The first major vote on tax reform is over. The House passed its tax reform legislation bill, also known as the “Tax Cuts and Jobs Act” (H.R. 1) on Thursday, November 16, 2017 by a vote of 227-205. The vote was along party lines, and there were no changes to this House tax bill that was passed by the House Ways and Means Committee on November 9, 2017. The House now awaits floor action in the Senate.
The Senate Finance Committee (SFC) has been meeting all week on its tax plan that was unveiled on November 9, 2017. The SFC was planning to complete work on its tax bill and vote on the bill today, but they finished late last night (November 16, 2017). The bill passed out of the SFC on a party line vote. The Senate’s version of tax reform legislation (which differs from the House version) now moves to action in the full Senate the week after Thanksgiving. All eyes will be on the Senate as the high stakes political drama plays out to see whether tax reform will move ahead.
SFC Chairman Hatch’s Amendments to the Bill
SFC Chairman Orrin Hatch made several changes to the tax bill on November 16, 2017, which were in addition to those he made on November 14, 2017. The changes were approved by the committee, but they were not as significant as the changes made earlier in the week. You can find the November 14, 2017 changes here, and the November 16, 2017 changes here. We have provided several selected changes below.
- Provisions removed entirely from initial Senate tax bill released November 9, 2017.
- The provisions on non-qualified deferred compensation plans are removed. The House also had this measure and then later pulled it as well.
- The Senate provision on the reporting of employee/independent contractor status was removed.
- Modifications to the initial Senate tax bill released November 9, 2017.
- The individual tax rates were modified and lowered slightly. Due to Senate budget rules, however, these individual tax rate changes have a sunset feature and lapse on December 31, 2025.
- The Alternative Minimum Tax (AMT) is repealed under the proposed Senate bill effective in 2018. Under the above noted Senate budget rules, the AMT would resurface in 2026.
- The child tax credit would be increased up to $2,000.
- The corporate tax rate cut to 20% would apply in 2019, but this lower rate would be permanent. It would not sunset as would the individual tax rates after 2025 (noted above).
- The 17.4% business deduction in the Senate bill would be enhanced at lower income levels. This is still a complicated provision, but this change enhanced this deduction.
- The Net Operating Loss (NOL) deduction limitation would drop from 90% to 80%; but this would not apply until 2023.
- Some revisions to business interest limitations, including a new exemption for farming.
- A modification to the repeal of the deduction for meals provided for the convenience of the employer. The effective date will be for tax years beginning after December 31, 2025.
- A modification of the rehabilitation tax credit would provide: (1) a 20% credit for qualified rehabilitation expenditures with respect to a “certified historic structure”; and (2) that the 20% credit be claimed ratably over a five-year period beginning in the taxable year in which a qualified rehabilitated structure is placed in service.
- New provisions to the initial Senate tax bill released November 9, 2017.
- Repeal of the ACA (Affordable Care Act) “individual mandate.” This item was scored as large revenue raiser, and thus permitted some of the above tax rate reductions.
- New tax credit for family leave. This proposed change would allow eligible employers to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave (“FMLA”) if the rate of payment under the program is 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. This new credit would first apply beginning in 2018.
- Deduction for fines and penalties. The proposal denies the deduction for any otherwise deductible amount paid or incurred (whether by suit, agreement, or otherwise) to or at the direction of a government or specified nongovernmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law. Some exceptions apply. This is effective for amounts paid or incurred after the date on which the tax bill is enacted.
- Carried Interests. This provision would impose a three-year holding period requirement for qualification as long-term capital gain with respect to certain partnership interests received in connection with the performance of services. This item is similar to a House provision that was also added as an amendment by the Ways and Means Committee Chairman Kevin Brady last week.
- A proposed change to deny attorneys an otherwise-allowable deduction for litigation costs paid under arrangements that are primarily on a contingent fee basis until the contingency ends. The proposal applies to expenses and costs paid or incurred in taxable years beginning after the tax bill is enacted.
- Research expenditures. Under the proposal, amounts defined as specified research or experimental expenditures are required to be capitalized and amortized ratably over a five-year period, in the tax year the specified research or experimental expenditures were paid or incurred. This would apply beginning in 2026.
- Several international tax changes. Please click here for a special separate Sikich Tax Alert on proposed international tax changes.
- Roth IRAs. The proposal repeals the special rule that allows IRA contributions to one type of IRA (either traditional or Roth) to be re-characterized as a contribution to the other type of IRA. Thus, for example, under the proposal, a conversion contribution establishing a Roth IRA during a taxable year can no longer be re-characterized as a contribution to a traditional IRA (thereby unwinding the conversion). This proposed change would apply in 2018.
- There is even a new tax form proposed to help those age 65 and over, “Form 1040SR.” It is supposed to be like a Form 1040EZ, but covers many items that senior filers often have.
- Several tax changes for craft beer makers. These changes are for those involved in making beer, wines, and spirits.
Next Steps & What to Expect
Now that the bill has passed through the SFC, it moves on to the Senate. The Senate is in recess until the week after Thanksgiving, at which time it will take up its tax bill. The political stakes will be high as the Senate debates this tax bill, and the outcome is still uncertain. It is important to keep an eye on what is in the Senate bill; if a tax bill does pass the Senate, any compromise bill worked on with the House will probably more closely resemble the Senate bill due to the narrower margins in the Senate.
Stay tuned for other tax alerts from Sikich so you can be up-to-date on all the tax reform legislative activity.