Today, House Ways and Means Committee Chairman Brady introduced an additional amendment to the amendment in the nature of a substitute to the Tax Cuts and Jobs Act (H.R. 1) that makes substantive changes to the bill. The committee approved the amendment 24 to 16 in a roll call vote. Following approval of the chairman’s amendment, the committee favorably reported the bill out of committee by a vote of 24 to 16. The bill is scheduled to move to the floor next week.
The amendment includes the following:
- Self-Employment Contributions. The amendment eliminates the proposed expansion of the self-employment tax regime to owners of passthrough businesses, particularly shareholders of S corporations and limited partners (or equivalents) of tax partnerships. Thus, the current rules would remain in place.
- Rate for Small Businesses with Net Active Business Income. The amendment includes a new phased-in-over-five-years lower individual income tax rate (nine percent) for active owners of passthrough businesses for up to $75,000 of their net business income (for owners with taxable incomes less than $150,000 and then fully phased out at taxable income of $225,000). (All such figures are for owners who are married filing joint returns (analogous figures are provided for other filers)). Although not clear from the summary or the legislative text, the terms “active” and “business” presumably will have the same meanings as they have for the special 25% passthrough rate. There is no exclusion for specified services activities that would not qualify for the special 25% passthrough rate.
- S Corporation Conversions to C Corporations. The amendment includes new provisions to address tax issues that may arise upon a conversion of an S corporation to a C corporation within two years of the enactment of this legislation (presumably in an effort by S corporations to gain the benefit of the new lower rate for taxable income of C corporations). First, any taxable income adjustments that arise from such a conversion under section 481 would be taken into account ratably over six years. Second, beneficial cash distribution rules for such converted S corporations would be expanded. Cash distributions from such converted S corporations would continue to be treated, generally for one year after conversion, as tax-free returns of (and to the extent of) previously-taxed, undistributed S corporation earnings (i.e., from an S corporation’s Accumulated Adjustments Account (AAA)). Thereafter, instead of subsequent cash distributions being tested entirely under the C corporation distribution rules, which would increase the likelihood that such distributions would constitute taxable dividends, the new provisions treat such distributions as partially nontaxable in proportion to any remaining AAA compared to accumulated earnings and profits.
- Transition Tax. The amendment would, as compared to the original bill, increase the effective tax rates on deemed repatriated earnings from 12% to 14% on earnings held in liquid assets and from 5% to 7% on earnings held in illiquid assets.
- Excise Tax on Payments to Related Foreign Corporations. The bill generally imposes a 20% excise tax on payments (other than interest) made by a US corporation to a related foreign corporation that are deductible, includible in costs of goods sold, or includible in the basis of a depreciable or amortizable asset. The amendment would modify certain aspects of this provision by eliminating the mark up on the deduction for deemed expenses and permitting a foreign tax credit to apply to 80% of foreign taxes. In addition, the amount of foreign taxes paid would by measured by reference to section 906(a) of current law (as opposed to a formula based on financial accounting information).
- Dividends Received Deduction. The amendment reduces the deduction for dividends received from 70% of the amount of the dividend under current law to 50%. The amendment also reduces the deduction for dividends received from corporations owned at least 20% by the taxpayer from 80% under current law to 65%.
- Amortization of R&D Expenditures. Under current section 174, taxpayers are allowed a deduction for research and experimental expenditures, with certain narrow exceptions. Under the amendment, all such expenditures must be charged to capital account, and those expenditures must be amortized and deducted ratably over a five-year period (15 years for foreign research expenditures). Amounts paid or incurred in connection with the development of software is to be treated as a research or experimental expenditure and must also be amortized. If property with respect to which research or experimental expenditures are paid is disposed of, retired, or abandoned during the amortization period, the amortization deduction shall continue notwithstanding that disposition.
- Surtax on Life Insurance Company Taxable Income. The amendment generally preserves current law tax treatment of insurance company deferred acquisition costs, life insurance company reserves, and pro-ration, and imposes an eight percent surtax on life insurance income. The committee summary of the amendment indicates that this provision is intented as a placeholder.
- Compensation. The amendment removes section 3801 of the bill so that the current-law tax treatment of nonqualified deferred compensation is preserved.
- Excise Tax on Endowments. The 1.4% excise tax on certain private college and university endowments is expanded to cover the assets and net investment income of related organizations that control, are controlled by, are under common control with, or are supported or supporting organizations of, the private colleges and universities.
- Political Statements of Exempt Organizations. Under the original bill, churches would have been permitted to make statements relating to political candidates in the ordinary course of religious services and activities, provided the church incurs only de minimis incremental expenses. The amendment expands this provision to apply to all section 501(c)(3) organizations making statements relating to political candidates in the ordinary course of the organization’s performance of its exempt purposes, provided the organization incurs only de minimis incremental expenses. However, the amendment would only apply after the end of 2018 and before the end of 2023. Between the bill’s passage and the end of 2018 and after 2023, the amendment would apply only to churches.
Click here to view the committee’s summary of the amendment.
Senate Releases Tax Reform Bill Concepts
Following the conclusion of the House Way and Means Committee markup, the Senate Finance Committee released a conceptual framework for its tax reform proposal. The committee is anticipated to begin a markup of the bill next week. The Senate’s proposal contains several substantial differences from the bill approved by the House Ways and Means committee today, including a one-year delay of the decrease in the corporate tax rate to 20%.