A Look at The Senate Tax Reform Bill

Fraser Trebilcock continues to monitor the tax reform plans moving through the House and Senate.  As we mentioned in our last post, the various proposals are a bit of a moving target and are in at state of flux. On November 9, the Senate Finance Committee released its “policy highlights” outlining their goals for tax reform.  The Senate framework has many proposals which are similar to the House bill released on November 2, but it also has a number of significant differences. On November 13, the Senate Finance Committee began its markup of its version of the Tax Cuts and Jobs Act, a summary of which was released last Friday and summarized below. Members of the senate Finance Committee have thus far filed 355 amendments.

Meanwhile the House Ways and Means Committee voted out its markup which makes a number of changes to the House Bill originally introduced.  The House Rules Committee is scheduled to meet on Wednesday, November 15, on that version of the House Bill approved by the Ways and Means Committee.  A floor vote is expected on Thursday, November 16.

The Senate anticipating to vote on their version as early as the week following Thanksgiving. After that, it is expected that the bills will head to a marathon conference in the first two weeks of December with at vote in both houses by the third week of December with final legislation being presented to the President’s signature by Christmas.  Below is a summary of the Senate Bill, with the differences noted between the completing bills noted appropriately.

Individual Provision

  • New individual income tax rates. The Senate plan provides a reformed tax rate structure of 6 rates verse the 4 in the House Bill. The Senate plan maintains the 10% bracket and provides a 38.5% bracket for high-income earners.
  • Standard deduction increased. The Senate plan would increase the standard deduction to $24,000 for joint returns and surviving spouses, $18,000 for single parents, and $12,000 for individuals. This is up from $12,700, $9,300, and $6,350 under current law.
  • Child tax credit. The Senate plan would expand the child tax credit from $1,000 to $1,650 and substantially lift existing caps.
  • State and local tax deduction. The Senate plan would repeal in full the deduction for State and local taxes. The House plan, in contrast, retains the state and local property tax deduction up to $10,000.
  • Retained credits & deductions. The Senate plan retains many current law provisions that have been potentially targeted for repeal in the House bill, including:
    • the child and dependent care credit;
    • the adoption credit (although this has been restored);
    • the deduction for charitable contributions;
    • the deduction for medical expenses;
    • the enhanced standard deduction for the blind and elderly;
    • provisions that provide “education relief for graduate students”;
    • the home mortgage interest deduction, preserved for existing mortgages and maintained for newly purchased homes up to $1 million;
    • the earned income tax credit; and
    • retirement savings programs including 401(k)s and IRAs.
  • Alternative minimum tax. Like the House plan, the Senate plan proposes to repeal the Alternative Minimum Tax.
  • Estate tax. Unlike the House bill, the estate tax itself would not be repealed but instead, the current exemption would be doubled.

Business Provisions

  • New corporate tax rate. The Senate plan would permanently lower the corporate tax rate to 20%. However, unlike the House bill, this reduction reportedly wouldn’t go into effect until 2019.
  • Deduction for pass-through businesses. The Senate plan would establish a “simple and easy-to-administer deduction for pass-through businesses of all sizes.”
  • Expensing. The Senate plan would allow for full and immediate expensing of new equipment. Unlike the House bill, which generally allowed for full expensing for five years, this provision would be permanent.
  • Enhanced cash accounting. Under the Senate plan, more businesses would be allowed to use the cash-basis accounting method.
  • Retained credits and deductions. The Senate plan would retain many current law provisions that have been potentially targeted for repeal, including:
    • the low-income housing credit;
    • the research and development credit; and
    • the interest deduction for “Main Street employers.”

International Provisions

  • Shift to territorial system. The Senate plan would eliminate the current “worldwide” system of U.S. taxation and change to a territorial system.
  • Repatriation. The Senate plan would eliminate the “lock-out effect” by making it “simpler and less onerous for American multinationals to bring foreign earnings back to America.”

Also yesterday the House Ways and Means Committee reported out it’s Bill after amendments. The changes bring the cost of the legislation down to the $1.5 trillion revenue loss that was agreed to in the budget. Among the key changes are:

Individual Provisions

  • New rate for certain small business income. The original Bill contained a new 25% maximum rate on business income of individuals who are active partners or S corporation shareholders. This provision has now been eliminated.  The amended Bill now provides a new a 9% tax rate, in lieu of the ordinary 12% tax rate, for the first $75,000 ($37,500 for single filers and $56,250 for heads of household filers) in net business taxable income of an active owner or shareholder earning less than $150,000 in taxable income ($75,00 for single filers and $112,500 for heads of household filers) through a pass-through business, such as an LLC or S corporation. This new 9% rate is to be phased in over five years.
  • Restores and preserves the adoption credit.
  • Moving expenses deduction for service members. The amended Bill preserves the above-the-line deduction for moving expenses of a member of the Armed Forces on active duty.
  • Certain rollover from 529 plans. Rollovers between qualified tuition programs and ABLE programs (ABLE Accounts, which are tax-advantaged savings accounts for individuals with disabilities and their families). This new provision would allow rollovers from section 529 plans to ABLE programs.

Business Provisions

  • Limitation on lowered corporate tax rate. The original House bill provided for lower corporate tax rates. This amendment lowers the 80% dividends received deduction to 65% and the 70% dividends received deduction to 50%, and thus preserves the higher current law effective tax rates on income from such dividends.
  • Easing of limit on reduction of business interest. Under the original House Bill, every business was to be subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. That provision has been eased for taxpayers that paid or accrued interest on “floor plan financing indebtedness”.
  • Modification of treatment of S corporation conversions into C corporations. This new provision provides that distributions from an “eligible terminated S corporation” would be treated as paid from its accumulated adjustments account and from its earnings and profits on a pro-rata basis.
  • Amortization of certain research and experimentation expenditures. The amended Bill provides that certain research or experimental expenditures are required to be capitalized and amortized over a 5-year period (15 years in the case of expenditures attributable to research conducted outside the U.S.).
  • Preserves the current rules regarding nonqualified deferred compensation. The original House Bill tightened up rules regarding nonqualified deferred compensation. The Bill reported out yesterday strikes this provision, so that the current-law tax treatment of nonqualified deferred compensation is preserved.
  • Change in the treatment of restricted stock units. The House bill, would have given certain employees of nonpublic companies who receive stock options or restricted stock, an election to defer income recognition for up to five years. As amended, restricted stock units are not eligible section 83 treatment except as provided in new section 83(i).

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 pmccord@fraserlawfirm.com.

House Tax Reform Bill: A Look at How It Breaks Down

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:

Business 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

International Provisions

  • 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.

Tax-Exempt Entities

  • 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.

Individual Provisions

  • 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 pmccord@fraserlawfirm.com.