Senate Republican Tax Reform Bill Released
On Thursday, November 9, the House Ways and Means Committee voted to move ahead with a modified version of their tax plan as the Senate released their version of the "Tax Cuts and Jobs Act." The Senate version is scheduled for markup by the Senate Committee on Finance this Monday, November 13th, and the full House plans to vote on the bill next week.
While both parties continue to advance their respective tax bills, some key differences remain. Below is a summary of some of the major tax law changes contained in the respective bills.
Changes Impacting Individual Taxpayers
Tax Brackets and Rates
Other Individual Provisions
- Personal exemptions are repealed under both versions of the bill
- Child tax credit increased from $1,000 to $1,650 (Senate) or $1,600 (House). In the House version, the phaseout begins at $230,000 and in the Senate version the phaseout begins at $1 million (beginning in 2018).
- Deduction for state and local income taxes is repealed in both versions of the bill
- Deduction for state and local property taxes (other than trade or business property taxes) is limited to $10,000 (House) and repealed in Senate version
- Mortgage interest deduction limited to mortgages of $500,000 (House) and retained at $1,000,000 in Senate
- Medical expense deduction is retained in the Senate version and repealed in the House version
- The alternative minimum tax is eliminated in both versions of the bill
Business Income of Individuals
The House and Senate versions took different approaches on the taxation of pass-through income.
The House created a 25% tax rate that applies to all the business income of passive owners and to the portion of the pass-through income considered related to capital for active owners. The remaining income is subject to the individual tax rates. The capital percentage is generally 30% but can be increased for certain industries. Specified service businesses are not eligible for the 25% rate.
In the original release of the bill, all income other than the portion eligible for the 25% rate was considered labor and subject to self-employment taxes. Prior to the committee vote, a significant change was made that retained the current rules for treatment of self-employment earnings.
The Senate created a deduction equal to 17.4% of qualified business income which is generally defined as domestic business income other than investments and the portion of the business considered compensation. The 17.4% deduction is limited to 50% of the taxpayer's W-2 wages and does not apply to specified services businesses above certain income levels.
Estate Tax Changes
- Both the House and Senate double the gift and estate tax exclusion.
- The House version had the estate tax repealed for years beginning after December 31, 2023, but the Senate version retained the provision.
- The gift tax rate was reduced to 35% beginning after December 31, 2023, in the House version and no change was made in the Senate version.
Changes Impacting Businesses Taxpayers
- C corporation tax rate is reduced to 20% in both bills. The House version would take place beginning in 2018 but the Senate version would be delayed until 2019.
- The House had a 25% rate for personal service corporations but the Senate version does not have a special rate.
- IRC 179 expensing increases to $1,000,000 with the phase-out beginning at $2,500,000 in the Senate version and $5,000,000 with the phase-out beginning at $20,000,000 in the House version. The increased amounts under the House version only went through 2022.
- Both the House and Senate bill have increased expensing of 100% of the cost of qualified property placed in service after September 27, 2017, and before January 1, 2023.
- The Senate version has a new limitation on the taxpayer's ability to deduct losses from pass-through entities. Taxpayers can't deduct losses in excess of $500,000 for married taxpayers and $250,000 for other taxpayers. Any loss disallowed is treated as an NOL in future years.
- Both the House and Senate version limit the deductibility of interest expense to 30% of adjusted taxable income. Both versions create an exception for taxpayers with average gross receipts under a threshold amount ($15 million in Senate version and $25 million in House version)
- Both provisions repeal the domestic production deduction (House version applies to years beginning after December 31, 2017, and Senate version applies to years beginning after December 31, 2018)
- Both versions allow smaller businesses increased ability to use the cash method of accounting, percentage of completion method, and increase the exemption for the uniform capitalization rules (UNICAP)
- The Senate version modifies the rules for deferred compensation and generally requires amounts to be recognized in income when there is no longer a substantial risk of forfeiture. There are rules to transition for deferred amounts currently in place. The House version had a similar rule in the original release but it was since removed from the proposal.
- The House version requires research and experimentation expenses to be capitalized and amortized over a 5 year period.
- There are a number of international tax reform provisions in the Senate version. One key difference from the House version was the repeal of the IC-DISC.
Congress continues to move forward on tax reform. The changes proposed would significantly impact our current tax system so individuals and business owners need to consider the potential impact on their business and decisions they make between now and the end of the year. We will continue to monitor what is happening and provide updates as things move forward.