Against all odds, Congress, on a straight party-line vote, enacted the most significant tax reform the U.S. has witnessed in more than 30 years. The tax reform legislation, known as the "Tax Cuts and Jobs Act," significantly alters the tax law landscape for businesses. This article offers a high-level overview of some of the tax law changes that may specifically impact the gaming and hospitality industry.
Corporate Tax Rates Slashed to 21%
A hallmark of the Tax Cuts and Jobs Act is adoption of a flat 21% corporate income tax rate. Under prior law, the U.S. had one of the highest corporate tax rates of the industrialized world, topping out at 35%. The new 21% corporate tax rate is effective for tax years beginning after December 31, 2017.
Immediate Expensing of Capital Investments
The Tax Cuts and Jobs Act expands bonus depreciation to permit 100% expensing of the costs of qualified property. "Qualified property" is generally defined to consist of tangible personal property with a recovery period of 20 years or less. Personal property, such as machinery and equipment, may be eligible for 100% expensing. The provision, however, is only temporary. The 100% expensing is available until 2022 and is then followed by a 5-year phase-out period.
Repeal of the Corporate AMT
The much-maligned corporate federal alternative minimum tax was repealed, effective for tax years beginning after December 31, 2017.
As is typical with reductions in tax rates, the "tax base" is broadened. The tax base is simply the items of income that are subject to taxation. Although the Tax Cuts and Jobs Act significantly simplified and reduced corporate income tax rates, the Act also included several other important changes that limit many deductions available under prior law. The base-broadening measures include the following:
- The ability to deduct business interest is severely restricted. Under the Tax Cuts and Jobs Act, a business may now deduct only its business interest in an amount not exceeding 30% of its adjusted taxable income. Real property businesses and businesses with gross receipts of $25 million or less are excepted from the limitation on the deduction of interest.
- Net operating loss ("NOL") deductions are also limited by the Tax Cuts and Jobs Act. Under the Act, NOLs may be deducted only in an amount equal to 80% of taxable income. Businesses may no longer "carryback" an NOL to offset the tax liability of an earlier year. Businesses can continue to "carryforward" unused NOLs to offset tax liability arising in future years. Unused NOLs can now be carried forward for an unlimited number of years.
- The Tax Cuts and Jobs Act eliminates the deduction for entertainment, amusement, and recreation expenses. The Tax Cuts and Jobs Act preserved the deduction for food and beverage expenses related to business activity. As was the case with prior law, the deduction for food and beverage expenses is capped at 50% of the expenses incurred.
- Under prior law, gains from the sale or other disposition of self-created patents, inventions, and similar property were characterized as capital gains. This favorable treatment under prior law allowed inventors to significantly reduce tax liability upon the sale of a patent or other intellectual property rights. The Tax Cuts and Jobs Act eliminates this favorable tax treatment by characterizing the gain upon the disposition of self-created intellectual property rights as ordinary income.
- The Tax Cuts and Jobs Act limits the ability of taxpayers to deduct local lobbying expenses. Under the Act, lobbying costs incurred to lobby a local governmental unit or an Indian Tribe are no longer deductible.
- Penalties, fines, and expenses paid to investigate a violation or potential violation of law are no longer deductible under the Tax Cuts and Jobs Act. The denial of the deduction is implicated when a government, or similar entity, is a complainant or investigator with respect to the violation or potential violation of a law.
Another hallmark of the prior U.S. tax law was taxation of the worldwide income of U.S. taxpayers. The Tax Cuts and Jobs Act adopted several changes to the U.S. international tax regime. The Act largely attempts to shift away from the worldwide taxation philosophy to a more territorial tax system. Significant changes include adopting a 100% dividend-received deduction for dividends received from certain foreign corporations owned by a U.S. corporation shareholder. Under the new law, post-1986 accumulated foreign earnings will be subject to immediate taxation – cash and cash equivalents will be taxed at a 15.5% rate, while illiquid assets will be taxed at an 8% rate.
The Tax Cuts and Jobs Act significantly modifies the U.S. tax law. For the gaming and hospitality industry, the reduced corporate rates and availability of a 100% bonus for qualified property may prove to be highly beneficial. On the other hand, limitations on the deduction of local lobbying expenses and costs associated with government investigations may increase taxable income.
Additionally, the tax law changes may be an opportunity for gaming and hospitality businesses to revisit organizational and intercompany structures to assess whether more tax-efficient approaches can be implemented.