On November 2, 2017, the House Republicans released their long-awaited tax reform bill, the Tax Cuts & Jobs Act.1 If the bill becomes law, it will mark the most significant change to the Tax Code in thirty years. The bill generally would apply to taxable years beginning after December 31, 2017.

As anticipated, the bill features a significant rate reduction for corporations, a reduction in the number of brackets for individuals, and a doubling of the standard deduction for individuals. It also eliminates and repeals many deductions both for individuals and businesses. Overall, the scope of the proposed changes in the bill is very broad. Here is an overview of key provisions:

Individuals

  • Consolidates the current seven tax brackets to four at 12%, 25%, 35% and 39.6%, retaining the current top rate for joint filers earning at least $1 million and single filers earning at least $500,000
  • Nearly doubles the standard deduction to $12,000 for single filers and $24,000 for married filers, while eliminating personal exemptions
  • Establishes a new family credit with an expansion of the child tax credit
    • Child tax credit - current $1,000 credit increased to $1,600
    • Family credit - new $300 credit for each parent and non-child dependent, but this credit will expire in 2023
  • Doubles the current exemption amount for the federal estate tax; repeals the tax entirely in 2024
  • Limits the mortgage interest deduction to interest on the first $500,000 of debt for mortgages incurred after November 2, 2017; existing mortgages (including refinances of current mortgage debt) will be grandfathered under current rules
  • Eliminates itemized deduction of state and local taxes other than property taxes and caps the deduction of property taxes at $10,000
  • Adds patents and inventions to the list of assets that are not treated as capital assets
  • Repeals the following:
    • Individual alternative minimum tax ("AMT")
    • Medical expense deduction
    • Personal casualty loss deduction
    • Alimony expense deduction and alimony income inclusion
    • Deductions for contributions to Archer Medical Savings Accounts ("MSAs") and exclusion from income for contributions of employers to Archer MSAs
  • Retains the following:
    • Charitable contribution deduction
    • Earned income tax credit
    • Treatment of popular retirement savings vehicles such as 401(k)s and IRAs

Businesses

  • Lowers the corporate income tax rate from 35% to 20%
  • Establishes immediate expensing with respect to new investment in depreciable assets but this provision would sunset after five years
  • Establishes a 25% tax rate for income of businesses conducted as sole-proprietorships, partnerships and S-corporations; owners who are active participants in such businesses will only get the benefit of the 25% rate on a portion (presumptively set at 30% -- 0% for service-related businesses) of their business income
  • 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)
  • Limits the business interest expense deduction to the sum of the amount of business interest income plus 30% of the taxpayer's adjusted taxable income; the limitation does not apply to small businesses
  • Limits § 1031 like-kind property exchanges to real property
  • Establishes territorial taxation with a 100% exemption for domestic corporations on dividends from foreign subsidiaries
  • Imposes 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
  • Repeals the following:
    • Corporate AMT
    • Entertainment expense and certain fringe benefits deductions
    • Technical terminations of partnerships
    • New market tax credit
    • Exclusion from income of § 118 contributions to capital
  • Retains the following:
    • Low-income housing credit
    • Research & development credit

Tax-Exempt Entities

  • Eliminates tax-exempt bond treatment for professional stadiums
  • Establishes 20% excise tax on compensation paid in excess of $1 million to an executive of a tax-exempt organization
  • Imposes 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
  • 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