The congressional conference committee negotiating differences between the U.S. House and U.S. Senate versions of the GOP tax reform bill, the Tax Cuts and Jobs Act, released the final version of the bill on Friday, December 15 (the “Conference Bill”). Both houses of Congress are expected to vote on the Conference Bill this week. For previous coverage of the House and Senate versions of the Tax Cuts and Jobs Act, click here. Significant highlights of the Conference Bill include:

  • Individuals would be subject to seven income tax brackets with a top tax rate of 37%, down from the current 39.6%.

  • The ability of individuals to deduct state and local income and property taxes would be capped at US$10,000.

  • The corporate tax rate would be reduced to 21%, from a current top rate of 35%, beginning in 2018. Consistent with the general approach taken in both the House and Senate bills, tax deductions for interest expense by a business would be limited to the amount of the business’s interest income earned plus 30% of adjusted taxable income.

  • Similar to the House and Senate bills, the Conference Bill moves the U.S. closer to a territorial system by excluding 100% of the foreign-source portion of the dividends received by U.S. corporations from 10%-or-more owned foreign corporations, subject to holding period requirements.

  • The Conference Bill also follows the House and Senate bills in subjecting U.S. shareholders of a foreign corporation to immediate taxation on the foreign corporation’s previously untaxed foreign earnings, with the Conference Bill adopting a tax rate of 15.5% for earnings held in cash or cash equivalents and 8% for the remainder.

  • Qualified business income from passthrough entities would be entitled to preferential tax treatment, generally following the approach taken in the Senate version of the bill, although the percentage of the deduction allowable would be 20% instead of 23% as under the Senate version. Income qualifying for this deduction would have an effective maximum federal income tax rate of 29.6%, down from the current 39.6%. An exclusion for income derived from specified service businesses and a limitation based on wages paid or wages paid plus a capital element are phased in above certain income thresholds (US$157,500, or US$315,000 for a joint return).

  • The corporate alternative minimum tax (“AMT”) would be repealed and the individual AMT would be retained, although the exemption amount and phaseout thresholds for the individual AMT would be increased.

  • Consistent with the general approach taken in both the House and Senate versions of the bill, net operating losses (“NOLs”) will have an indefinite carryforward and no carryback. The Conference Bill follows the Senate bill in limiting the NOL deduction to 80% of taxable income (although this 80% limitation would apply beginning in 2018, not in 2023 as under the Senate bill), and in declining to increase carried forward NOLs by an interest factor as was proposed in the House bill.

  • The limit on the deductibility of home mortgage interest for any mortgage incurred after December 15, 2017 would be reduced to acquisition indebtedness of US$750,000, down from the current limit of US$1 million.

  • In contrast to the Senate bill, the Conference Bill does not require taxpayers to use the first-in-first-out (“FIFO”) method of identifying securities which are sold.

  • The estate and gift tax exemption would be doubled, from approximately US$5.5 million to approximately US$11 million.

  • The shared responsibility payment for individuals failing to maintain minimum essential coverage would be eliminated, effectively repealing the individual mandate under the Affordable Care Act.

  • Consistent with the Senate bill, the provisions of the Conference Bill relating to the taxation of individuals (including the new individual tax brackets, the preferential treatment of qualified business income from passthrough entities, the increased gift and estate tax exemption, and the provisions relating to the individual AMT) expire after 2025.