What Is the Tax Cuts and Jobs Act (TCJA)?

Source: Internal Revenue Service

State and Local Tax

The new law capped the deduction for state and local taxes at $10,000 through 2025.

2024 State and local tax burdens

Businesses and the TCJA

• Corporate Tax Rate: The law created a single corporate tax rate of 21% and repealed the corporate AMT. These provisions do not expire. Supporters of cutting the corporate tax rate argued that it reduced incentives for corporate inversions, in which companies shift their tax base to low- or no-tax jurisdictions, often through mergers with foreign firms.
• Immediate Expensing: TCJA allows full expensing of short-lived capital investments rather than requiring them to be depreciated over time. The section 179 deduction cap doubles to $1 million, and phaseout begins after $2.5 million of equipment spending, up from $2 million. 
• Pass-Through Income: Owners of pass-through businesses—which include sole proprietorships, partnerships, and S-corporations—gained a 20% deduction for pass-through income. To discourage high earners from recharacterizing regular wages as pass-through income, the deduction is capped at 50% of wage income or 25% of wage income plus 2.5% of the cost of qualifying property.
• Interest: The net interest deduction is capped at 30% of earnings before interest and taxes (EBIT).
• Cash Accounting: Businesses with up to $25 million in average annual gross receipts over the preceding three years can use cash accounting—up from $5 million from the old tax code.
• Net Operating Losses: The law scrapped net operating loss (NOL) carrybacks and caps carryforwards at 90% of taxable income, falling to 80%.
• Section 199: The law eliminated the section 199 (domestic production activities) deduction for businesses that engage in domestic manufacturing and other production work.
• Foreign Earnings: The law introduced a territorial tax system, under which only domestic earnings are subject to tax. Companies with over $500 million in annual gross receipts are subject to the base erosion anti-abuse tax, designed to counteract base erosion and profit shifting, a tax-planning strategy that involves moving taxable profits from one country to another with low or no taxes. BEAT is calculated by subtracting a company’s regular corporate tax liability from 10% of its taxable income, ignoring base-eroding payments.

Intangible Property

TCJA altered the treatment of intangible property held abroad, such as patents, trademarks, and copyrights. For instance, Nike (NKE) houses its Swoosh trademark in an untaxed Dutch subsidiary. 

When the foreign tax rate on foreign earnings above a 10% standard rate of return is below 13.125%, the law taxes these excess returns at 21%, after a 50% deduction and a deduction worth 37.5% of FDII. This excess income, which the law assumes to be derived from intangible assets, is called global intangible low-taxed income (GILTI). Credits can offset up to 80% of GILTI liability.

Foreign-derived intangible income refers to that which is from the export of intangibles held domestically, which is taxed at a 13.125% effective rate, rising to 16.406% after 2025. The European Union has accused the U.S. of subsidizing exports through this preferential rate violating World Trade Organization (WTO) rules.

Projected Economic Growth

Treasury Secretary Steven Mnuchin claimed that the Republican tax plan would spur sufficient economic growth to pay for itself and more. On Dec. 11, 2017, the Treasury released a one-page analysis claiming that the law will increase revenues by $1.8 trillion over 10 years.

The Federal Reserve projected growth of 2.5% in 2018, 2.1% in 2019, 2.0% in 2020, and 1.8% over the longer run. Real GDP data for the years after the TCJA show the following growth rates. The 2020 GDP was significantly affected by the COVID-19 epidemic.

• 2.9% in 2018
• 2.6% in 2019
• -2.2% in 2020
• 6.1% in 2021
• 2.5% in 2022
• 2.9% in 2023

Who Benefited From TCJA?

The TCJA cut the corporate tax rate to benefit shareholders, who tend to be higher earners. It only cuts individuals’ taxes for a limited period. It scales back the AMT and estate tax and reduces the taxes levied on pass-through income. It does not close the carried interest loophole, which benefits professional investors.

Once individual tax cuts expire after 2025, the TPC estimates that the majority of taxpayers—53.4%—will face a tax increase: 69.7% of those in the middle quintile (40th to 60th percentile) will pay more, compared to just 8% of the highest-earning 0.1%.

Change in after-tax income by income percentile

The Joint Committee on Taxation estimated that the 22 million households making $20,000 to $30,000 will collectively pay 26.6% more in 2027 than they would under the previous statute in that year. The 629,000 households making over $1,000,000 will pay 1% less.

The Bottom Line

The Tax Cuts and Jobs Act (TCJA) was a major tax code overhaul signed into law in 2018 by President Trump. TCJA cut taxes for shareholders and individual taxpayers alike. However, cuts for individuals expire in 2025.