Tax reform took a major step forward early this morning as the Senate passed its version of tax reform legislation by a vote of 51-49. After several anxious days of debate and negotiations, the Republican leadership was able to push through the “Tax Cut and Jobs Act” (“H.R. 1”). A number of senators sought changes to the bill and threatened to vote against the bill unless their demands were heard, and this led to a number of revisions. The Senate tax bill differs from the House version (which was passed on November 16, 2017 – click here for a link to an article on this step) and the differences between the two bills will now need to be ironed out.
On September 16, 2017 the Senate Finance Committee (SFC) approved its tax reform bill and sent the bill to the full Senate. The bill first passed a preliminary vote in the Budget Committee this week before moving to the Senate floor. As the debate began, the Senate leadership did not have sufficient votes to secure passage of the tax bill. There were several senators that wanted/demanded changes be made to the bill. With only a two vote margin to work with, the Senate leadership needed to address the concerns of certain senators without risking losing the support of other senators. It was a Rubik’s Cube loaded with political drama, but in the end the leadership was able to secure the 50 votes needed to pass the tax bill under the special reconciliation process.
As part of the negotiations, there were several late changes made to the tax bill that were adopted in the process. A few senators were concerned the tax cuts in the legislation may not produce sufficient economic growth, and thus could add to the federal deficit. This led to an attempt to add a “trigger” mechanism that would invoke tax hikes under certain conditions, but this procedure was ruled improper by the senate parliamentarian. Thus, several of the tax cuts needed to be scaled back and other changes made. Some of the selected final changes are as follows:
- The state and local property tax deduction of up to $10,000 was included in the bill. Initially, the SFC bill would have eliminated all state and local taxes, including state income taxes, but the late change kept $10,000 for property taxes. This is similar to what the House version contains.
- The taxes paid by pass-through businesses would be reduced by a special deduction of 23%. Initially, the senate bill had this deduction at 17.4%. This would drop the overall tax rate for individuals down to around 30% for qualified business income.
- The itemized deduction for medical expenses would be set at 7.5% of a taxpayer’s adjusted gross income (AGI), and this would apply for 2017 and 2018. It would then move to 10% after that. The House version would eliminate the medical deduction beginning in 2018.
- The individual AMT (Alternative Minimum Tax) would be retained and not repealed as had been done in the SFC bill. The AMT exemption amounts, however, would be increased. The House bill would repeal this AMT, so this will need to be worked out by congressional leaders.
- The corporate AMT would also be retained and not repealed as the SFC bill provided. The corporate AMT was also repealed in the House version, so this too needs to be reconciled.
- The 100% bonus depreciation provision was scheduled in the SFC version to expire as of December 31, 2022. This was changed to phase down the reduction after 2022 by 20% per year. Thus, the bonus depreciation would be 80% in 2023; 60% in 2024; 40% in 2025; and 20% in 2026.
- The Interest-Charge Domestic International Sales Corporation (IC-DISC) would be retained and not eliminated in 2019 as the initial SFC bill provided. There was no change to the IC-DISC in the House version, so the IC-DISC is likely to survive in tax reform.
- The toll charge on the repatriation of foreign assets would be increased from the SFC bill. The tax rate would go up to 7.5% for non-cash items, and to 14.5% for cash items, and this is similar to the House version of repatriation provisions.
- There were numerous amendments offered during the senate deliberations late last night (often referred to as the “vote-a-rama”). Almost all these proposed amendments were defeated in this long, tedious process. One such amendment, however, was adopted with Vice President Pence casting the tie-breaking vote. The amendment would expand Section 529 plans, now used to save for college education expenses, to cover elementary and secondary education costs.
- The Joint Committee on Taxation (JCT) in Congress provided a summary of the projected amounts (but not descriptions) of these last changes to the SFC tax bill that were included in the tax bill that passed in the Senate overnight. Please click here for the JCT summary.
Next Steps and Outlook
Please keep in mind – tax reform legislation is not final. The Senate has now passed its version of tax reform and so has the House. The tax bills, however, have a number of differences and the same bill must eventually pass in both the House and the Senate. There are two possible alternatives that could be followed to resolve the differences in these tax plans.
The first, and most likely option, is for the tax bill to go through a House-Senate Conference. This Conference involves leaders of both the House and Senate who will work through the two bills and decide what to include in a final bill. This Conference could start as early as next week, and the House is considering a vote on Monday, December 4, 2017 to send the tax bill to Conference. Once an agreement is reached in the Conference, the compromise bill is put up for a vote in both the House and Senate where a majority vote in each chamber would be needed. The second possibility is for the Senate tax bill to move directly over to the House and not go to a Conference, although this route seems unlikely at this time. The bill, however, could not be amended at all and would be subject to an up or down vote in the House.
We will keep you posted as the process unfolds. Please consult your local Sikich tax professional with any questions you may have or visit www.sikich.sikichdevelopment.com for more information.