Senate Passes Tax Code Overhaul; Conference Looms
We know everyone is anxious due to the ambiguity of the impending tax legislation. At the present time, the House and Senate have passed separate bills which contain differing provisions that must be reconciled through a joint committee process. We are keeping a close eye on this aspect and will send a more complete explanation when an agreed upon bill has been completed.
Both the Senate and the House tax proposals, while markedly different when it comes to detail, would revise tax brackets and pare back some breaks. These differences will need to be reconciled before we can clearly determine the impact on your specific tax situation. The majority of these proposed changes would apply to tax years beginning January 1, 2018.
In the meantime, for those who would like to review what has been passed to date you may review a summary below.
Senate Passes Tax Code Overhaul; Conference Looms
The Senate, on December 2, 2017, approved a sweeping tax reform package – the Tax Cuts and Jobs Act (HR 1) – by a vote of 51 to 49, moving the GOP one step closer to achieving a signature legislative victory. The House previously approved its version of HR 1, also along party lines. Now, the game plan for GOP leaders in the House and Senate appears to be to work out the differences in the two bills in conference. GOP leaders are aiming to reach an agreement quickly on a final bill and secure passage in the House and Senate before year-end.
Both the House bill and Senate bill would impact virtually every individual and business on a level not seen in over 30 years. As with any tax bill, however, there would be “winners” and “losers.” Both versions call for lowering the individual and corporate tax rates, repealing countless tax credits and deductions, enhancing the child tax credit, boosting business expensing, and more.
The White House has signaled its support for tax legislation before yearend. Possible roadblocks to ultimately getting a bill to the President’s desk before year-end are unified opposition from Democrats, intense lobbying efforts to preserve tax breaks slated for elimination, and the significant differences in the House and Senate bills. Nevertheless, there remains the outside possibility that the House would bypass the conference-committee stage and bring the Senate version directly to the House floor for a vote.
The House bill proposes four tax rates: 12, 25, 35, and 39.6 percent after 2017. The Senate bill calls for seven rates: 10, 12, 22, 24, 32, 35, and 38.5 percent after 2017. Under current law, individual income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent.
The House bill calls for a near doubling of the standard deduction to $24,400 for married filing jointly and $12,200 for single filers, as adjusted for inflation using a chained CPI for 2018. Heads-of-households could claim a standard deduction of $18,300. Similarly, the Senate bill calls for these amounts to be $24,000, $12,000, and $18,000, respectively, but only temporarily. Under current law, the standard deduction absent any changes will be $13,000 for joint filers, $9,550 for heads of households, and $6,500 for single filers. The Senate bill would retain the additional standard deduction for the elderly and blind.
Deductions and Credits
Both the House bill and Senate bill would make significant changes to some popular individual credits and deductions. The changes in the Senate bill, however, generally would be temporary, expiring after 2025 in order to keep overall revenue costs for the bill within budgetary constraints.
Under the House bill, the child tax credit would increase to $1,600 from its current $1,000 level and expanded to children under the age of 17. A temporary credit of $300 would be allowed for non-child dependents. The Senate bill would temporarily increase the child tax credit to $2,000 (of which $1,000 would be refundable), expand it to children under the age of 18, and allow a $500 credit for non-child dependents.
Under the House bill, a temporary family flexibility credit of $300 would also be allowed with respect to the taxpayer (each spouse in the case of a joint return) who is neither a child nor a non-child dependent, irrespective of whether he or she has children or a non-child dependent.
The House bill would consolidate the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit after 2017. The Senate bill makes no changes to these education credits.
The House bill would repeal the student loan interest deduction. The Senate bill would retain the student loan interest deduction. Neither bill revives the tuition and fees deduction, which expired after 2016.
The House bill generally retains the current rules for 401(k) and other retirement plans. However, the House bill would repeal the rule allowing taxpayers to recharacterize Roth IRA contributions as traditional IRA contributions and the rule allowing conversion of a traditional IRA to a Roth IRA. Rules for hardship distributions would be modified, among other changes.
Federal Estate Tax
The House bill calls for first doubling the federal estate tax exemption and later eliminating the estate tax after 2024. The Senate bill would keep the federal estate tax but would temporarily double the current exemption through 2025.
Alternative Minimum Tax
The House bill, but not the Senate bill, abolishes the individual AMT. The Senate bill retains it but with higher exemption amounts.
Affordable Care Act
The Senate bill repeals the Affordable Care Act (ACA) individual shared responsibility requirement after 2018, making the payment amount $0. The House bill makes no changes to the ACA’s individual mandate.
The House bill calls for a 20-percent corporate tax rate beginning in 2018. The Senate bill calls for a 20-percent corporate tax rate beginning in 2019. Both bills make the new rate permanent. The maximum corporate tax rate currently tops out at 35 percent.
Business Tax Benefits
A number of proposed changes to various business incentives are in the House bill and Senate bill. Chief among them is bonus depreciation and Section 179 expensing.
Both the House and Senate would increase bonus depreciation to 100 percent but for different time frames. Under the House bill but not the Senate bill, used property with first-use by the taxpayer, as well as new property, would now qualify. The Senate bill adds qualified film, television and live theatrical productions to the list of qualifying property.
The Senate bill would raise the cap placed on depreciation write-offs of business-use vehicles. The new caps would be $10,000 for the first year a vehicle is placed in service (up from a current level of $3,160); $16,000 for the second year (up from $5,100); $9,600 for the third year (up from $3,050); and $5,760 for each subsequent year (up from $1,875) until costs are fully recovered. (No additional accommodation appears to be made, however, for added first-year bonus depreciation, which is currently capped at $8,000.)
Section 179 Expensing
The House bill would also enhance Section 179 expensing, raising it from the current $500,000 level with a $2 million phase-out threshold to $5 million and $20 million thresholds, respectively. The Senate version would increase the maximum Section 179 expensing to $1 million, with a $2.5 million phase-out threshold, but would be permanent.
Deductions and Credits
Numerous business tax preferences would be eliminated after 2017 under the House and Senate bills. These include the Code Sec. 199 domestic production activities deduction, non-real property like-kind exchanges, and more. Additionally, the rules for business meals would be revised.
The House bill leaves the research and development credit in place, but requires five-year amortization of research and development expenditures. The Senate bill generally tracks the House bill. The Senate bill, but not the House bill, provides a temporary credit for employers paying employees on family and medical leave.
Both the House bill and Senate bill would cap the deduction for net interest expenses generally at 30 percent of adjusted taxable income, among other criteria. Exceptions would exist for small businesses, with the House exempting from the rules businesses with average gross receipts of $25 million or less and the Senate setting the exemption at less than $15 million during the three preceding years.
Currently, owners of partnerships, S corporations, and sole proprietorships – as “pass-through” entities – pay tax at the individual rates, with the highest rate at 39.6 percent. The House GOP bill proposes a 25-percent tax rate for certain pass-through income after 2017, with a nine-percent rate for certain small businesses. The Senate bill generally would allow a temporary deduction in an amount equal to 23 percent of qualified income of pass-through entities, subject to a number of limitations and qualifications. In both bills, the remaining portion of net business income – subject to a variety of anti-abuse rules – would be treated as compensation subject to ordinary individual income tax rates.
The House bill would repeal many current energy tax incentives, including the marginal well tax credit and the credit for plug-in electric vehicles. Other energy tax preferences, such as the residential energy efficient property credit, would be modified. The Senate bill does not address these incentives.
The House bill would modify the so-called “Johnson amendment,” which generally restricts Code Sec. 501(c)(3) organizations from political campaign activity. The House bill would also revise reporting requirements for donor advised fund sponsoring organizations and impose an excise tax on the investment income of certain colleges and universities, among other changes.
The House and Senate bills would create a dividend-exemption system for taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when the earnings are distributed. The foreign tax credit rules would be modified as would the Subpart F rules. The look-through rule for related controlled foreign corporations would be made permanent, among other changes.
A portion of deferred overseas-held earnings and profits (E&P) of subsidiaries would be taxed at a reduced rate. Under both bills, foreign tax credit carryforwards would be fully available and foreign tax credits triggered by the deemed repatriation would be partially available to offset the U.S. tax.