UPDATE: (November 14, 2017) A Look at The Senate Tax Reform Bill
On November 2, 2017, House Ways and Means Committee introduced the much anticipated House Tax Reform Bill – The Tax Cuts and Jobs Act. The bill is 429 pages, so it will take some time to completely digest and analyze all of the provisions. The scope of the proposed changes is very broad and the task is more difficult as various provisions are a moving target, since the House Ways and Means Committee’s markup began Monday, November 6th. The Senate Finance Committee, the Senate counterpart to the House Ways and Means Committee, is expected to release its version of the tax bill the week of Nov. 13th. The Administration has expressed its desire to sign tax legislation by Christmas.
If the Bill becomes law, it will mark the most significant change to the Tax Code in over 30 years. The bill generally would apply to taxable years beginning after December 31, 2017. Here is an overview of key provisions:
- Corporate tax rate. Lowers the corporate tax rate to 20% – down from 35%
- Pass-through rate. Sets a top 25% rate for owners who are active participants in pass-through businesses such as sole-proprietorships, S corporations and partnerships. The plan includes complicated guardrails that limit people from turning what would otherwise be wage income taxed at up to 39.6% into business income taxed at a lower rate (presumptively set at 30% — 0% for service-related businesses) of their business income.
- Immediate expensing of business investment. Allows businesses to immediately write off the full cost of new equipment instead of depreciating it over a number of years.
- Net Operating Losses. Establishes an indefinite carryforward (and no carryback) for net operating losses (“NOL”) but also caps the NOL deduction at an amount equal to 90% of taxable income (as computed without the NOL deduction).
- LITC. Retains the low-income housing tax credit.
- R&D. Preserves the Research & Development Tax Credit.
- Interest deduction. Limits the business interest expense deduction, capping it at 30% of earnings before interest, taxes, depreciation and amortization, which is a measure of cash flow. Real estate firms and small businesses would be exempt from that limit.
- Limits executive compensation deduction. Publicly traded businesses would lose the ability to deduct certain executive compensation above $1 million, which they can now do for performance-based pay.
- Nonqualified Deferred Compensation. Nonqualified deferred compensation, stock options, and stock appreciation rights would be subject to immediate taxation upon “vesting,” which (in many cases) might also be triggered more quickly.
- Limits like-kind exchanges. Limits §1031 like-kind property exchanges to real propert
- Repeals the following:
- Corporate Alternative Minimum Tax
- Entertainment expense and certain fringe benefits deductions
- Technical terminations of partnerships
- New market tax credit
- Exclusion from income of §118 contributions to capital
- Repatriation tax rate. Creates a one-time 12% tax on offshore earnings held as cash or cash equivalents and a 5% tax on noncash assets, payable over up to eight years, whether or not the earnings are repatriated.
- Controlled Foreign Corporations. Creates a new 10% tax on US companies’ high-profit foreign subsidiaries, calculated on a global basis.
- Territorial Tax System. Establishes territorial taxation with a 100% exemption for domestic corporations on dividends from certain foreign subsidiaries.
- Sports stadium financing. Eliminates tax-exempt bond treatment for professional stadiums.
- Executive Compensation. Establishes 20% excise tax on compensation paid in excess of $1 million to an executive of a tax-exempt organization.
- Excise tax on private college endowments. Imposes a 1.4% excise tax on net investment income of private colleges and universities if the aggregate fair market value of assets is at least $100,000 per student.
- Permissible political activity. Establishes rule that churches and religious organizations will not lose exempt status or be deemed to have intervened in any political campaign on behalf of a candidate as a result of the content of any sermon, teaching or presentation.
- Reduces the number of individual tax rates as follows:
- 12%: Applies to incomes from $0 up to $45,000 for individuals and $90,000 for couples.
- 25%: Applies to incomes up to $200,000 for individuals and $260,000 for couples.
- 35%: Applies to incomes up to $500,000 for individuals and $1 million for couples.
- For single parents that are heads of households, the thresholds would be the midpoint between individuals and joint filers, except for the highest bracket which would still kick in at $500,000.
- 39.6%: Applies to incomes over $500,000 for individuals and couples making more than $1 million a year.
- A larger standard deduction. The standard deduction for all taxes would increase to $12,000 for individuals (up from $6,350) and $24,000 for couples (up from $12,700). The benefit is offset, however, since the Bill eliminates the personal exemption and various secondary deductions.
- Expands child tax credit. The Bill proposes to increase the child tax credit to $1,600, up from $1,000, for any child under 17. But the Bill also limits the refundability of this credit. The $600 increase in the credit is, however, not refundable. Further, the Bill will let more people claim the child tax credit. The income level where the credit starts to be phased out is increased to $115,000 for single parents, up from $75,000 today, and to $230,000 for married parents, up from $110,000.
- Creates two new family credits. The Bill would create two different $300 tax credits.
- Credit for non-child dependents. Credit for nonchild dependents — for instance, any son or daughter over 17 whom you are supporting, an ailing elderly mother or an adult child with a disability. The credit is equal to $300 per individual.
- Spousal Credit. A $300 credit for each spouse if they file jointly (or, in the case of single parents, the head of household).
These credits are in effect only for 5 years and would not be refundable.
- Charitable contributions. The Bill continues the deduction for charitable contributions.
- Retains the earned income tax credit. Provides tax relief for low-income Americans.
- No changes to 401(k) plans. Retains retirement savings options such as 401(k)s and IRAs.
- No repeal of Affordable Care Act’s individual mandate.
- Limits the home-mortgage interest deduction. Retains the home mortgage interest deduction for existing mortgages but limits the home mortgage interest deduction for newly purchased homes for mortgages up $500,000.
- SALT Deduction. Limits the state and local tax deduction to local property taxes up to $10,000 but eliminates the deduction for state income and sales taxes.
- Patents and inventions. Adds patents and inventions to the list of assets that are not treated as capital assets.
- Eliminates personal exemptions. The Bill eliminates the personal exemption of $4,050 for you, your spouse and each of your dependents.
- Removes most personal itemized deductions. The only deduction preserved explicitly is for charitable gifts and edited home-mortgage interest and SALT deductions. Eliminated itemized deductions include:
- Student-loan-interest deduction.
- Medical expense deduction.
- Moving expense deduction.
- Alimony payments.
- Repeals the adoption tax credit. Repeals the tax credit for adoption.
- Eliminates the exclusion for dependent care assistance accounts. Some employers provide parents the opportunity to save up to $5,000 of their income in a dependent care flexible spending account. That money is excluded from the parent’s taxable income. The Bill would repeal that exclusion.
- Removes the deductions for MSA’s. Deductions for contributions to Medical Savings Accounts (“MSAs”) and exclusion from income for contributions of employers to MSAs are eliminated under the Bill.
- Repeals the estate tax. Under current law, the threshold for the tax, which applies only to estates with greater than $5.6 million in assets during 2018, would double to over $10 million. Then, the tax would be phased out after six years.
Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or firstname.lastname@example.org.