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One of the major tax raising provisions in the Tax Act is a one-time tax imposed on the accumulated earnings held in foreign subsidiaries of US companies. This provision is broader that it may first appear. Under the Tax Act, any 10% US shareholder of a foreign corporation (determined on December 31, 2017) will be required to include in income, for the taxable year 2017, its proportionate share of the foreign corporation's undistributed earnings, if the foreign corporation is either a controlled foreign corporation (CFC) or has at least one 10% US shareholder that is a corporation.

This law change could generate significant phantom income with respect to 10%-or-greater owned foreign portfolio companies both (i) for US taxable investors (including the general partner and its owners) in partnership funds organized in the United States and/or for US sponsors of non-US funds. The Tax Act provides for reduced tax rates on such income for corporate investors of 8% (for earnings invested in tangible business assets) and 15.5% (for cash and cash equivalents), and 9.05% and 17.54% for investors taxed as individuals.

5. Tax-Free Section 1031 Like Kind Exchanges Eliminated Except for Real Property Transactions

The Tax Act eliminates the ability to qualify for tax-free exchange treatment under Code section 1031 if the property being exchanged is personal property. Consequently, for transactions occurring after December 31, 2017, exchanges of artwork, equipment, vehicles or other personal property held for investment or for use in a business, including Bitcoin or other cryptocurrencies, for like kind property will not eligible for Section 1031 tax treatment. Exchanges of real property continue to be eligible for Section 1031 exchange treatment.

6. Certain Tax Accounting Rules Have Been Revised

Under prior law, net operating losses (NOLs) could be carried back two years and carried forward for twenty years. Under the Tax Act, NOLs arising in tax years ending after December 31, 2017 generally cannot be carried back, but can be carried forward indefinitely. However, only 80% of a company's taxable income is permitted to be offset by NOLs. The remainder of the unused NOLs will carry forward.

The Tax Act also expands the category of corporations and partnerships that are eligible to use the cash method of accounting. Certain businesses may derive a tax benefit by switching from the accrual method to the cash method of accounting.

7. Deferred Compensation

The Tax Act generally leaves the current tax rules for deferred compensation intact. However, the Act also includes a new deferral provision for certain types of broad-based employee equity, which may apply to certain private companies.

8. Estate and Gift Tax Changes

In 2017, an individual could give or transfer at death up to $5,490,000 without paying gift or estate taxes. The Tax Act doubles the federal estate and gift tax unified exemption amount for estates of decedents dying and gifts made after December 31, 2017, and inflation adjustments will continue to apply. Therefore, in 2018, an individual has approximately an $11.2 million exemption, and a married couple has approximately $22.4 million of available shelter from federal gift and estate taxation. Note that the large exemption which applies to gifts may be useful in federal income tax planning. For example, large lifetime gifts of appreciated securities, artwork and other personal property (including possibly, a carried interest) to relatives who are in lower income tax brackets, or who reside in states with lower, or no state income taxes could save the family substantial federal income and/or state income taxes when such property is sold by the recipient of the gift.

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