1, 2024 for longer production period property and aircraft). Bonus depreciation is applicable to used property (previously was for new property only).
• Section 179 depreciation allows 100% expensing of capital assets up to $1,000,000 per year, with an investment limit of $2.5 million. If a taxpayer places more than $2,000,000 worth of section 179 property into service during a single taxable year, the § 179 deduction is reduced, dollar for dollar, by the amount exceeding the $2,500,000 threshold, again as of January 1, 2018. Previously, in 2017, this was $510,000 with a phase-out beginning at $2,030,000 of section 179 property placed into service in the tax year.
5. Business Deductions
There are several business deductions that have been completely eliminated with the Tax Cuts and Jobs Act, most notably:
• Entertainment expenses are not deductible. Previously 50% of entertainment expenses were deductible for tax purposes. Entertainment expenses includes entertaining clients at nightclubs, sporting events, theatres etc. Entertainment expenses incurred prior to before January 1, 2018 are deductible, if they meet specific criteria.
• Section 199 deduction (also referred to as the domestic manufacturing deduction, U.S. production activities deduction, and domestic production deduction) was a tax break for businesses that perform domestic manufacturing and certain other production activities. The Section 199 deduction has been eliminated.
Please refer to our firm’s companion article regarding 2018 U.S. individual income tax changes as well as other U.S. corporate income tax articles.
The Tax Cuts and Jobs Act enacted significant reductions in U.S. federal corporate tax rates, and has basically ‘leveled the playing field’ with Canadian corporate tax rates. Canadian corporations should review these changes to ensure their structures are set up to take advantage of tax planning opportunities.
We hope you have found this article useful. Please contact our firm to discuss how Edelkoort, Smethurst, Schein CPAs LLP can assist you with your U.S. and Canadian corporation tax planning and filings. We look forward to hearing from you. Thanks for taking the time to read this article, and best wishes.
Derek Edelkoort, CPA, CGA,
IRS registered paid tax preparer and IRS Certified Acceptance Agent
Edelkoort, Smethurst, Schein CPAs LLP
Edelkoort | Smethurst | Schein CPAs LLP is located in Burlington Ontario servicing the Golden Horseshoe and Greater Toronto Area and well beyond. The firm is fully licensed with CPA Ontario to provide assurance, tax and accounting services as well as registered as tax preparers with the Canada Revenue Agency (CRA) & Internal Revenue Service (IRS).
All blogs and articles published on this site are for informational purposes only and do not constitute professional advice. Readers should contact a professional to discuss their individual situation. Neither the author nor the accounting firm shall accept any liability for any reliance placed on the information posted.