Legislation Set for Final Votes in Congress Next Week
The “Tax Cuts and Jobs Act” (H.R. 1) is one step closer to passage. The House-Senate Conference has completed its work of reconciling the two separate tax reform bills passed in each chamber. The Conference included members of both the House and Senate and was led by House Ways and Means Committee Chairman Kevin Brady. These conferees worked through early December to come up with a compromise tax bill that will now be sent to the House and Senate for an up or down vote the week of December 18, 2017. No other change will be allowed to the bill produced by the Conference. The bill was approved today by the conferees along party lines with Republican conferees supporting the plan and Democrat conferees opposing it.
The conferees addressed each provision in the separate tax bills and needed to resolve the various differences and issues. In some cases they were in agreement and they retained the provision; in other cases they took the House provision or the Senate provision; or they came up with a new compromised provision. All changes were made keeping in mind: (1) the overall budget cap of $1.5 trillion in the tax cuts permitted in the plan, and (2) what impact any change might have on the prospects for passage of the bill, especially in the Senate.
Some of the key issues facing the conferees in ironing out differences between the two tax bills were:
- The tax rates for corporations and the effective date;
- The tax rates for individuals;
- The tax treatment of “pass-through businesses”;
- Limits on the deduction for state and local taxes;
- The corporate and individual alternative minimum tax (“AMT”);
- The child tax credit;
- The repeal of the estate tax; and
- The repatriation tax rate on foreign earnings.
There were many other provisions that needed to be worked out, but these maintained a lower profile as the drama played out this week in Congress.
We have included the chart below which presents selected business provisions and what the House and Senate versions of tax reform offered, and then what was ultimately agreed upon in the Conference. Here are selected business changes in the compromised tax bill:
COMPARISON OF HOUSE, SENATE, AND CONFERENCE REPORT
SELECTED HIGHLIGHTS FOR BUSINESS
|PROVISION||HOUSE BILL||SENATE BILL||PROVISION IN CONFERENCE AGREEMENT|
|Corporate Tax Rates||20% for C Corporations beginning in 2018.
A Personal Service Corporation (PSC) would be taxed at 25%.
|Same tax rate, but delays the effective date to 2019.
PSC rate at 20%.
|21% effective in 2018.
PSC rate at 21%.
|Corporate AMT||Corporate AMT repealed in 2018.||Corporate AMT retained.||Corporate AMT repealed. Effective in 2018.|
|Pass-Through Tax Rates||25% tax rate available for “pass-through businesses” (S Corporations and Partnerships/LLC’s), however, this rate is subject to a number of complexities. The actual tax rate might end up at 30-35%; not 25%. Effective in 2018.||Adds a new business deduction of 23% for “pass-through businesses” to achieve tax savings. Different format than House version with its own complications. The actual tax rate winds up around 30%. Effective in 2018.||Congress followed the Senate version for pass-through businesses, but dropped the 23% deduction down to 20%. Overall net tax rate for owners would be around 30%, but could vary based on taxpayer’s income.|
|Interest Deduction for Small Business
(Under $25 million or $15 million in revenue).
|Small business not subject to limitations (small business < $25 million in revenue).||Similar provision, but small business defined as < $15 million in revenue.||Conference follows the Senate bill, however, the definition of small business is defined at $25 million in average gross receipts.|
|Interest Deduction for Companies with over $25 million or $15 million in revenue||Limited in their interest deduction based on 30% of adjusted taxable income. Any unused interest expense above 30% threshold would be disallowed, and would carry forward for five years. This limitation would first apply in 2018. Exceptions apply for “real estate businesses” and for “floor plan financing” for auto dealers.||Similar provision for the 30% of adjusted taxable income. Also, unlimited carryforward on excess interest expense. Exception for real estate businesses is elective. Also, no “floor plan” exception.||Conference follows the Senate bill, however, the definition of small business is defined at $25 million in average gross receipts.|
|CapEx Additions||100% bonus depreciation for additions placed in service after September 27, 2017. Applies to property new to the buyer, thus could be “used.” Further, the 100% bonus depreciation is not available for “real estate businesses” (see above item for real estate businesses for interest expense limitation).||Similar provision, and effective date. Unsure if “used” property definition applies to Senate bill.
Also, enhanced depreciation for property used in farming.
Finally, depreciable life of building (commercial or residential) reduced to 25 years.
|Similar to Senate version. 100% expensing applies for additions made after September 27, 2017. But, also applies to “used property” as had been in the House version.
The 25 year life for real property was not adopted in Conference Agreement.
|Section 179 Expensing||
||Similar provision, but increases smaller. Expensing would be raised to $1,000,000 and phase-out at $2,500,000.||Conference Agreement follows Senate version with $1,000,000 amounts and phase out at $2,500,000.
Effective for tax years after 2017.
|Accounting Method Reforms for Small Businesses||
||Similar small business provisions, however, small business definition is less than $15 million of revenue.||Conference Agreement adopts the House version with a definition of small business set at $25 million of annual gross receipts.
Effective in 2018.
|Net Operating Losses (NOLs)||
||Similar NOL provision with 90% income limitation.
NOLs can only be carried forward indefinitely (except 2 year NOL carryback for farming business). No interest factor listed with NOL carryforwards.
|Conference Agreement follows Senate bill. Thus, NOL carrybacks are no longer available (except special 2 year carryback for farming). Also, NOL deduction as carryforward limited to 80% of taxable income. Applies in tax years after 2017.|
|LIFO Inventory||No limitation or changes to LIFO.||No changes.||LIFO retained.|
|R&D Credit||Retained.||Retained.||R&D Credit retained.|
|Like-Kind Exchanges (Section 1031 Exchanges)||Limited. Only applies to real property beginning in 2018. Does not apply for personal property.||Similar provision as House bill.||
Conference Agreement follows House version. Thus, no-like kind exchange treatment for gains applicable to personal property. Applies for exchanges after December 31, 2017.
We have included another chart below which presents selected individual provisions; it compares the House and Senate versions for tax reform. The last column shows what was ultimately agreed upon by the Conference. Here are selected individual changes in the agreed upon tax bill:
COMPARISON OF HOUSE, SENATE, AND CONFERENCE REPORT
SELECTED HIGHLIGHTS FOR INDIVIDUALS
|PROVISION||HOUSE||SENATE||PROVISION IN CONFERENCE AGREEMENT|
|Individual Tax Rates||Tax rates of 12%, 25%, 35%, and a top rate of 39.6%. Also, a higher tax rate applies for a portion of the taxable income over $1 million.||Retains current seven tax brackets, but drops the 15% rate to 12%, and reduces the top tax rate from 39.6% to 38.5%. No surtax over $1 million.||Seven tax rates of 10%, 12%, 22%%, 24%, 32%, 35%, and a new top rate of 37%. The 37% top rate is slightly lower than the current tax rate, and lower than the proposed tax rates in the House and Senate versions.
The “marriage tax penalty” in the brackets has been lessened, but some exists in the 35% tax rate.
The top 37% tax rate applies at $600,000 of taxable income and above for a married couple and $500,000 and up for a single filer.
|Standard Deduction||Doubled to $24,000 for a married couple filing jointly and to $12,000 for a single taxpayer (in both the House and Senate bills).||Same as House and Senate versions. $24,000 for a married couple and $12,000 for a single taxpayer.|
|Child Credit||Increase from $1,000 to $1,600 (more than doubled for married taxpayers). This would apply beginning in 2018.||Increase from $1,000 to $2,000 in 2018. Also, much higher phase-out range. Credit phased out for married couple with $1,000,000 of income.||$2,000 per child credit. Credit begins to be phased-out for families making over $400,000.|
|Itemized Deduction for State Income Taxes and Property Taxes||Retained a $10,000 deduction limit for property taxes. No deduction, however, for any state income taxes.
|Retained a $10,000 deduction limit for property taxes (like the House Bill). Also, no deduction, for any state income taxes.||Conference bill allows taxpayers to decide between property taxes, income taxes, or sales tax for this $10,000 limit. Overall cap of $10,000. Also, no prepayment of future year’s income taxes in 2017.|
|Mortgage Interest||Limited mortgage interest to home mortgages of $500,000 or less (for loans after November 2, 2017).||No change on acquisition debt, but interest deduction on “home equity” debt would be repealed beginning in 2018.||Limited mortgage interest deductions set at $750,000 for new mortgages on principal residence or second home (up from the House version of $500,000). Effective date is for loans on or after 12/15/2017.
Deduction for “home equity interest” is repealed for tax years after 2017.
||Both charitable provisions in the House bill are also in the Senate bill.||Similar to House and Senate versions. Effective in 2018.|
|Casualty Losses||Itemized deduction to be repealed in 2018. Some relief for those in disaster areas from Hurricanes.||Itemized deduction to be repealed in 2018||Itemized deduction repealed in 2018, except for losses in declared disaster areas.|
|Medical Expenses||Repeal medical deductions beginning in 2018 in House bill.||Medical deduction would not be eliminated. Also, the AGI limitation will be 7.5% in 2017 and 2018, and 10% thereafter.
Also, eliminates the individual ACA mandate for health insurance.
|Medical expense deduction retained. 7.5% of AGI applies for 2017 and 2018, and rises to 10% of AGI thereafter.
Also, eliminates individual ACA mandate for health insurance. Effective after 12/31/2018.
||No provision included in Senate bill for alimony.||Conference Agreement follows House bill and repeals alimony deduction, but effective date would be for divorce decrees executed after 12/31/2018.|
|AMT||The individual AMT is repealed in the House bill beginning in 2018, but a softened AMT is retained in the Senate bill.||Individual AMT is retained, but with enhanced AMT exemption. The AMT exemption is increased to $109,400 for married couples and to $70,300 for single taxpayers.
The point at which the AMT exemption is phased out is increased to $1,000,000 for married couples and to $500,000 for single filers.
Applies in 2018.
|401(k) Contributions||Unchanged (in both the House and Senate bills).||Retains 401(k) plans and IRAs for employees.|
|IRA||The proposal would preclude an individual from
re-characterizing a Roth IRA conversion back to a traditional IRA.
|Same as House.||
Adopted proposal in House and Senate versions. Effective in 2018.
|Estate Tax Exemption||Estate tax exemption doubled to $10,000,000 beginning in 2018, and indexed for inflation. The estate tax would be repealed in 2025.||The estate tax exemption would be doubled and indexed for inflation. But, estate tax would not be repealed as in the House bill.||Estate tax exemption doubled from current levels. Effective for decedents dying after 12/31/2017.|
Here are links to the full legislative text as well as a brief description of the changes as provided by the Joint Committee on Taxation (JCT) in Congress that was released today (December 15, 2017):
The agreed upon tax bill now moves to the House and Senate for final votes. The votes are tentatively scheduled for Tuesday or Wednesday next week, but this could change. A simple majority vote is needed in each chamber on what comes out of the Conference; no other amendments or changes can be made to the tax bill. The exact same bill must pass the House and Senate. If it passes both, it moves to the President for his signature. It is unclear now whether the House will vote first, or if it will wait until after the Senate has passed it. The timing depends in part on the Senate, as two Senators have been in the hospital in recent days, which may impact the voting logistics.
Prospects for passage. The bill will likely have enough support to pass in the House, but the drama will rest in the Senate where the political spotlight has been for most of the year. Look for a close vote, and Vice President Pence will be on hand to cast a tie-breaking vote if necessary. In fact, Pence delayed a Middle East trip next week to be available if needed. At this point, it seems there is enough support for passage in the Senate, but it will be a narrow vote, and things could change before the vote next week. If the tax bill secures enough votes in Congress for passage next week, there will then be a major signing ceremony with the President later in the week. Stay tuned . . .
If you have any questions regarding Tax Reform, please contact your local Sikich Tax Advisor or visit www.sikich.sikichdevelopment.com for more information.