The proposed federal tax reform now being considered in Congress would make many changes after this year, if passed into law. The following areas are under consideration as of November 27, 2017 for domestic businesses, compensation and benefits and individuals. The purpose of this checklist is to provide only a general idea of how the tax landscape may change after this year. The actual details of any final tax proposal will be hammered out by the Joint Committee on Taxation as it marks up the bill in preparation for a Congressional vote. Unless otherwise specified, the features below are in both the House and Senate Bills.
CORPORATE AND BUSINESS
CORPORATE TAX RATES
Corporate tax rates would be reduced to 20%, effective in 2018 or 2019. After the effective date, the 80% dividends received deduction would drop to 65%; and the 70% dividends received deduction would drop to 50%.
ALTERNATIVE MINIMUM TAX
The corporate alternative minimum tax would be repealed after 2017.
CASH METHOD OF ACCOUNTING FOR MORE BUSINESSES
The $5 million average gross receipts threshold for corporations and partnerships with corporate partners that are not allowed to use the cash method of accounting would be increased to something higher ($15 or $25 million are being considered).
OTHER PROPOSED ACCOUNTING CHANGES
The Senate Bill considers allowing taxpayers to defer advance payments for goods and services to the end of the tax year following the tax year of receipt if that income is also deferred for financial statement purposes. The proposal would also require taxpayers to recognize income no later than the year in which income is taken into account on the applicable financial statement (except for certain long-term contract income).
CONTRIBUTIONS TO CAPITAL
The House Bill is considering treating contributions to capital for a corporation as part of the corporation’s gross income unless exchanged for stock.
EXPENSING BUSINESS ASSETS
The cost of qualified property would temporarily be fully deductible when acquired and placed into service after September 27, 2017.
LIMITING INTEREST EXPENSE DEDUCTION
The deduction for net interest expense would be limited to 30% of adjusted taxable income, beginning for tax years after 2017. Any disallowed interest deduction would not be carried forward. However, smaller businesses, with average annual gross receipts of under $25 (or $15) million, would be exempt from the 30% limit.
The deduction for net operating losses would be limited to 90% of taxable income. Carryforwards would be permitted at least for 20 years, but carrybacks would be limited to one or two years.
DEDUCTION FOR INCOME FROM DOMESTIC PRODUCTION
Congress is considering repealing the deduction allowed for domestic production activities.
SALE OF PATENTS
The House bill would repeal the special rule for treating the transfer of a patent prior to its commercial exploitation as a long-term capital gain.
The research and development credit would be preserved.
UNUSED BUSINESS CREDITS
Effective for tax years after 2017, the proposals would repeal the deduction for certain unused business credits that remain after they are carried back one year and forward 20 years.
PASS-THROUGH TAX TREATMENT
New rules would be established for how business income from certain pass-through entities (S corporation, partnership, sole proprietorship) would be taxed after 2017. The House would impose a low tax rate (up to 25%) on all business income remaining after compensation is paid. Under the Senate Bill, taxpayers receiving qualified business income from a pass-through entity would get a 17.4% deduction against that income before it is taxed at individual tax rates, and compensation would be deductible up to 50% of W-2 wages. These differences need to be reconciled. Partnerships providing professional services such as in law, accounting, consulting, engineering, finance, or health would be exempt from the rules.
After 2017, transfers of certain partnership interests held for fewer than 3 years would be treated as short-term capital gains.
COMPENSATION AND BENEFITS
The House proposed to allow state and local government retirement plans and defined benefit plans to make in-service distributions to participants who are age 59-1/2 or older; allow certain participants to rollover loan notes to their individual retirement accounts; allow participants to continue making 401(k) deferrals immediately after a hardship distribution; expand the amount available for hardship distributions by including interest; and liberalize the nondiscrimination rules for frozen plans. The Senate Bill would cap the limits that can be contributed to 401(k), 457(b) and 403(b) plans of the same employer, and would eliminate catch-up contributions for participants over the age of 50.
RE-CHARACTERIZATION OF TRADITIONAL IRA AND ROTH CONTRIBUTIONS
After 2017, taxpayers would not be permitted to re-characterize contributions to a traditional IRA as Roth contributions (or vice versa).
NONQUALIFIED DEFERRED COMPENSATION
The rules for deferred compensation under 409A would continue to apply.
DEDUCTION FOR EXCESSIVE COMPENSATION
For tax years beginning after 2017, the million dollar limit on the compensation deduction of officers of public companies would be modified to apply to the CEO, CFO and 3 highest paid employees. The exceptions for commissions and performance-based compensation would be eliminated, thus closing an avenue for circumventing the rule. The Senate Bill proposes a transition rule that would allow a public company to take advantage of the existing rules if it has a written, binding contract in effect on November 2, 2017 that is not modified.
QUALIFIED EQUITY GRANTS
An employee of a nonpublic company who is granted stock options or restricted stock units for services could elect to defer gain for up to 5 years. A written plan would be required that applies to at least 80% of employees, except for business owners of 1% or more, and the CEO and CFO. No 83(b) election would be allowed for grants of RSUs. New rules would apply to options exercised or RSUs settled after 2017.
INDIVIDUAL TAXES AND DEDUCTIONS
Individual tax rates would generally be reduced, the standard deduction increased, and certain itemized deductions curtailed or eliminated. Under consideration are the elimination of all miscellaneous itemized deductions subject to the 2% floor, and the deduction for trade or business expenses incurred by an employee. Mortgage interest deductions on a taxpayer’s principal residence would be limited to $500,000 for debt incurred after November 2, 2017. State and local income and sales tax deductions would be eliminated but the deduction for certain state and local property taxes may be preserved up to $10,000. The House Bill would eliminate the medical expense deduction for uninsured expenses over 10% of adjusted gross income. The alternative minimum tax (“AMT”) (typically applied to stock options) is being considered for repeal after 2017. The House Bill would eliminate the deduction for alimony payments after 2017 and tax alimony to the payer. The House Bill would eliminate the deduction for interest on education loans.
EXPENSES IN CONTINGENCY FEE CASES
The proposal would deny attorneys a deduction for litigation costs paid on contingency fee cases until the contingency ends.
The limit on cash contributions to charities would be increased from 50% to 60% of adjusted gross income; the current 80% deduction for charitable contributions to universities for athletic seating rights would be repealed; and the requirement to acknowledge in writing charitable contributions of $250 or more would be repealed after 2017.
IMPROPER TAX LEVY FROM RETIREMENT PLANS
The Senate Bill would require that any improper withdrawals from an IRA or retirement plan after 2017 because of a tax levy may be returned to the IRA or plan (or rolled over to an IRA). The proposal would require the IRS to pay interest on the amount returned to the individual and would treat that interest as not includible in gross income.
ESTATE AND GIFT TAXES
The Senate Bill would increase the federal estate and gift tax unified credit basic exclusion to $10 million after 2017 and before 2026.