How Donald Trump’s Tax Cuts and Jobs Act Affected Business

Introduction

One of the most extensive changes enacted during Donald Trump’s presidency was the Tax Cuts and Jobs Act (TCJA) passed by Republicans in 2017. While the tax overhaul impacted individuals, it also included major reforms aimed at providing businesses and corporations significant tax relief.

In this post, we’ll examine how the TCJA affected U.S. businesses through changes to corporate tax rates, pass-through entities, capital expensing, and more.

Corporate Tax Rate Reduction

A centerpiece of the TCJA was a drastic reduction in the corporate tax rate [1]:

Prior 35% Rate Cut to 21%

• The corporate tax rate was cut from 35% down to 21% starting in 2018.
• This 14 percentage point reduction was one of the largest single-year corporate tax rate cuts in modern history.

Potential Boost to Business Investment and Competitiveness

• Proponents argued the rate reduction would make the U.S. more competitive globally and encourage investment.
• But opponents disputed the cuts would spark enough growth to offset revenue losses.

Permanent Change vs. Temporary Individual Cuts

• Unlike individual tax changes, the corporate rate cuts do not expire. This cements permanently lower corporate taxes.

Cutting the flagship corporate tax rate offered major savings for public and private sector businesses of all sizes.

New Deduction for Pass-Through Businesses

The TCJA also provided tax relief for pass-through entities like S-Corps and LLCs [2]:

New 20% Income Deduction

• Pass-throughs were given a 20% deduction applicable to qualified business income.
• This effectively reduced taxes on pass-through business earnings by 20%.

Benefits for Smaller Businesses

• About 95% of American businesses are organized as pass-through entities [3].
• Over 90% of pass-through owners qualify for the full deduction.

Limitations on Higher Incomes

• For income above $157,000 ($315,000 joint), limits on eligibility start phasing in.
• The deduction aimed to benefit truly small independent businesses more than those just structured as pass-throughs.

The new pass-through deduction delivered major tax relief to a sector employing about 50% of American workers [4].

Changes to Capital Expensing and Depreciation

The tax bill also included temporary expensing provisions to incentivize capital investment [5]:

100% Expensing for 5 Years

• Businesses gained the ability to immediately deduct 100% of capital expenditures through 2022.
• This “full expensing” applied to short-lived capital investments like machinery.

Faster Depreciation of Other Assets

• Depreciation schedules were accelerated enabling faster write-offs for buildings and other longer-lived assets.

Driving Increased Investment Near Term

• The combination provided tax incentives for businesses to purchase capital assets and expand operations in the law’s early years.

Length of Deductions Limited

• Full expensing expires after 2022 with depreciation schedules then lengthening again.

These first-five-year expensing benefits offered targeted investment stimulus.

Shifting Toward a Territorial Tax System

The TCJA also changed the U.S. corporate tax code to a more territorial system [6]:

Prior Worldwide Taxation

• Before TCJA, U.S. corporations owed U.S. taxes on all foreign earned income.
• This made profits overseas subject to a 35% rate if repatriated.

New Exemption for Foreign Income

• The TCJA exempted U.S. corporations from owing taxes on most foreign earnings.
• A one-time tax was charged on deferred overseas profits.

Incentive to Invest in U.S.

• The territorial shift ended incentives to keep profits abroad and discouraged use of offshore tax havens.
• Foreign profits can now be returned to the U.S. tax free to invest domestically.

While controversial, moving toward a territorial system aimed to boost competitiveness.

Impact on Specific Business Sectors

Beyond general changes, some provisions targeted specific industries [7]:

Retailers

• Immediate capital expensing benefits retailers rapidly opening and improving locations.

Manufacturers

• Accelerated depreciation schedules help capital-intensive manufacturers upgrade facilities and automation.

Service Companies

• Pass-through deduction advantages smaller services firms like consultants, accountants, and architects.

Multinational Corporations

• Territorial taxation and lower rates encouraged profit repatriation by technology and pharma giants.

So while all businesses benefited, some sectors experienced tailored advantages.

Unresolved Issues Under the TCJA

However, some business tax issues remained unaddressed under the TCJA [8]:

Interest Deductibility Limits

• Full interest deductibility helps cash flow for small businesses. But TCJA left limits from prior laws.

Incentives for R&D and Renewables

• Tax incentives for research and sustainable energy expired under TCJA awaiting potential extension.

Stepped-Up Basis at Death

• Eliminating this inheritance provision raising capital gains taxes was considered but not ultimately addressed.

So additional reforms remain possible to address business priorities the massive TCJA left outstanding.

Conclusion

The Tax Cuts and Jobs Act enacted under Donald Trump implemented some of the most dramatic tax code changes for businesses in the last 30 years. The signature cut in corporate tax rates combined with accelerated expensing and benefits for pass-through entities added up to hundreds of billions in tax savings for companies large and small.

While democrats criticized the cuts as excessive and untargeted, the reforms fulfilled Republican’s promises to stimulate growth through business tax relief. The long-term economic impacts continue being studied as corporate balance sheets adapted to the new tax environment. But in the short term, provisions like full expensing aimed to incentivize hiring and investment critical for continued recovery from the deep pandemic recession.

Looking ahead, allowing some temporary measures to expire risks spiking taxes and unwinding stimuli too rapidly barring further legislative action. But the permanent lowering of corporate rates will extend benefits to American companies indefinitely in a highly competitive global business environment regardless of shifts in political winds.

References

[1] https://taxfoundation.org/tcja-business-tax-provisions-expiring/

[2] https://www.jct.gov/publications/2018/r42018/

[3] https://www.sba.gov/sites/default/files/advocacy/2018-Small-Business-Profiles-US.pdf

[4] https://www.cbpp.org/research/federal-tax/tax-cuts-and-jobs-act-deeply-cuts-into-nationwide-individual-income-taxes-and

[5] https://www.cfo.com/tax/2021/03/the-benefits-of-capital-expensing/

[6] https://taxfoundation.org/territorial-tax-system-oecd-review/

[7] https://www.journalofaccountancy.com/news/2018/feb/tax-reform-bill-impacts-manufacturing-retail-201822550.html

[8] https://budgetmodel.wharton.upenn.edu/issues/2021/10/26/tcja-budget-reconciliation-2022