House and Senate Disagree on Tax Reform Plans

Nov 16th Update—The Senate Finance Committee passed its version of the Tax Cuts and Jobs Act (TCJA) by a party-line vote of 14-12.

Nov 16th Update—The U.S. House of Representatives passed the Tax Cuts and Jobs Act bill, H.R. 1, by a vote of 227–205, on Thursday afternoon, with all Democrats and 13 Republicans voting no.

On November 9th, the Republican plan for tax reform took one step forward and two steps back. The House Ways and Means Committee approved H.R. 1 the, “Tax Cuts and Jobs Act” while the Senate’s Joint Committee on Taxation released their plan for tax reform. The goals of both the House and Senate are to cut individual and business tax rates and simplify our tax system but they have taken very divergent positions on many politically charged issues. To further complicate tax reform, the Senate plan has introduced some significant tax law changes that are not considered in the House plan. Today the Senate announced the inclusion of a provision to repeal the “individual mandate”, enacted as part of Obamacare, requiring taxpayers to have health insurance.

Among other contentious issues their plans disagree on the number of individual income tax brackets, the deduction for state and local taxes, mortgage loan limits for primary residence interest deductions and the effective date for a reduced corporate tax rate.

The House and Senate proposals include broad changes to existing tax rules that will impact homeowners, the tech economy, closely held businesses and both middle and high income taxpayers. These broad changes include:

Individuals:

  • Require taxpayers to live in primary residence five years to exclude up to $500K of gain upon sale. Gain exclusion will be phased out for “high income” taxpayers.
  • Eliminate “back door” Roth IRA contributions
  • Repeal of income exclusion for contributions to dependent care assistance programs
  • Income from nonstatutory stock options and SARS would be taxable upon vesting not upon exercise (Senate): AS OF 11/15/17 THIS PROVISION HAS BEEN DROPPED BY THE SENATE
  • Election for five year deferral of gain from stock options and RSU’s (House)
  • Reduced tax rates on income from pass-through entities
  • Repeal of Estate Tax

Business Entities:

  • Require R & D expenditures to be capitalized and amortized over 5 years
  • Reduce the depreciation period for nonresidential real property to 25 years
  • Eliminate the deferral of gain from all like kind exchanges except for real property exchanges.
  • Eliminate the deduction for income from domestic production activities
  • Adopt 100% bonus depreciation
  • Allow more business entities to use the cash basis method of reporting taxable income

Provisions in both the House and Senate reform plans are generally effective for tax years beginning after Dec 31, 2017 (except for 100% bonus depreciation which will apply to property placed in service after Sept 27, 2017).

The House is scheduled to vote on their bill later this week. The Senate plans a vote after Thanksgiving then the negotiations begin to agree on compromise legislation. Congress plans to have tax reform legislation ready for the President’s signature before the end of 2017. We will update you as the House and Senate work toward their goals.

Below is a summary of House Bill H.R.1 and the Senate proposal as noted by Bloomberg BNA.




Individual

Topic House Bill (H.R. 1) Senate Plan
Tax Rates Individual Income Tax Rates
The bill would have four tax brackets: 12 percent, 25 percent, 35 percent, and 39.6 percent, in addition to an effective fifth bracket at zero percent in the form of the enhanced standard deduction.

Married Filing Jointly (Surviving Spouses):
12% (Taxable income not over $90,000)
25% (Over $90,000 but not over $260,000)
35% (Over $260,000 but not over $1,000,000)
39.6% (Over $1,000,000)

Married Filing Separately:
12% (Taxable income not over $45,000)
25% (Over $45,000 but not over $130,000)
35% (Over $130,000 but not over $500,00)
39.6% (Over $500,000)

Head of Household:
12% (Taxable income not over $67,500)
25% (Over $67,500 but not over $200,000)
35% (Over $200,000 but not over $500,000)
39.6% (Over $500,000)

Other Individuals:
12% (Taxable income not over $45,000)
25% (Over $45,000 but not over $200,000)
35% (Over $200,000 but not over $500,000)
39.6% (Over $500,000)

The income levels would be indexed for inflation using the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) for tax years beginning after 2018.

The bill would, for high-income taxpayers, impose a phase-out of the tax benefit of the 12% bracket. It would impose an increase in tax at 6 percent of any excess of adjusted gross income over $1,200,000 in the case of a joint return or surviving spouses, $600,000 in the case of a married individual filing separately, and $1,000,000 for any other individual. These amounts will be adjusted for inflation using C-CPI-U for taxable years beginning after 2018.

Capital Gains Tax Rates
Under the 0 percent capital gains bracket, the bill would amend the 25 percent rate to a 15 percent rate threshold. Under the 15 percent capital gains bracket, the bill would amend the 39.6 percent rate to 20 percent rate threshold. The rate thresholds would be as follows:

Married Filing Jointly (and Surviving Spouses):
15% Rate Threshold – $77,200
20% Rate Threshold – $479,000

Married Filing Separately:
15% Rate Threshold – $38,600
20% Rate Threshold – $239,500

Head of Household:
15% Rate Threshold – $51,700
20% Rate Threshold – $452,400

Other Individuals:
15% Rate Threshold – $38,600
20% Rate Threshold – $425,800

The above 15% and 20% threshold amounts would be adjusted for inflation beginning in tax years after 2018.

The bill would make this provision effective for tax years beginning after 2017.

MODIFIED 11/14: Individual Income Tax Rates
Would have seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%:

Married Filing Jointly and Surviving Spouses:
10% (Taxable income not over $19,050)
12% (Over $19,050 but not over $77,400)
22% (Over $77,400 but not over $140,000)
24% (Over $140,000 but not over $320,000)
32% (Over $320,000 but not over $400,000)
35% (Over $400,000 but not over $1,000,000)
38.5% (Over $1,000,000)

Married Filing Separately:
10% (Taxable income not over $9,525)
12% (Over $9,525 but not over $38,700)
22% (Over $38,700 but not over $70,000)
24% (Over $70,000 but not over $160,000)
32% (Over $160,000 but not over $200,000)
35% (Over $200,000 but not over $500,000)
38.5% (Over $500,000)

Head of Household:
10% (Taxable income not over $13,600)
12% (Over $13,600 but not over $51,800)
22% (Over $51,800 but not over $70,000)
24% (Over $70,000 but not over $160,000)
32% (Over $160,000 but not over $200,000)
35% (Over $200,000 but not over $500,000)
38.5% (Over $500,000)

Single Individuals:
10% (Taxable income not over $9,525)
12% (Over $9,525 but not over $38,700)
22% (Over $38,700 but not over $70,000)
24% (Over $70,000 but not over $160,000)
32% (Over $160,000 but not over $200,000)
35% (Over $200,000 but not over $500,000)
38.5% (Over $500,000)

The new rate structure would apply to tax years beginning after Dec. 31, 2017. It would expire after Dec. 31, 2025, except for the requirement to index amounts for inflation using C-CPI-U.

Standard Deduction The bill would increase the standard deduction to the following amounts:
$24,400 (joint return or a surviving spouse)
$18,300 (unmarried individual with at least one qualifying child)
$12,200 (for single filers)
The bill would make these rates effective for tax years beginning after 2017. Additionally, the bill
would provide that these amounts be adjusted for inflation using the C-CPI-U beginning in tax years after 2019.
Would increase the standard deduction to the following amounts:
$24,000 (joint return or a surviving spouse)
$18,000 (unmarried individual with at least one qualifying child)
$12,000 (for single filers)
The plan would retain the enhanced standard deduction for the blind and elderly that is available under current law.
The amount of the standard deduction would be indexed for inflation using CCPI-U beginning in tax years after 2018.

MODIFIED 11/14: Enhanced standard deduction amounts would expire after Dec. 31, 2025, but standard deduction amounts would continue to be indexed for inflation using C-CPI-U after Dec. 31, 2025.

Mortgage Interest Deduction The bill would reduce the mortgage interest deduction limitation to $500,000 for debt incurred after Nov. 2, 2017, and the interest would only be deductible on a taxpayer’s principal residence. The current limitation is $1,000,000. For refinancing that occurred prior to Nov. 2, 2017, the refinanced debt is treated as incurred on the same date as the original debt. The plan would repeal the mortgage interest deduction with respect to interest on home equity indebtedness. But, the plan would retain the deduction with respect to interest on acquisition indebtedness of up to $1,000,000 ($500,000 for a married person filing a separate return).

MODIFIED 11/14: Would provide that the repeal of the mortgage interest deduction with respect to interest on home equity indebtedness expires after Dec. 31, 2025, and that the mortgage interest deduction would revert back to its form
as it existed before Jan. 1, 2018 at that time.

State and Local Tax Deduction The bill would eliminate the itemized deduction for state and local income and sales tax.
The bill would allow individuals to write off the cost of state and local property taxes up to $10,000.
The plan would eliminate the itemized deduction for all state and local taxes paid by individuals.
The plan would only allow a deduction for state and local taxes paid or accrued in carrying on a trade or business.
The plan would only allow state and local property taxes imposed on business assets to be written off.

MODIFIED 11/14: Would provide that these changes expire after Dec. 31, 2025, and the state and local tax deduction would revert back to its form as it existed before Jan. 1, 2018 at that time.

Alternative Minimum Tax The proposal would repeal the existing individual AMT. The proposal would repeal the existing individual AMT.

MODIFIED 11/14: Repeal of the individual AMT would expire after Dec. 31, 2025.

Personal Exemptions The bill would repeal the deduction for personal exemptions, which would be effective for taxable years beginning after Dec. 31, 2017. The plan would repeal the deduction for personal exemptions, which would be effective for taxable years beginning after Dec. 31, 2017.

MODIFIED 11/14: Repeal of personal exemptions would expire after Dec. 31, 2025, and that personal exemptions would revert back to their form as they
existed before Jan. 1, 2018 at that time.

Miscellaneous Itemized Deductions – 2 Percent Floor Not addressed. Would repeal all miscellaneous itemized deductions that are subject to the two percent floor under present law.

MODIFIED 11/14: Would increase the limit for the deduction of certain educator expenses to $500. Effective for tax years beginning after Dec. 31, 2017. Would
provide that these changes expire after Dec. 31, 2025, and that miscellaneous itemized deductions would revert back to
their form as they existed before Jan. 1, 2018 at that time.

Limitation on Itemized Deductions The bill would eliminate the overall limitation on itemized deductions. Under current law, itemized deductions are limited once a taxpayer’s adjusted gross income exceeds a threshold amount ($261,500 for single individuals, $313,800 for married couples filing joint returns and surviving spouses; $287,650 for heads of households; $156,900 for married individuals filing separately). The plan would eliminate the overall limitation on itemized deductions.

MODIFIED 11/14: Would provide that the elimination of the overall limitation on
itemized deductions expires after Dec. 31, 2025, and that the limitation would revert back to its form as it existed before
Jan. 1, 2018 at that time.

Personal Casualty Losses Deduction The bill would repeal the personal casualty loss deduction for property losses (not used in connection with a trade or business or transaction entered into for profit) incurred from fire, storm, shipwreck, or other casualty, and theft. The bill would preserve the above-the-line casualty loss deduction for personal
casualty losses incurred due to a disaster and associated with special disaster relief legislation.
The plan would repeal the personal casualty loss deduction for property losses (not used in connection with a trade or business or transaction entered into for profit) incurred from fire, storm, shipwreck, or other casualty, and theft. The plan would allow taxpayers to claim
a personal casualty loss if the loss was incurred as a result of federally-declared disasters.

MODIFIED 11/14: Would provide that the repeal of the personal casualty losses deduction expires after Dec. 31, 2025, and that the personal casualty loss deduction would revert back to its form as it existed before Jan. 1, 2018 at that time.

Medical Expense Deduction The bill would eliminate the itemized deduction for medical expenses for tax years beginning after 2017. Under current law, taxpayers may deduct out-of-pocket medical expenses to the extent that the medical expenses exceed 10 percent of the adjusted gross income. Would preserve the current deduction for medical expenses.
Alimony Payments Deduction The bill would eliminate the current above-the-line deduction for alimony payments. The bill would not require the payee receiving alimony payments to include alimony payments into income. This provision would
be effective for divorce decrees, separation agreements, and modifications entered into after 2017.
Not addressed.
Moving Expenses Deduction The bill would generally eliminate the deduction that is available for moving expenses incurred when starting a new job in a new location at least 50 miles farther from the taxpayer’s former residence. However, the deduction would still be available for members of the armed forces. The provision would be effective for tax years beginning after Dec. 31, 2017. The plan would generally repeal the deduction for moving expenses. The deduction would still be available for members of the armed forces for amounts attributable to certain expenses (in-kind moving and storage expenses).

MODIFIED 11/14: Would provide that the
modifications to the moving expense deduction expire after Dec. 31, 2025 and would revert back to its form as it existed before Jan. 1, 2018 at that time.

Expenses Attributable to the Trade or Business of Being an Employee The bill would deny a deduction for expenses attributable to the trade or business of performing services as an employee,
however, the bill would preserve the above-the-line deductions for reimbursed expenses included in an employee’s income and for expenses for members of reserve components of the United States military.
Not addressed.
American Opportunity Tax Credit Under the bill, the three existing higher education tax credits (American Opportunity Tax Credit (AOTC), Hope Scholarship Credit (HSC), and Lifetime Learning Credit (LLC)) would be consolidated into a new, enhanced AOTC.
The new AOTC, like the current AOTC, would provide a 100-percent tax credit for the first $2,000 of certain higher education expenses and a 25-percent tax credit for the next $2,000 of such expenses.
The AOTC would also be available for a fifth year of post-secondary education at half the rate as the first four years, with up to $500 of such credit being refundable.
The provision would be effective for tax years beginning after 2017.
Would provide education relief for graduate students.
Consolidation of Education Savings Rules Under the bill, new contributions to Coverdell education savings accounts after 2017 (except rollover contributions) would be prohibited, but tax-free rollovers from Coverdell accounts into section 529 plans would be allowed.
Elementary and high school expenses of up to $10,000 per year would be qualified expenses for section 529 plans.
The provision would be effective for contributions and distributions made after 2017.
Would provide additional ways for parents to save for the education costs of their unborn children.

MODIFIED 11/14: Would specify that an unborn child may qualify as a designated beneficiary for §529 plans. Effective for contributions made after Dec. 31, 2017. Would sunset after Dec. 31, 2025 and revert back to its form as it existed before Jan. 1, 2018 at that time.

Gain from Sale of a Principal Residence Exclusion The bill would continue to exclude from gross income up to $500,000 ($250,000 for other filers) from the sale of a principal residence, but only if the taxpayer owned and used the home as such for five out of the previous eight years. The exclusion would only be available once every five years and would begin to phase out by one dollar for every dollar by which the taxpayer’s gross income exceeds $250,000 ($500,000 for joint filers). The provision would be effective for sales and exchanges after 2017. The plan would provide that the exclusion be available only if the taxpayer has owned and used the residence as a
principal residence for at least five of the eight years with an exception for taxpayers that change places of employment, health, or unforeseen circumstances (equal to a fraction of the $250,000, or $500,000 if married filing a joint return). The plan would limit the ability of taxpayer’s to use the exclusion to once every five years.

MODIFIED 11/14: Would provide that the modifications to the exclusion of gain from the sale of a principal residence expire after Dec. 31, 2025, and that the exclusion of gain from the sale of a principal residence would revert back to its form as it existed before Jan. 1, 2018 at that time.

Exclusions for Dependent Care Assistance Programs Effective after Dec. 31, 2017, the bill would repeal the exclusion for dependent care assistance programs. Not addressed.
Exclusion for Qualified Moving Expense Reimbursements Effective after Dec. 31, 2017 the bill would repeal the exclusion for qualified moving expense reimbursements – such
reimbursements would constitute taxable income.
The bill would repeal the exclusion from gross income for qualified moving expense reimbursements.
Qualified Equity Grants Would create new election to defer recognition of gain for up to 5 years for employees of nonpublic companies who are
granted stock options or restricted stock units (RSUs). Elections would apply only to stock of the employee’s employer and the options or RSUs would have to be granted in connection with the performance of services by the employee. A written plan would have to provide that at least 80% of the employees of the company would be granted stock options or RSUs with the same rights and privileges. Certain employees would not be permitted to make the election, such as 1% owners, the chief executive officer, and chief financial officer. Under Bill §3805, added by the chairman by amendment, RSUs would not be eligible for a §83(b) election and receipt of qualified stock would not be treated as a nonqualified deferred compensation plan for purposes of §409A. Subject to a transition rule, these provisions would apply to stock attributable to options exercised, or RSUs settled, after Dec. 31, 2017.
MODIFIED 11/14: Similar to House Bill.
The proposal also would allow a qualified employee to make an inclusion deferral election with respect to qualified stock
attributable to a statutory option. Generally would apply to stock attributable to options exercised or RSUs settled after Dec.31, 2017. Under a transition rule, until the IRS issues regulations or other guidance implementing the 80% and employer notice requirements under the provision, a corporation will be treated as complying with those requirements if it complies with a reasonable good faith interpretation. The penalty for a failure to provide the required notice would apply to failures after Dec. 31, 2017.
Elimination of Catch-Up Contributions for High-Wage Employees Not addressed. An employee would not be permitted to make catch-up contributions for a year if the employee received wages of $500,000 or more for the preceding year. Effective for plan years and taxable years beginning after Dec. 31, 2017.

MODIFIED 11/14: Struck provision.

Recharacterization of Certain IRA and Roth IRA Contributions Would strike I.R.C. §408A(d)(6), which permits taxpayers to recharacterize a contribution to a traditional IRA as a contribution to a Roth IRA, or vice versa, and permits taxpayers to recharacterize a conversion of a traditional IRA to a Roth IRA. Would be effective for tax years beginning after Dec. 31, 2017. MODIFIED 11/14: Same as H.R. 1.
Like-Kind Exchanges of Real Property The bill would limit deferral of gain on like-kind exchanges after 2017 to real property. The plan would limit the nonrecognition of gain in the case of like-kind exchanges to real property that is not held primarily for sale. This portion of the plan would generally apply to exchanges completed after Dec. 31, 2017. However, an exception is provided for any exchange if either the property being exchanged or received is exchanged or received on or before Dec. 31, 2017.
Nonqualified Deferred Compensation Earlier version of the House bill would have eliminated exceptions to taxation of nonqualified deferred compensation as soon as there is no substantial risk of forfeiture, and would have added a new I.R.C. section.
Subsequent amendments to the bill struck the provision. Current law, including §409A, would be retained.
Nonqualified deferred compensation would be includible when there is no substantial risk of forfeiture. A substantial risk of forfeiture would occur only when the rights are conditioned on the future performance of substantial services. A covenant not to compete would not create a substantial risk of forfeiture.
The plan would apply to all stock options and SARs. No exceptions would be provided in regulations or other administrative guidance. Statutory options would not be considered nonqualified deferred compensation for purposes of the plan. An exception would be applied to a transfer of property under §83 (other than nonstatutory stock options), or a trust to which §402(b) applies, or relating to statutory options under §422 or §423 for which there is no disqualifying disposition.
Generally would apply to amounts attributable to services performed after Dec. 31, 2017.

MODIFIED 11/14: Struck provision.

Affordable Care Act
Individual Mandate
Not addressed. MODIFIED 11/14: Would reduce the
amount of the individual shared responsibility payment enacted as part of the Affordable Care Act to zero.

 


Corporate & Business

Topic House Bill (H.R. 1) Senate Plan
Corporate Tax Rate After 2017, 20% flat corporate tax rate; 25% flat rate for personal service corporations.
After 2017, the 80% dividends received deduction would be reduced to 65% and the 70% dividends received deduction would be reduced to 50%, preserving the current law effective tax rates on income
from such dividends.
After 2018, 20% flat corporate tax rate; would eliminate the special tax rate for personal service corporations.
After 2018, would reduce the 80% dividends received deduction to 65% and the 70% dividends received deduction to 50%, and would repeal the maximum corporate tax rate on net capital gain as obsolete.
Increased Bonus Depreciation The bill would extend the availability of first-year additional depreciation for qualified property and specified fruit- and nut-bearing plants for three additional years, and would increase the first-year additional depreciation percentage to 100%, effectively allowing taxpayers to deduct immediately the full cost of qualified property acquired and placed in service after September 27, 2017, and before Jan. 1, 2023 (Jan. 1, 2024 for longer production period property).
The bill would expand the property that is eligible for this additional depreciation (“qualified property”) to include used property acquired by the taxpayer, provided the property was not used by the taxpayer before the taxpayer acquired it.
Qualified property would exclude property used in a real property trade or business, certain regulated utility property, and property used in a trade or business that has floor plan financing indebtedness.
Under the bill, the taxpayer’s election to use AMT credits in lieu of deducting the additional depreciation would be repealed. The repeal of this election would be effective for tax years beginning after 2017.
The plan would extend and modify the availability of first-year additional depreciation for qualified property and
specified fruit- and nut- bearing plants through 2022, and would increase the first-year additional depreciation percentage to 100% for property placed in service after September 27, 2017, and before Jan. 1, 2023.
The plan would exclude certain public utility property from the definition of qualified property.
Under the plan, the taxpayer’s election to accelerate AMT credits in lieu of bonus depreciation would be repealed because of the plan’s elimination of AMT.
Cash Method of Accounting 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 $25 million (indexed for inflation) and would be extended to certain farming entities for tax years beginning after 2017. The requirement that such businesses satisfy the requirement for all prior years would be repealed. 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 $15 million (indexed for
inflation) and would be extended to farming C corporations and farming partnership with C corporation partners. Such entities would be required to meet the threshold for the three prior taxable-year period.
Alternative Minimum Tax (AMT) After 2017, would repeal corporate AMT. In 2019, 2020, and 2021, if taxpayer would have AMT credit carryforward, taxpayer would be able to claim a refund of 50% of remaining credits (to extent credits exceed regular tax for year). For 2022, taxpayer would be able to claim a refund of all remaining credits. After 2017, would repeal corporate AMT.
The plan would allow the AMT credit to offset the taxpayer’s regular tax liability for any taxable year. For any taxable year beginning after 2017 and before 2022, the AMT credit would be refundable in an amount equal to 50% (100% in the case of taxable years beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability.
UNICAP The bill would increase the average gross receipts threshold from the UNICAP rules from $10 million to $25 million (indexed for inflation). Exemptions from the UNICAP rules which are not tied to a gross receipts test will be retained. The plan would increase the average gross receipts threshold from the UNICAP rules from $10 million to $15 million (indexed for inflation). Exemptions from the UNICAP rules which are not tied to a gross receipts test will be retained.
Accounting for Longterm Contracts The $10 million average gross receipts exception to the requirement to use the percentage-of-completion accounting method for long-term contracts to be completed within 2 years would be increased to $25 million (indexed for inflation) for contracts entered into after 2017, and businesses that meet such exception would be permitted to use the completed-contract method (or any other permissible exempt contract method). The $10 million average gross receipts exception to the requirement to use the percentage-of-completion accounting method for long-term contracts to be completed within 2 years would be increased to $15 million (indexed for inflation) for contracts entered into after 2017, and businesses that meet such exception would be permitted to use the completed-contract method (or any other permissible exempt contract method).
Limitation on Losses for Taxpayers Other than Corporations Not addressed. Would expand the excess farm business loss limitation to excess business losses of a taxpayer other than a C corporation. An excess business loss for the taxable year would be the excess of aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount ($500,000 for married taxpayer filing jointly;
$250,000 for married filing separately (adjusted for inflation). The limitation would apply at the partner or S corporation shareholder level.
Accounting for Longterm Contracts The $10 million average gross receipts exception to the requirement to use the percentage-of-completion accounting
method for long-term contracts to be completed within 2 years would be increased to $25 million (indexed for inflation) for contracts entered into after 2017, and businesses that meet such
exception would be permitted to use the completed-contract method (or any other permissible exempt contract method).
The $10 million average gross receipts exception to the requirement to use the percentage-of-completion accounting method for long-term contracts to be completed within 2 years would be increased to $15 million (indexed for inflation) for contracts entered into after 2017, and businesses that meet such exception would be permitted to use the completed-contract method (or any other permissible exempt contract method).
Contributions to Capital Beginning with date of enactment, contributions to capital of a corporation would be included in corporation’s gross income unless exchanged for stock. Contributions in excess of fair market value of stock issued would be included in gross income. Basis in property contributed to capital would be greater of either basis of transferor increased by gain recognized, or amount included in gross income. Not addressed.
Depreciation Deductions for Nonresidential Real and Residential Rental Property Not addressed. The plan would shorten the recovery period for nonresidential real and residential rental property to 25 years.
Additionally, the plan would eliminate the separate definitions of qualified leasehold property, qualified restaurant, and qualified retail improvement property, and a 20-year ADS recovery period for such property.
Interest Expense Deduction Effective for tax years beginning after 2017, the bill would limit the deduction for net interest expenses incurred by a business in excess of 30 percent of the business’s adjusted taxable income. The plan would limit the deduction for net interest expense to 30 percent of adjusted taxable income, and the limit would be applied at the taxpayer level (for affiliated corporations filing a consolidate return it
would apply at the consolidate tax return filing level). Any interest not allowed as a deduction may be carried forward indefinitely.
Section 179
Expensing
Effective for tax years 2018 through 2022, the bill would increase the business expensing limitation to $5 million and the phase out amount to $20 million. The new limitations would be adjusted for inflation. Effective beginning after Nov. 2, 2017, section 179 property would include qualified energy efficient heating and air-conditioning property. The plan would increase the amount that a taxpayer may expense under section 179 to $1,000,000. The plan would also increase the phase-out threshold to $2,500,000. These amounts would be indexed for inflation for tax years beginning in 2018.
The plan would expand the definition of section 179 property to include certain depreciable tangible personal property (property used to furnish lodging).
The plan would also expand the definition of qualified real property for improvements made to nonresidential real property. The types of improvements falling under that definition include: roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems.
Small Business Exception from Limitation on Deduction of Business Interest Under the bill, businesses with average annual gross receipts of $25 million or less would be exempt from the interest limitation rules (described in section 3301 of the bill). This provision would be effective for tax years beginning after Dec. 31, 2017. Under the plan, businesses that satisfy the $15 million gross receipts test would be exempt from the interest limitation rules (described in JCT. III.C.1.). This provision would be effective for tax years beginning after Dec. 31, 2017.
NOL Deduction The bill would allow a taxpayer to deduct an NOL carryover or carryback of up to 90 percent of the taxpayer’s taxable income. Additionally, the bill would generally repeal all carrybacks but for a special one-year carryback for small businesses and farms in the event of certain casualty and disaster losses arising in tax years beginning after 2017. Under the bill, any net operating loss, specified liability loss, excess interest loss, or eligible loss, carryback would be permitted in a taxable year beginning in 2017, unless the NOL is attributable to the increased expensing allowed under section 3101 of the bill. The bill would also allow NOLs arising in tax years beginning after 2017 that are carried forward to be increased by an interest factor. Also, under the bill, NOL carryforwards could be carried forward indefinitely, rather than 20 years as is the case currently. The plan would limit the NOL deduction to 90 percent of taxable income and provide that amounts carried to other years be adjusted to account for the limitation.
The plan would further provide that amounts may be carried forward indefinitely.

MODIFIED 11/14: Would limit the NOL deduction to 80% of taxable income in tax years beginning after Dec. 31, 2023. Would be repealed effective for tax years bginning after Dec. 31, 2025, if Oct. 1, 2017-Sept. 30, 2026 revenue targets are met.

MODIFIED 11/16: Would change the effective date to tax years beginning after Dec. 31, 2022.

Like-Kind Exchanges of Real Property The bill would limit deferral of gain on likekind exchanges after 2017 to real property. The plan would limit the nonrecognition of gain in the case of like-kind exchanges to real property that is not held primarily for sale. This portion of the plan would generally apply to exchanges completed after Dec. 31, 2017. However, an exception is provided for any exchange if either the property being exchanged or received is exchanged or received on or before Dec. 31, 2017.
Deductions for Income Attributable to Domestic Production Activities Effective for tax years beginning after 2017, the bill would repeal the deduction allowed for domestic production activities. Effective for taxable years beginning after Dec. 31, 2018, the plan would repeal the deduction allowed for domestic production activities.
Entertainment, etc. Expenses The bill would disallow deductions for entertainment, amusement or recreation activities under all circumstances. In
addition, no deduction would be allowed for transportation fringe benefits, benefits in the form of on-premises gyms and other athletic facilities, or for personal amenities provided to an employee that are not directly related to the employer’s trade or business, except to the extent that the
benefit is treated as taxable compensation to the employee. The bill would also disallow deductions for reimbursed entertainment expenses paid as part of a reimbursement arrangement involving a tax-indifferent party. This provision would be effective for amounts paid or incurred after 2017.
No deduction allowed generally for entertainment, amusement, or recreation; membership dues for a club organized for business, pleasure, recreation, or other social purposes; or a facility used in connection with
any of the above. Would repeal the exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business (and the related rule applying a 50% limit).
Deduction for 50% of food and beverage expenses associated with operating a trade or business generally would be retained.
Would expand 50% limit to include employer expenses associated with providing food and beverages to employees through an eating facility meeting de minimis fringe requirements.
Deduction disallowed for expenses associated with providing any qualified transportation fringe to employees, and except for ensuring employee safety of employees, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment. Applicable to amounts paid or incurred after Dec. 31, 2017.

MODIFIED 11/14: Would disallow employer deductions for expenses associated with meals provided for the employer’s convenience on, or near, the employer’s business premises through an employer-operated facility that meets certain requirements. Would be repealed if Oct. 1, 2017 – Sept. 20, 2026 revenue targets are met.

MODIFIED 11/16: Would change the effective date to tax years beginning after Dec. 31, 2025.

Self-Created Property not Treated as a Capital Asset The bill would treat gain or loss from the disposition of a self-created patent, invention, model or design, or secret formula or process as ordinary in character. The bill would also repeal the election to treat musical composition and copyright in musical works as a capital asset. This provision would be effective for disposition of such property after 2017. Not addressed.
Sale or Exchange of Patents Effective for dispositions after 2017, the bill would repeal the special rule treating the transfer of a patent prior to its commercial exploitation as long-term capital gain. Not addressed.
Amortization of Research and Experimental Expenditures The bill would provide that research or experimental expenditures, including software development expenditures, must
be capitalized and amortized over a 5-year period (15 years if expenditures are attributable to foreign research). Land acquisition and improvement costs and mine exploration costs would not be subject to this rule. This rule would apply to research or experimental expenditures paid or incurred during taxable years beginning after Dec. 31, 2022.
MODIFIED 11/14: Research or experimental expenditures, including software development expenditures, would have to be capitalized and amortized ratably over a five-year period (15 years if attributable to research conducted outside of the United States). Land acquisition and improvement costs, and mine (including oil and gas) exploration costs, would not be subject to this rule. Upon retirement, abandonment, or disposition of property, any remaining basis would continue to be amortized over the remaining amortization period. Would be repealed effective for tax years beginning after Dec. 31, 2025, if Oct. 1,
2017-Sept. 30, 2026 revenue targets are met. Would apply on a cutoff basis to expenditures paid or incurred in tax years beginning after Dec. 31, 2025.
Research and Development Credit The House Ways and Means Committee talking points explicitly preserve the research and development credit. Would preserve the research and development credit.
Unused Business Credits The bill would repeal the deduction for unused business credits that may currently be carried back one year and forward 20 years. Effective for taxable years beginning after Dec. 31, 2017, the plan would repeal the deduction for certain unused business credits.
Private Activity Bond Reforms The proposal would repeal tax-exempt status for qualified private activity bonds and terminate the qualified bond classifications. Not addressed.
Worker Classification, Withholding and Reporting Not addressed. Would provide a safe harbor if: (1) the service provider is not treated as an employee, (2) the service recipient is not treated as an employer, (3) a payor is not treated as an employer, and (4) the compensation paid or received for the service is not treated as paid or received with respect to employment. Would amend the direct seller rules under §3508 to include a person engaged in the trade or business of selling, or soliciting the sale of, promotional products from other than a permanent retail establishment. A service provider would be any qualified person who performs service for another person, and a qualified person would be any natural person or any entity if any of the services performed for another person are performed by one or more natural persons who directly own interests in the entity.
Services would have to be pursuant to a written contract, the term of which would not exceed 2 years, subject to renewal.
A withholding requirement would apply. The amount required to be withheld would be 5% of the compensation and only on compensation up to $20,000 paid pursuant to the contract. Would increase the reporting threshold for two categories of reportable payments from aggregate payments of $600 or more to $1000 or more. Applicable to payments made after Dec. 31, 2018.

MODIFIED 1/14: Struck provision.

 


Pass-Through Entities

Topic House Bill (H.R. 1) Senate Plan
Pass-Through Tax Treatment After 2017, 25% maximum tax rate on portion of pass-through entity net income distributions treated as business income (remaining portion of distributions treated as wage income subject to individual income tax rates). Owners or shareholders receiving distributions from active business activities would be able to elect to: (1) treat 30% as business income and 70% as wage income, or (2) determine ratio of business income to wage income based on capital investment. Owners or shareholders receiving distributions from passive business activities would be able to treat 100% as business income. Certain personal service businesses (e.g., businesses involving the performance of services in the fields of law, accounting, consulting, engineering, financial services, or performing arts) would not be eligible for the pass-through rate. Transition rules would apply. Deduction for pass-through entities in lieu of changing rates.
After 2017, would generally allow an individual taxpayer to deduct 17.4% of domestic qualified business income from a partnership, S corporation, or sole proprietorship. Qualified business income
would not include income from specified service trades or businesses, i.e., those involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees, except in the case of a taxpayer whose taxable income does not exceed a threshold amount (subject to phaseout). Qualified business income would not include any reasonable compensation paid by an S corporation, any amount allocated or distributed by a partnership to a partner who is acting other than in his or her capacity as a partner for services, or any amount that is a guaranteed payment for services actually rendered to or on behalf of a partnership. The deduction would be limited to 50% of W-2 wages of a taxpayer who has qualified business income from a partnership or S corporation. While qualified business income or loss would not include certain investment related income, gain, deductions, or loss, dividends from certain cooperatives or a real estate investment trust (other than any portion that is a capital gain dividend) would be included.
If the amount of qualified business income is less than zero for a tax year, i.e., is a loss, the amount of the loss would be carried over to the next tax year.
MODIFIED 11/14: The deduction would be limited to 50% of W-2 wages of a taxpayer who has qualified business income from a partnership or S corporation, except in the case of a taxpayer whose taxable income does not exceed a threshold amount (subject to phaseout). The deduction shall expire after Dec. 31, 2025.
Reduced Rate for Owners of Small Pass-Throughs The bill would provide a 9% tax rate, in lieu of the ordinary 12%, for the first $75,000 ($37,500 for unmarried individuals, $56,250 for heads of household) in net business taxable income of an active owner or
shareholder earning less than $150,000 ($75,000 for unmarried individuals, $112,500 for heads of household) in taxable income through a pass-through business. As taxable income exceeds $150,000, the benefit of the 9% rate relative to the 12-percent rate would be reduced, and it would be fully phased out at $225,000. Businesses of all types would be eligible for the preferential 9% rate, and such
rate would apply to all business income up to the $75,000 level. The 9% rate would be phased in, such that the rate for 2018 and 2019 would be 11%, the rate for 2020 and 2021 would be 10%.
Qualified business income would not include any reasonable compensation paid by an S corporation, any amount allocated or distributed by a partnership to a partner who is acting other than in his or her capacity as a partner for services, or any amount that is a guaranteed payment for services actually rendered to or on behalf of a partnership.
The deduction would be limited to 50% of W-2 wages of a taxpayer who has qualified business income from a partnership or S corporation.
While qualified business income or loss would not include certain investment-related income, gain, deductions, or loss, dividends from certain cooperatives or a real estate investment trust (other than any portion that is a capital gain dividend) would be included.
If the amount of qualified business income is less than zero for a taxable year, i.e., is a loss, the amount of the loss would be carried over to the next taxable year.
Contributions to Capital Beginning with date of enactment, contributions to capital of partnership would be included in partnership’s gross income
unless exchanged for interest in partnership. Contributions in excess of fair market value of interest received would be included in gross income.
Not addressed.
Basis Limitation on Partner Losses Not addressed. After 2017, the basis limitation on the deductibility of partner losses would apply to a partner’s distributive share of charitable contributions and foreign taxes, which are exempted from such limitation under the current regulations.

MODIFIED 11/16: Clarifies that the basis limitation on partner losses does not apply to the excess of fair market value over adjusted basis on charitable contributions of appreciated property.

Technical Termination of Partnership After 2017, technical termination rule would be repealed. A partnership would be treated as continuing even if more than 50% of the total capital and profit interest of partnership were sold or exchanged, and new elections would not be required or permitted. Not addressed.

 


Estates, Gifts & Trusts

Topic House Bill (H.R. 1) Senate Plan
Estate and Gift Taxes The bill would increase the federal estate and gift tax unified credit basic exclusion amount to $10,000,000 (with inflation adjustments), effective for decedents dying and gifts made after 2017. The bill would repeal the federal estate tax, effective for decedents dying after 2024 (while retaining the provision allowing a “stepped-up” income tax basis at death). The bill would lower the federal gift tax rate from 40% to 35%, effective for gifts made after 2024. The plan would increase the federal estate and gift tax unified credit basic exclusion amount to $10,000,000 (with
inflation adjustments from 2011), effective for decedents dying and gifts made after 2017.
The plan does not provide for a repeal of the estate tax at any point in the future.
Generation-Skipping Transfer Tax The bill would increase the federal GST exemption amount to $10,000,000 (with inflation adjustments), effective for generation-skipping transfers made after 2017. The bill would repeal the federal generation-skipping transfer tax, effective for generation-skipping transfers made after 2024. The plan would increase the federal GST exemption amount to $10,000,000 (with inflation adjustments), effective for
generation-skipping transfers made after 2017.
The plan does not provide for a repeal of the generation-skipping transfer tax at any point in the future.

 


International

Topic House Bill (H.R. 1) Senate Plan
100% Deduction for Foreign-Source Portion of Dividends & Repatriation 100% deduction for foreign-source portion of dividends received from “specified 10-percent owned foreign corporations” by U.S. shareholders, subject to a six-month holding period. No foreign tax credit permitted for foreign taxes paid or accrued with respect to a qualifying dividend.
Accumulated foreign earnings held in cash or cash equivalents and in illiquid assets deemed repatriated and taxed at 14% and 7% respectively. Taxpayer may elect to pay resulting liability over 8-year period in equal annual installments of 12.5% of the total tax liability due.
100% deduction for foreign-source portion of dividends received from “specified 10-percent owned foreign corporations” by U.S. shareholders, subject to a one-year holding period. No foreign tax credit permitted for foreign taxes paid or accrued with respect to a qualifying dividend. Deduction unavailable for “hybrid dividends.”
Accumulated foreign earnings held in cash or cash equivalents and in illiquid assets deemed repatriated and taxed at 10% and 5% respectively. Taxpayer may elect to pay resulting liability over 8-year period. Limitations period for assessment of tax on such mandatory inclusions extended to six
years. Recapture rule imposing 35% tax rate on mandatory inclusions of a U.S. shareholder that becomes an expatriated entity with 10 years of bill’s enactment.
Foreign Tax Credit Repeal of indirect foreign tax credit under §902.
No foreign tax credit or deduction permitted for taxes paid or accrued with respect to exempt dividends.
Income from sale of inventory sourced based solely on basis of production activities.
Repeal of indirect foreign tax credit under §902. Determination of foreign tax credit
§960 on a current-year basis.
Addition of separate foreign tax credit limitation basket for foreign branch income.
Acceleration of effective date of worldwide interest allocation election by three years.
Income from sale of inventory sourced based solely on basis of production activities.
Subpart F Repeal of current taxation of previously excluded qualified investments under §955.
Repeal of foreign base company oil related income as subpart F income under §954.
Inflation adjustment of de minimis exception threshold for foreign base company income.
CFC look-through exception made permanent.
Stock attribution rules for determining CFC status modified to treat U.S. corporation as constructively owning stock held by its foreign shareholder.
Elimination of 30-day rule in §951(a)(1).
Expand definition of U.S. shareholder.
Provide an exception to §956 for domestic corporations that are U.S. shareholders in a CFC either directly or through a domestic partnership.
Repeal of current taxation of previously excluded qualified investments under §955.
Repeal of foreign base company oil related income as subpart F income under §954.
Inflation adjustment of de minimis exception threshold for foreign base company income.
CFC look-through exception made permanent.
Stock attribution rules for determining CFC status modified to treat U.S. corporation as constructively owning stock held by its foreign shareholder.
Elimination of 30-day rule in §951(a)(1).
Base Erosion U.S. shareholders of CFCs subject to current U.S. taxation on 50% of “foreign high return amounts.”
Deductible net interest expense of a U.S. corporation that is a member of an “international financial reporting group” limited based on U.S. corporation’s share of group’s EBITDA.
Excise tax of 20% imposed on certain payments made by a U.S. corporation to a related foreign corporation, unless U.S. corporation elects to treat the payments as effectively connected income. Payments (other than interest) that are deductible, includible in costs of goods sold, or includible in the basis of a depreciable or amortizable asset subject to the 20% excise tax. A credit is permitted for 80% of foreign taxes paid or accrued.
U.S. shareholders of CFCs subject to current U.S. taxation on “global intangible low-taxed income” (GILTI) with a deduction for foreign-derived intangible income. Basis adjustment rules for transfers of intangible property from CFCs to U.S. shareholders.
Deductible net interest expense of a U.S. corporation that is a member of a “worldwide affiliated group” reduced based on the U.S. corporation’s net interest expense and the group’s “debt-to-equity differential percentage.”
Revised definition of intangible property for purposes of §367(d) and §482. Clarification of Commissioner’s authority to specify method used with determine value of intangible property.
Denial of deduction for certain related-party amounts paid or accrued in hybrid transactions or with hybrid entities.
Repeal of domestic international sales corporation (DISC) provisions.
Dividends received by an individual shareholder of a surrogate foreign corporation not eligible for reduced rate on dividends in §1(h).
Tax equal to “base erosion minimum tax amount” would be imposed on “base erosion payments” paid or accrued by a taxpayer to a foreign related person. Base erosion minimum tax amount would be the excess of 10% of the modified taxable income of the taxpayer for the taxable year, liability (defined in §26(b)) of the taxpayer for the taxable year reduced by excess of credits allowed under Chapter 1 over general business credits for the taxable year allocable to the research credit.

MODIFIED 11/14: 50% GILTI deduction reduced to 37.5% and foreign-derived intangible income deduction reduced to 21.875% for taxable years after 2025. foreign-derived intangible income deduction reduced to 21.875% after 2025) for intangible income. Rate applicable to base erosion minimum tax amount increased to 12.5% of the modified taxable income of the taxpayer for the taxable year over an amount equal to the regular tax liability (defined in §26(b)) of the taxpayer for the taxable year for taxable years beginning after December 31, 2025. Exception to base erosion payment definition for an amount paid or incurred for services if the services meet the requirements for the services cost method under §482 and the amount is the total services cost with no markup.

 


Tax-Exempt Organizations

Topic House Bill (H.R. 1) Senate Plan
Unrelated Business Taxable Income The bill would increase unrelated business taxable income by the amount of certain fringe benefit expenses for which a deduction is disallowed, effective for amounts paid or incurred after 2017. The bill would not address the inclusion of certain fringe benefit expenses in unrelated business taxable income.
The bill would require that income derived from the licensing of an organization’s name or logo be treated as derived from an unrelated trade or business regularly carried on and included in the
organization’s unrelated business taxable income notwithstanding provisions that otherwise exclude passive income from unrelated business taxable income.
The bill would also require that organizations that carry on more than one unrelated trade or business separately calculate unrelated business taxable income for each trade or business, effectively prohibiting using deductions relating to one trade or business to offset income from a separate trade or business.
The changes would apply to tax years beginning after 2017.
Excise Tax on Tax Exempt Organization Executive Compensation The bill would impose a 20% excise tax on compensation in excess of $1 million paid to an applicable tax-exempt organization’s five highest-paid employees for the tax year (or any person who was such an employee in any prior tax year beginning after 2016). The bill would also apply the 20% excise tax to any parachute payment exceeding the portion of the base amount (defined as the average annual compensation of the employee for the five tax years prior to the employee’s separation from employment) that is allocated to the payment. The tax on excess parachute payments applies to all employees regardless of whether they were covered employees.
The changes would apply to tax years beginning after 2017.
Same as H.R. 1 as passed by the House Ways & Means Committee.
501(c)(3)
Organizations Permitted to Make Statements Relating to Political Campaign in Ordinary Course of Activities
The bill would provide that 501(c)(3) organizations could make political statements in the ordinary course of activities in carrying out exempt purposes if the incremental expenses incurred are de minimis, effective for tax years beginning after December 31, 2018. The provision would sunset for tax years beginning after December 31, 2023. Not addressed.
Modifications to Intermediate Sanctions Excise Tax on Excess Benefit Transactions Not addressed. The plan would impose an excise tax on a tax-exempt organization involved in an excess benefit transaction equal to 10% of the excess benefit unless the organization establishes that minimum due diligence standards have been met, or satisfies the Secretary of the Treasury that other reasonable procedures were
followed.
The plan would eliminate the rebuttable presumption of reasonableness contained in regulations and convert the regulations’ procedures into the standard by which an organization can establish that minimum due diligence has been performed.
The plan would eliminate the special rule regarding organization managers being treated as not “knowingly” participating where the manager relied on professional advice and the regulatory rule that a manager does not act knowingly where the organization satisfies the rebuttable presumption. However, the bill would retain reliance on professional advice as a factor in determining whether the
manager “knowingly” participated in the transaction.
The plan would add investment advisors and athletic coaches to the definition of “disqualified persons” for purposes of the excess benefit transaction rules.
The plan would also extend the intermediate sanctions excess benefit transaction rules to organizations described in §501(c)(5) (labor and certain other organizations) and §501(c)(6) (business leagues and certain other organizations).
The changes would apply to tax years beginning after 2017.
Private Foundation Excise Tax on Investment Income The bill would simplify the private foundation excise tax on investment income and would reduce the rate from 2% to 1.4%, effective for tax years beginning after 2017. Not addressed.
Private Foundation Excise Tax on Failure to Distribute Income For purposes of the private foundation excise tax on failure to distribute income, the bill would exclude organizations operating art museums from the definition of operating foundations, unless the museum is open for at least 1,000 hours during the tax year, effective for tax years beginning after 2017. Not addressed.
Exception From Excess Business Holding Tax for Independently operated Philanthropic Business Holdings The bill would exempt certain private foundations (PFs) from the 10% excise tax for holding a 20% interest in a for-profit business, as well as the 200% excise tax for PFs that do not divest the holding by the close of the subsequent tax year. To qualify for the exception, the PF would have to satisfy the following four conditions: (i) the PF must own 100% of the for-profit business’ voting stock, (ii) the PF must not have acquired the forprofit business by a means other than purchasing the business, (iii) the for-profit business must distribute all of its net operating income for any given tax year to the
PF within 120 days of the close of the tax year, and (iv) the for-profit business’ directors and shareholders cannot be substantial contributors nor make up a majority of the PF’s board of directors. The changes would apply for tax years beginning after 2017.
MODIFIED 11/14: Same as H.R. 1.
Additional Reporting Requirements for Donor Advised Fund Sponsoring Organizations The bill would require donor advised funds to annually disclose (i) the average amount of grants made from their donor advised funds, and (2) their policies on inactive donor advised funds for frequency and minimum
level of distributions, effective for returns filed for tax years beginning after 2017.
Not addressed.

Source: Bloomberg Tax, “Roadmap to House and Senate Tax Reform Plans”

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