Tax reform took another step forward on two fronts on November 9, 2017. First, the House Ways and Means Committee finalized work on the “Tax Cut and Jobs Act” (“H.R. 1”). The committee approved this bill along party lines, and the bill now moves forward to the full House where action is scheduled for the week of November 13, 2017. Second, the Senate Finance Committee released its version of tax reform on November 9, 2017, shortly after the Ways and Means Committee passed its bill.
House
The House Ways and Means Committee released its tax bill last week (November 2, 2017, click here to view our article on this release), and was then discussed in committee hearings this week. There were several amendments made to the bill, including a manager’s amendment made on November 9, 2017, by Chairman Kevin Brady. Here are several selected changes in H.R.1 from the bill presented last week:
- A new business income provision was added for small businesses. This item provides for a lower rate of 9% on business income for the first $75,000 of business taxable income for individuals rather than the 12% rate.
- There were several changes related to self-employment (SE) tax that would apply to owners of S Corporations and Partnerships/LLC’s. These SE tax changes were removed by the amendment today.
- There were provisions in H.R. 1 proposed last week to significantly change the tax rules on non-qualified deferred compensation plans. This provision would be scrapped, and thus the current law treatment would be preserved. (It should be noted, however, that the Senate tax bill includes changes in deferred compensation arrangements that are similar to what the House bill initially offered. So this is an item to keep an eye on as tax reform moves forward.)
- Any S Corporation that converts to a C Corporation and pays distributions after its conversion, the distribution would be treated pro-rata as paid from the S Corporation and from the corporation’s earnings and profits.
- Carried Interests. An amendment on November 6, 2017 would impose a three-year holding period requirement for long-term capital gain treatment with respect to certain partnership interests received in connection with the performance of services.
- The treatment of deferred foreign income during the transition to the new participation exemption system of taxation. The amendment adopted today provides for effective tax rates on deemed repatriated earnings of 7% on earnings held in illiquid assets and 14% on earnings held in liquid assets.
- The adoption tax credit would be retained. It had been scheduled for repeal next year.
- A provision was included in the initial bill that would impose a 1.4% excise tax on the net investment income of certain educational institutions, private colleges, and universities if the fair market value of the institution’s assets (other than those assets used directly in carrying out its exempt purpose) is at least $100,000 per student. This $100,000 threshold was increased to $250,000 by the amendment adopted on November 6, 2017.
The House will take up this tax reform bill the week of November 13, 2017. Although uncertain, the bill could be amended as it moves to the House floor. It will be an up or down vote on the bill. House leaders would like to have final action on the tax bill before their Thanksgiving recess.
Senate
Senate Finance Committee (SFC) Chairman Orrin Hatch introduced details on November 9, 2017 on its version of comprehensive tax reform. The proposal involves a major overhaul of many provisions throughout the tax code. While there are numerous similarities in the SFC tax bill to the House tax bill, there are also many differences. As the House did, the SFC draft was designed to fit within the Tax Framework released on September 27, 2017, which was drafted by Congressional leaders and the Administration.
Highlights for Businesses in Senate Tax Reform Proposal
The tax reform framework offered several major provisions for businesses. One of which was a drop in the corporate tax rate from 35% down to 20%. Another major provision was to establish 100% expensing of capital expenditures. The framework, however, indicated that many other deductions and incentives may be repealed or curtailed. Selected business provisions included in Senate Finance Committee’s tax proposal compared with proposals in the House version are highlighted in the chart below.
HOUSE vs. SENATE | ||
HIGHLIGHTS FOR BUSINESSES | ||
| PROVISION | HOUSE (as Amended) | SENATE |
| 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%. |
| Pass-Through Tax Rates | 25% tax rate for “pass-through businesses” (S Corporations and Partnerships/LLC’s). Effective in 2018. | Adds a new business deduction of 17% for pass-through businesses to achieve tax savings. Effective in 2018. |
| Interest Deduction for Small Business | Small business not subject to limitations (small business < $25 million in revenue). | Similar provision, but small business defined as < $15 million in revenue. |
| Interest Deduction for Companies with over $25 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. Also, an exception for “floor plan financing” for auto dealers. | Similar provision for the 30% of adjusted taxable income. Also, unlimited carryforward on excess interest expense. No “floor plan” exception. |
| 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.” | 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. |
| Section 179 Expensing |
| Similar provision, but increases smaller. Expensing would be raised to $1,000,000 and phase-out at $2,500,000. |
| Accounting Method Reforms for Small Businesses |
| Similar small business provisions, however, small business definition is < $15,000,000 of revenue. |
| 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. |
| LIFO Inventory | No limitation or changes to LIFO. | No changes. |
| R&D Credit | Retained. | 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. |
Highlights for Individuals in Senate Tax Reform Proposal
The tax reform framework also offered several major provisions for individuals. These included a doubling of the standard deduction; repeal of the Alternative Minimum Tax (“AMT”); and elimination of the estate tax. The framework, however, indicated that several deductions and incentives may be eliminated as part of tax reform. Selected individual provisions included in Senate Finance Committee’s tax proposal compared with proposals in the House version are highlighted in the chart below.
HOUSE vs. SENATE | |||
HIGHLIGHTS FOR INDIVIDUALS | |||
| PROVISION | HOUSE | SENATE | |
| Individual Tax Rates | Tax rates of 12%, 25%, 35%, and a top rate of 39.6%. | Retains current seven tax brackets, but drops the 15% rate to 12%, and reduces the top tax rate from 39.6% to 38.5% | |
| 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). | ||
| 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 $1,650 in 2018. Also, much higher phase-out range. Credit phased out for married couple with $1,000,000 of income. | |
| Itemized Deduction for State Income Taxes and Property Taxes | Retained a $10,000 deduction limit for property taxes. | No deduction for any state income taxes, sales taxes, and property taxes. | |
| 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. | |
| Charitable Contributions |
| Both charitable provisions in the House bill are also in the Senate bill. | |
| 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. | |
| Medical Expenses | Repeal medical deductions beginning in 2018 under this tax proposal. | Medical deduction would not be changed or limited. | |
| Alimony Deduction |
| No provision included in Senate bill for alimony. | |
| AMT | Repealed beginning in 2018 (in both House and Senate bills). | ||
| 401(k) Contributions | Unchanged (in both the House and Senate bills). | ||
| IRA | The proposal would preclude an individual from re-characterizing a Roth IRA conversion back to a traditional IRA. | Same for Senate. | |
| 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 2024. | The estate tax exemption would be doubled and indexed for inflation. But, estate tax would not be repealed as in the House bill. | |
Highlights for International
The tax reform framework offered several major provisions for international businesses. The goal was to make the tax rate for U.S. companies more competitive with the rest of the world and offer an incentive to repatriate money back into the U.S. Among the international provisions included in today’s SFC proposal are the following selected items:
- Senate bill makes several international changes. The bill permanently modernizes our outdated international tax system by eliminating the antiquated “worldwide” system, to eliminate double taxation, enhance the competitiveness of American companies, and bring business and investment back to the United States. It establishes a new “participation exemption system” for taxation of foreign earnings.
- The Senate bill eliminates the “lock-out effect” by making it simpler and less onerous for American multinationals to bring foreign earnings back to America for investment and growth here at home.
- Many of the international tax provisions are significant and complicated, but there is one minor provision in the Senate bill that could impact smaller and mid-size businesses. The Senate bill proposes to repeal the IC-DISC in 2019, however, the House bill does not include this provision.
- We are planning a separate Sikich Tax Alert on a number of the proposed international changes in the House and Senate tax bills.
For your reference, please review the following resources:
- Summary from Senate Finance Committee on its tax proposal.
- Detailed description of the changes in the Senate tax proposal from the Staff of the Joint Committee on Taxation (JCT) in Congress.
Next Steps and Outlook
Please keep in mind – tax reform legislation is not final. The Senate Finance Committee tax reform proposal released today will be part of upcoming SFC hearings the week of November 13, 2017. Legislation could then be modified or amended. These two bills will continue to be worked out almost side-by-side in the House and Senate, and there will likely be differences between these two tax plans that will need to be reconciled. We will keep you posted as the process picks up speed.
Please consult your local Sikich tax professional with any questions you may have or visit www.sikich.sikichdevelopment.com for more information.
