Tax Reform Legislation Update

 

Draft tax reform legislation was released by the House Ways of Means Committee on November 2, 2017.  The Senate Finance Committee is working on its own version of tax reform legislation which is expected to be released in the next few weeks.  Before legislation could be sent to the president, both the House and the Senate would need to pass identical versions of the legislation.  At this time, it is unclear how much of the reform legislation of the Senate will differ from the released House bill.

The House legislation mirrors many of the provisions listed in the Republicans’ tax reform framework and provides new details.  Below is a summary of some of the notable provisions contained in the House legislation:

 

Individuals

• Imposes four tax rates on individuals: 12%, 25%, 35%, and 39.6% effective tax year 2018.  The maximum rate of 39.6% applies to single taxpayers with $500,000 or more taxable income and $1,000,000 or more taxable income for married taxpayers filing jointly.

• The standard deduction increases from $6,350 to $12,200 for single taxpayers and from $12,700 to $24,400 for married taxpayers filing jointly effective 2018.

• Most of personal deductions would be repealed, including the medical expense, alimony deduction, the casualty loss deduction, and the deduction for state and local income or sales taxes. Deduction for state and local real property taxes would be limited to $10,000 effective 2018.

• Deduction for mortgage interest attributable to acquisition indebtedness (acquired after November 2, 2017) in excess of $500,000 would be disallowed. However, the mortgage interest deduction on existing mortgages would remain the same - $1.1 million acquisition and home equity indebtedness.

 

Alternative Minimum Tax (“AMT”)

• The AMT would be repealed effective 2018.

 

Estate & Gift Tax

• The estate tax exclusion amount would be increased to $11 million from $5.5 million. The estate tax would be repealed after 2023.

 

S-corps and Partnerships (“Passthrough Entity”)

• Passive activity income from a passthrough entity would be taxed at the 25% tax rate. Generally, non-passvie activity income from a passthrough entity would be taxed at ordinary income rate.

 

Business

• The bill introduces a flat 20% tax rate.
• The bill introduces 100% expensing of qualifying property (excluding no real property) acquired and placed in service after September 27, 2017 and before January 1, 2023.
• Net operating losses (“NOLs”) deduction will be limited to 90% of taxable income. NOLs will have indefinite carryforward period with no carryback provision.
• Repeal Section 163(j) limitation for interest paid to related party, but introduces a deduction limitation of 30% of adjusted taxable income for businesses with average gross receipts in excess of $25 million.
• Repeal Section 199 domestic activity deduction.
• Disallow deductions for entertainment, amusement, or recreation activities.
• The bill limits tax deferral provision under Section 1031 to real estate.
• Most business and energy credits would be repealed except for research and development (“R&D”) credits.
• The performance-based compensation exception for Section 162(m) 1 million officer compensation limitation would be repealed. And covered employees subject to Section 162(m) will increase.

 

International

• The bill would introduce a dividend exemption for foreign source dividend received by 10% U.S. corporate owners.
• Repeal Section 902 indirect foreign tax credit provision.
• Repeal Section 956 which subjects immediate taxation on a controlled foreign corporation’s undistributed earnings that are reinvested in U.S. property.
• Unremitted foreign earnings as of December 31, 2017 would be immediately taxed at rate of 12% (for earnings attributable to cash or cash equivalents) or 5% (for the remainder).

 

As mentioned above, the House tax reform legislation faces a number of significant legislative procedures and hurdles prior to being signed into law.  We will continually monitor and provide updates on any developments.