Key Provisions of the H.R. 1 Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act of 2017, also known as H.R. 1, represented a substantial overhaul of the United States tax code. Signed into law on December 22, 2017, the legislation enacted comprehensive changes to individual, corporate, and international tax rules. The stated objectives were to simplify the tax system for many individuals and families and enhance the competitiveness of the American business environment. The law aimed to achieve these goals by modifying tax rates, deductions, and credits.

Key Changes for Individual Taxpayers

The vast majority of the law’s changes for individual taxpayers are temporary. These modifications, including adjustments to tax rates, the standard deduction, and various credits, are scheduled to expire after December 31, 2025. Unless Congress extends these provisions, the individual tax code will largely revert to its pre-act state.

The legislation restructured the individual income tax system by adjusting tax rates and income brackets. It retained the seven-bracket structure but lowered the rates for most levels of income. For example, the rate for those in the middle-income ranges dropped by a few percentage points. These changes were intended to allow taxpayers to keep a larger portion of their earnings, though the specific impact varied based on a person’s total income and filing status.

The act significantly increased the standard deduction. For the 2025 tax year, the standard deduction is $15,000 for single filers and $30,000 for married couples filing jointly. This change was paired with the elimination of the personal exemption. This trade-off was designed to simplify tax preparation, as the higher standard deduction makes it less necessary for many to itemize.

A new limitation was placed on the deduction for state and local taxes, known as the SALT deduction. The act capped the amount that itemizing taxpayers can deduct for state and local income, sales, and property taxes at a combined total of $10,000 per household. This provision has a more pronounced effect on residents of areas with high property values and state income tax rates.

The Child Tax Credit was also modified. The credit amount was doubled to $2,000 per qualifying child under 17, and up to $1,700 was made refundable, meaning families could receive it even if they owed no federal income tax. The income thresholds at which the credit begins to phase out were substantially increased to $200,000 for single parents and $400,000 for married couples, extending its availability. A smaller, non-refundable credit of $500 was also introduced for other dependents.

Other itemized deductions were also altered. The deduction for mortgage interest was limited to interest paid on the first $750,000 of new mortgage debt. This limit is scheduled to revert to the previous $1 million threshold in 2026.

The act also suspended nearly all miscellaneous itemized deductions previously subject to a 2% of adjusted gross income floor. This included deductions for unreimbursed employee expenses, tax preparation fees, and investment advisory fees.

The act also addressed the individual Alternative Minimum Tax (AMT) and the federal estate tax. The AMT exemption amounts were increased, and the income level at which the exemption begins to phase out was raised, meaning fewer taxpayers would be required to pay this tax. For the federal estate tax, the exemption amount was doubled. For 2025, the exemption is $13.99 million per individual, but this is temporary and scheduled to revert to its pre-act, inflation-adjusted level of around $7 million after 2025.

Major Provisions for Businesses

The centerpiece of the business tax reforms was a permanent reduction in the corporate income tax rate. The previous graduated rate structure, which could reach as high as 35%, was replaced with a flat 21% rate for C corporations. This change was intended to make the United States a more attractive location for businesses and aligned the U.S. more closely with the tax rates of other developed nations.

A new deduction was introduced for owners of pass-through businesses, which include sole proprietorships, partnerships, and S corporations. These entities do not pay tax at the business level; instead, profits are “passed through” and taxed on the owners’ individual returns. The Qualified Business Income (QBI) deduction allows these owners to deduct up to 20% of their qualified business income. This provision was designed to provide a tax cut to businesses that would not benefit from the lower corporate rate, but it is scheduled to expire after 2025.

The law made it easier for businesses to recover investment costs through enhanced expensing provisions. It initially allowed for 100% bonus depreciation, enabling businesses to immediately deduct the full cost of eligible property. This provision is phasing down, and for property placed in service in 2025, the rate is 40%. Additionally, the expensing limits under Section 179 were increased, allowing small and medium-sized businesses to deduct a larger amount of the purchase price of qualifying assets.

A new limitation was placed on the deductibility of business interest expenses. The deduction for net business interest expense is limited to 30% of the business’s adjusted taxable income (ATI). This limit became more restrictive as the formula for calculating ATI no longer allows for the add-back of depreciation and amortization. This rule was implemented to reduce the tax incentive for businesses to finance their operations with debt rather than equity.

The rules for Net Operating Losses (NOLs), which occur when a company’s tax deductions exceed its taxable income, were also changed. For most businesses, the option to carry back an NOL to prior tax years was eliminated. The law also limited the amount of an NOL that could be carried forward to offset future profits to 80% of taxable income in a given year. While the CARES Act temporarily suspended these rules, the TCJA’s general rule of no carrybacks and an 80% income limitation now applies.

Reforming International Taxation

A fundamental change was the shift of the U.S. from a “worldwide” system of taxation to a “territorial” system. Under the previous worldwide system, U.S.-based companies were subject to U.S. tax on their global profits. The new territorial system largely exempts foreign-earned profits of U.S. corporations from domestic taxation when they are repatriated. This change was designed to encourage multinational corporations to bring overseas profits back to the United States.

To transition to the new system, the act imposed a one-time mandatory tax on the accumulated, untaxed foreign earnings of U.S. companies. This “transition tax” required companies to pay tax on historical offshore profits that had not yet been subject to U.S. income tax. The rate was 15.5% for earnings held as cash and 8% for earnings reinvested in the foreign business. This prevented past earnings from escaping U.S. taxation under the new system.

The act introduced several new provisions aimed at preventing corporate tax avoidance. One such measure is the tax on Global Intangible Low-Taxed Income (GILTI). The GILTI rules are designed to discourage U.S. companies from shifting profits from intangible assets, like patents and copyrights, to very low-tax foreign jurisdictions by subjecting a portion of this foreign income to a U.S. minimum tax.

Another anti-abuse provision is the Base Erosion and Anti-Abuse Tax (BEAT). The BEAT functions as a minimum tax that targets large multinational corporations that reduce their U.S. tax liability by making deductible payments, such as interest and royalties, to foreign affiliates. If these payments are deemed excessive, the BEAT imposes a tax on a modified taxable income that adds back these base-eroding payments.

To complement the anti-abuse rules, the act created a tax incentive known as the Foreign-Derived Intangible Income (FDII) deduction. This provision provides a tax deduction for U.S. corporations on income earned from exporting goods and services that are tied to their domestic intellectual property. The FDII deduction effectively lowers the tax rate on this income, creating an incentive for companies to hold their intangible assets in the United States.