On November 2, 2017, the House of Representatives released the first draft of a tax reform bill entitled the Tax Cuts and Jobs Act. Since the Act’s release, there have already been several changes to the Act’s proposals. The House Ways and Means Committee made several amendments to the plan before approving the Act on November 9th. The changes would bring the cost of the bill over a decade to just over $1.4 trillion, as estimated by the Joint Committee on Taxation.
The Senate Finance Committee has also released a summary of its tax reform proposals, with several significant departures from the House proposal. Although no formal bill has been released, the Senate Plan is set forth and explained by the Joint Committee on Taxation’s Description of the Chairman’s Mark of the “Tax Cuts and Jobs Act.” Below is a summary list of the Act’s notable provisions and the differences between the current House Bill and the Senate Plan.
It is important to keep in mind that this is only a preliminary draft of a bill containing numerous highly-contentious reform measures. The Act’s release does not create any new tax obligations or benefits. There will be more changes. The policy measures are not final and are expected to be revised as the provisions are negotiated.
Corporate Alternative Minimum Tax Repealed. Both the House Bill and Senate Plan would repeal the AMT.
Reduction of the Corporate Tax Rate.
House Bill: The top Corporate Tax Rate would be lowered to 20% from the current rate of 35%.
Senate Plan: The Corporate Tax Rate reduction to 20% would be delayed one year, not taking effect until 2019.
Reduced Rate for Pass-Through Entities.
House Bill: The top tax rate for income from pass-through entities would be reduced to 25%. For net income from an active business, a formula would be applied to ensure that compensation (salary, guaranteed payments, etc.) will be taxed at the individual owner’s rate (and be treated as self-employment income). For active business income, the presumption is that 30% is eligible for the lower 25% rate, while 70% of such income would be taxable compensation. Creates a 9% tax for the first $75,000 in net business taxable income of a pass-through business earning less than $150,000.
Senate Plan: Would create a new 17.4% deduction for non-wage pass-through income. The deduction is limited to those taxpayers whose net business taxable income is less than $75,000.
Limits on the Deductibility of Business Interest.
House Bill: The deduction for business interest expenses would be limited to the lesser of the amount of business interest income or 30% of the business’s adjusted taxable income. There would be an exception for “small businesses” (average gross receipts <$25 million).
Senate Plan: Would limit the deduction to 30% of adjusted taxable income. The “small business exception” would apply to businesses with $15 million or less of gross receipts, but it would permit interest not allowed as a deduction to be carried forward indefinitely.
Deductions for the Full Cost of New Equipment. Under both the House Bill and Senate Plan, the depreciation deduction would be increased from 50% to 100% of the adjusted basis of qualified property for the next five years.
Fringe Benefit Changes.
House Bill: $50,000 cap on housing and meals. Phase out after $120,000.
Senate Plan: Does not address this topic.
Re-characterization of Gain on Certain Partnership Carried Interests.
House Bill: Gain on sale of certain types of carried interests would be taxed as short-term capital gain unless held for at least three years.
Senate Plan: Does not include any provisions for changing the treatment of carried interest.
House Bill: Gain or loss from the disposition of a self-created patent, invention, model, or design (whether or not patented), or secret formula or process would be considered ordinary income and would no longer be allowed treatment as long-term capital gain.
Senate Plan: Does not address the topic.
Technical Termination Rules for Partnership.
House Bill: Would repeal the technical termination rule for partnerships.
Senate Bill: Does not address this topic.
Deduction for Entertainment Expenses Repealed. Both the House Bill and Senate plan would disallow deductions for entertainment, amusement, or recreation.
Only Real Property will Qualify for Like-Kind Exchange Treatment. Both the House Bill and Senate Plan would limit the non-recognition of gain in like-kind exchanges to real property.
Global Minimum Tax.
House Bill: Applied to income of foreign subsidiaries of American Companies (10%).
Senate Plan: Would follow a territorial system rather than a global system.
Assets Held Overseas.
House Bill: Imposes tax rate on repatriated earnings (14% for liquid assets; 7% for illiquid assets).
Senate Plan: Imposes tax rate on repatriated earnings (10% for liquid assets; 5% for illiquid assets).
Excise Tax for American Subsidiaries of Foreign-Owned Companies.
House Bill: New Excise Tax (20%) on payments sent to foreign affiliates. Payments are considered amounts allowable as a deduction or amounts includible in costs of goods sold, inventory, or the basis of a depreciable asset. Would expand the foreign tax credit to apply to 80% foreign credit for taxes paid under the repatriation tax measure.
Senate Bill: Would not include an excise tax on payments companies make to their foreign affiliates, but would impose a 10% tax on foreign earnings.
Alternative Minimum Tax Repealed. Both the House and Senate Bills repeal the AMT.
Home Mortgage Interest Deduction.
House Bill: The deduction will be limited to interest on up to $500,000 of new debt. Homeowners with existing mortgages may continue to deduct mortgage interest on debt up to the current $1 million limit.
Senate Plan: Would retain the current deduction for home mortgage interest with a $1 million limit.
Exclusion for Gain on Sale of Home. Both the House Bill and Senate Plan would increase the two-year residency requirement to five years. Phased out for income levels above $500,000.
Estate & GST Taxes.
House Bill: The exemption per individual would double to $10 million in 2018 and these taxes would be completely repealed in 2024.
Senate Plan: The exemption per individual would also double, but with no plan for repeal. The tax rate would remain at 40%.
State and Local Tax Deduction.
House Bill: Would limit deduction for state and local taxes to property taxes, up to $10,000 per year.
Senate Plan: Would completely eliminate any deductions for state and local taxes paid by individuals.
Nonqualified Deferred Compensation.
House Bill: Preserves current-law treatment of nonqualified deferred compensation.
Senate Plan: Section 409A rules will be phased out and tax would be triggered when the recipient’s rights to deferred compensation are no longer subject to a risk of forfeiture.
Credits and Deductions.
Changes to Income Tax Brackets.
House Bill: Brackets will be reduced from seven to four. There would also be changes in the income ranges affected by each bracket, shown as follows (for married filing jointly):
Senate Plan: Would retain 7 tax brackets with adjusted rates for each bracket as follows (for married filing jointly):