On November 2, 2017 the House Ways and Means Committee Chairman Kevin Brady (R-TX) released a 429 page “Tax Cuts and Jobs Act” (HR 1), which proposes to lower business and individual tax rates, modernize US international tax rules and simplify the tax law with significant impacts on numerous sector of the economy. The Ways and Means Committee will begin consideration of the bill on November 6th. The legislation is proposed to be generally effective for tax years beginning after 2017. Certain provisions have separate effective dates with some effective after November 2, 2017.
Tax Reform for Businesses
- The current 35% top corporate rate would be reduced to 20% for years beginning after 2017.
- A 25% corporate rate would apply to certain personal service corporations in the fields of health, law, engineering, architecture, accounting, actuarial services or consulting services in which services are performed by employee-owners.
- A 25% percent rate is provided on pass-through income of businesses operating as sole proprietorships, partnerships, limited liability companies and S Corporations, with limitations on the amounts that qualify for the 25% rate.
- In 2018 the US worldwide tax system would be converted into a territorial system through a 100% dividend received deduction for certain qualified foreign source dividends received by US Corporations from the foreign subsidiaries.
- Businesses could immediately write off (expense) the cost of qualified property (not including structures) placed in service after September 27, 2017 and before January 1, 2023.
- Section 179 small business expensing would be increased to $5 million and the phase-out increased to $20 million effective for tax years beginning after 2017 and before 2023.
- Interest expense deductions would be capped at 30% of the business’s adjusted taxable income, effective for tax years beginning after 2017, this would not apply to certain regulated public utilities and real property trades or businesses.
- Repeal of business deductions for entertainment expenses and transportation fringe benefits.
- Research credit and low-income housing credit would be retained; while the New Markets Tax Credit, the Work Opportunity Tax Credit, and the Rehabilitation Tax Credit would be repealed.
- Modifications of certain rules for tax-exempt organizations, including changes to unrelated business income tax provisions and tax treatment of private foundations.
- The Section 199 domestic manufacturing deduction would be repealed.
- Net operating losses would be limited to 90% of taxable income, with changes to carry-back and carry-forward rules.
- Bill would allow like-kind exchanges only with respect to real property, effective for transfers after 2017.
- Alternative Minimum Tax (AMT) to be repealed for corporations.
- One-time transition tax, subject to foreign tax credit, on all previously untaxed earnings and profits of foreign subsidiaries of US corporations.
Tax Reform for Individuals
- The seven individual tax brackets will be replaced with four brackets set at 12%, 25%, 35% and 39.6%, effective after 2017. The limit for the 39.6% tax rate in 2018 would apply above $500,000 (single filers) or $1 million (joint filers) as opposed to $426,700 and $480,050.
- AMT to be repealed for individuals.
- Individual standard deduction would be increased to $12,200 (single), $18,300 (single with qualifying child) and $24,400 for joint filers. The personal exemption and additional standard deduction would be repealed.
- Existing home mortgages deductions would be preserved under current rules, while allowing a deduction on new mortgages up to $500,000 on principal residence for debt incurred after November 2, 2017, and interest on home equity indebtedness after that date would not be deductible.
- Phasing out the exclusion of the gain from the sale of a principal residence for taxpayers with adjusted gross income over $250,000/$500,000.
- Repealing deduction for state and local as well as sales taxes and deduction for medical expenses, deduction for state and local property taxes would remain but capped at $10,000.
- Charitable contribution deduction would continue with some modifications.
- Retains retirement savings accounts, including 401(k) plans and IRAs.
- Doubling the estate tax exemption from $5.6 million per person for tax years after 2017 and repealing the estate tax and generation-skipping transfer tax beginning in 2024.
House Speaker Paul Ryan has announced that the House of Representatives is expected to vote on the Ways and Means Committee-approved bill during the week of November 13th. It is possible that Senate Finance Committee Chairman Orrin Hatch could propose a Senate version of tax reform the week of November 6th. Full Senate complete action on tax reform legislation before Thanksgiving. President Trump is hopeful he can sign a tax reform bill before Christmas.
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ABOUT THE AUTHOR
Randy is a Principal and the Tax Director at Brown Schultz Sheridan & Fritz and is one of the key members of the Firm’s Tax Department. He is responsible for managing tax consulting and compliance services for his clients as well as overseeing the tax department.