1. Aaron Nocjar Steptoe & Johnson LLP
Partner in Steptoe's Washington office and member of the Tax Group
Focuses on federal income taxation issues, with particular emphasis on the taxation of pass- through entities
Has experience with oil, gas, nuclear, electric and alternative energy federal tax issues
Also has experience addressing tax policy issues before Congress and the Treasury Department
Contact information:

2. Major Tax Act Changes

3. The Tax Act Prior indicated goals of tax reform:
Reduce corporate tax rate
Convert from a worldwide system of taxation to a territorial system of taxation
Increase jobs and wages in the US
Simplify tax rules for all taxpayers
Make changes permanent
Revenue neutral
New tax act signed into law Dec. 22, 2017, generally effective January 1, 2018
Various provisions sunset after 2025 tax year
Some provisions apply to 2017 tax year
Some provisions apply only after 2018 tax year
Broadest change to US tax rules, since (or perhaps beyond) TRA of 1986
Data points to come:
Joint Committee on Taxation “Bluebook”
IRS/Treasury interpretive guidance
Technical corrections
US economic output over the coming decade
Mid-term elections

4. Major Provisions Tax Rates
Lowers corporate federal income tax rate from 35% to 21%
No more graduated rates – flat 21%
Permanent change
Lowers individual federal income tax rates (top rate from 39.6% to 37%)
Temporary change (until 2026)
No change to tax rates for long-term capital gain and qualified dividends (20%)
No change to additional tax on net investment income (3.8%) and additional HI tax on wages/earnings (0.9%), if income in excess of $250K
No change to employment tax rates and self-employment tax rates

5. Major Provisions Interest Deduction Limit
Broad expansion of limitation on deductibility of interest expense
The amount of business interest expense that can be deducted is generally limited to
business interest income, plus
30% of “adjusted taxable income” (ATI)
Taxpayer-by-taxpayer basis
Exception: consolidated groups
Annual limit
Unlimited carryforward (but no carryback) of disallowed business interest expense
Permanent change
No grandfathering rules – immediate application to pre-existing debt structures

6. Major Provisions
Define types of income and deductions, then apply operating rules.
Business interest expense = any interest paid/accrued on debt properly allocable to trade or business (not investment)
Business interest income = any interest income properly allocable to a trade or business (not investment)
ATI = taxable income computed without regard to
Non-business tax items,
Business interest income and business interest expense,
Net operating loss,
199A deduction, and
For tax years , depreciation, amortization, or depletion
ATI is not “EBITDA” for , and then “EBIT” after 2021
ATI is a function of tax rules – not accounting rules

7. Major Provisions Interest Deduction Limit
Exceptions from business interest expense limitation
Based on definition of business interest expense:
Business of performing services as an employee (automatic)
Electing real property business
“any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business”
Electing farming business
Certain public utilities (automatic)
“trade or business of the furnishing or sale of electrical energy, water, or sewage disposal services, gas or steam through a local distribution system, or transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, by a public service or public utility commission or other similar body of any State or political subdivision thereof, or by the governing or ratemaking body of an electric cooperative.”
Overall exception from operating rules for “small businesses”
25M average gross receipts of the taxpayer over the previous 3 years
Two big drawbacks from seemingly helpful exception:
broad aggregation rules
“tax shelter” ineligible

8. Major Provisions Interest Deduction Limit
Electric and natural gas utilities appear to fall into public utility exception
Oil pipelines appear to fall outside exception
Consider whether real property exception also captures some portion of utility businesses
Unclear how these exceptions will apply
Multiple entities could conduct portions of activities that do not constitute excepted business activity alone, but together they constitute an excepted business activity
Excepted business activity may be conducted by only one subsidiary of a large consolidated group
Excepted business activity could be only one component of larger business activities of same entity
How “properly allocate” interest expense among entities, where some (but not all of them) qualify for exceptions
Interest tracing, relative FMV or tax basis of assets, other approaches?
How determine ATI for entity or consolidated group where only portion of overall activities are excepted?

9. Major Provisions
“Full expensing” of most tangible business personal property
100% bonus depreciation for “qualified property” acquired and placed in service after September 27, 2017, through December 31, 2022, with gradual phase-down over next five years
Qualified property ~
New or used property
Subject to MACRS with recovery period of 20 years or less
Acquired & placed in service in relevant tax year (state of readiness/most testing completed)
Used in taxpayer’s business
Public utilities excepted out of interest expense limitation are denied 100% bonus depreciation
Maintains current law regarding 50% bonus depreciation for property acquired prior to September 28, 2017, but placed in service after that date
50% for 2017 placed in service
40% for 2018 placed in service
30% for 2019 placed in service
0% for 2020 placed in service

10. Major Provisions
Taxpayers can still elect to forego bonus depreciation for slower cost recovery (ADS)
May increase interest expense deductibility in 2022 and thereafter
Insufficient regular tax liability
However, can no longer elect to accelerate use of corporate AMT credits
Corporate AMT repealed
Corporate AMT credits from prior years
Generally used when corporate taxpayer in AMT position in prior years and then shifts back into regular tax position later – smoothing out of overall tax liability
Since corporate AMT repealed, prior-year AMT credits can be used:
In full against regular corporate tax
Partially refundable for
Fully refundable in 2021
Permanent change

11. Major Provisions Net operating losses
No carrybacks
Unlimited carryforwards (but no inflation adjustment)
Carryforwards can reduce taxable income only by 80%
Permanent change
State taxes imposed at entity level continue to be deductible for businesses
Headline change of $10k limit inapplicable to taxes paid by businesses (rather than individuals) with respect to business (or investment) activity
State tax burdens may change depending on
Whether relevant states “conform” to federal tax changes (and when) or “opt out” to any extent (e.g., 100% bonus depreciation)

12. Major Provisions MLP exception from treatment as corporation retained
Typical tax benefits still available – no entity-level tax, passthrough of tax items to unit holders
However, level of tax benefits to unit holders will change in light of new rules on bonus depreciation, business interest expense, and others
Active consideration by MLPs of converting to public C corporations
Application of interest expense limitation in partnership context (including MLP context) is complicated and unclear
Limit generally appears to apply at partnership level
However, unused ATI (i.e., excess ATI) and business interest expense disallowed at the partnership level flow immediately up to partners
Unclear how exceptions apply in partnership context

13. Major Provisions QBI Deduction – “the passthrough deduction”
Temporary (until 2026)
Deduction against taxable income of 20% of domestic business income
Applies to individuals, trusts, and estates (not corporations)
Produces effective federal income tax rate on domestic business income of 29.6%
Intended as a bridge between large corporate tax rate reduction and more modest individual income tax reductions

14. Major Provisions QBI Deduction – “the passthrough deduction”
Many limitations and exceptions
Only business income counts (investment income and employee compensation excluded)
Only income attributable to certain types of businesses count – specified services exception (very broad exception)
Only domestic business income counts
Deduction generally determined on a business-by-business basis (not taxpayer-basis or entity-by-entity basis)
Loss from one eligible business offsets income from other eligible business – can reduce overall QBI deduction
Deductible amount for each business generally equal to lesser of
20% of domestic business income of eligible business, and
Greater of
50% of W-2 wages (paid with respect to employees of business), or
Sum of 25% of W-2 wages and 2.5% of unadjusted tax basis of business property used therein
Overall taxable income limitation (after reducing taxable income by capital gain and qualified dividends)
Taxpayers under certain taxable income limits not subject to specified services exception and not subject to W-2 wages limitations
MFJ: 315K to 415K complete phase-out range
QBI rules generally applied in the partnership context at the partner level (compare interest deduction limit)
Special rules to permit unitholders in most MLPs to take deduction free of the W-2 wages limitations

15. Major Provisions Contributions to Capital
Section 118(a) excludes from corporation’s gross income any “contribution to the capital of the taxpayer”
Contribution to capital of taxpayer:
Prior to Tax Act:
Does not include contribution in aid of construction or any other contribution as a customer or potential customer
But does include money/other property received by regulated public utility providing water or sewerage disposal services
Tax Act:
Does not include any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such)
Special rules for water or sewerage disposal utilities repealed
New express grant of regulatory authority, including “guidance for determining whether any contribution constitutes a contribution in aid of construction”
Permanent change
Unclear how Treasury/IRS will interpret revision to section 118 in context of pre-existing electric “intertie” Notices

16. Major Provisions Corporate Tax Rate Reduction - Normalization
Public utility property generally ineligible for more beneficial Code-based tax depreciation if taxpayer not treated as using normalization method of accounting
Public utility property generally has the same meaning as used in new interest deduction limitation and 100% bonus depreciation provision
If public utility property and fail to use normalization, tax depreciation limited to amount of regulated book depreciation
Normalization method of accounting requires under the Code that:
taxpayer must, in computing tax expense for establishing cost of service for ratemaking purposes and reflecting operating results in regulated books, use depreciation method that is same as depreciation determined for regulated books; and
taxpayer must maintain and adjust deferred tax reserve to reflect deferred tax from differences between tax depreciation and such regulated book depreciation; and
taxpayer does not reduce excess tax reserve (with respect to assets placed in service before January 1, 2018) more rapidly, or to a greater extent, than under the average rate assumption method (ARAM)
Excess tax reserve = actual deferred tax reserve (generally based on 35% corporate rate) less hypothetical deferred tax reserve if lower corporate rate were in effect for all prior periods (21%)
ARAM – excess tax reserve is reduced over the remaining lives of the property that created the deferred tax reserve in taxpayer’s regulated books (during the years the deferred tax reserve related to such property is reversing) based on an average tax rate over the lives of the property
Similar rules applied to corporate tax rate reduction arising in Tax Reform Act of 1986

17. Major Provisions Corporate Tax Rate Reduction - Normalization
ARAM example provided in legislative history
Facts:
Calendar year regulated utility placed property costing $100 million in service in 2016
For regulatory (book) purposes, property depreciated over 10 years on straight-line basis
For tax purposes, property depreciated over 5 years using MACRS (200 percent declining balance method)
Conference Report: “The 5-year and 10-year book lives are used for illustration purposes only. In general, public utility property may be depreciated over various periods ranging from 5 to 20 years under MACRS. For regulatory purposes, public utility property may, in certain cases, have a useful life of 30 years or more.”

18. Major Provisions Corporate Tax Rate Reduction - Normalization
Normalization Calculation for Corporate Rate Reduction
(Millions of dollars – Years)
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Total
Tax expense 20 32
19.2
11.52
5.76
100
Book depreciation 10
Timing difference 22
9.2
1.52
(4.24)
(10)
Tax rate
35%
21%
31.1%
Annual adjustment to reserve
3.5
7.7
1.9
0.3
(1.3)
(3.1)
Cumulative deferred tax reserve
11.2
13.1
13.5
13.8
12.5
9.3
6.2
3.1
(0.0)
Annual adjustment at 21%
(0.9)
(2.1)
(9.3)
Annual adjustment at average rate
(13.8)
Excess tax reserve
0.4
1.0
4.5
The excess tax reserve as of December 31, 2017, the day before the corporate rate reduction takes effect, is $4.5 million (cumulative deferred tax reserve of $11.2 million minus cumulative timing difference as of December 31, 2017 of $32 million, multiplied by 21 percent).
The taxpayer will begin taking the excess tax reserve into account in the 2021 taxable year, which is the first year in which the tax depreciation taken with respect to the property is less than the depreciation reflected in the regulated books of account.
The annual adjustment to the deferred tax reserve for the 2021 through 2025 taxable years is multiplied by 31.1 percent, which is the ratio of the aggregate deferred taxes as of the beginning of 2021 ($13.8 million) to the aggregate timing differences for the property as of the beginning of 2021 ($44.2 million).