In the early hours of Saturday (December 2, 2017) morning, the U.S. Senate passed the Tax Reform bill. While the overall framework of the Senate bill is similar to the House bill passed on November 16, 2017, there are certain differences. It is anticipated that the Senate and the House will have a Joint Conference Committee to reconcile their respective bills and send a final bill to the President by December 22, 2017. This table highlights some of the proposed changes*:
*Other changes as well as the actual Senate Bill can be found here.
| Income Tax Rates | ||||
| Rule | Present Law | House | Senate | GHJ Insights |
| Corporate Rates |
15%, 25%, 34%, and 35% |
Beginning in 2018 – 20% flat rate |
Beginning in 2019 – 20% flat rate |
Corporate tax rate is reduced to 20% in both House and Senate bill. For 2017 year-end tax planning, corporation should consider accelerating deductions in 2017 and deferring income to future years. |
| Corporate Rates – personal service corporation | 35% flat rate for personal service corporation | Beginning in 2018 – 25% flat rate for personal service corporations | No special tax rate for personal service corporations | It is not certain that 25% rate will make it to final bill, but 2017 year-end planning strategy, personal service corporation should consider accelerating deductions in 2017 and deferring income to 2018. |
| Individual – Married Filing Jointly (Surviving Spouse) | 2017 Tax Year
10% – under $18,650 15% – under $75,900 25% – under $153,100 28% – under $233,350 33% – under $416,700 35% – under $470,700 39.6% – over $470,700 |
12% – under $90,000
25% – under $260,000 35% – under $1,000,000 39.6% – over $1,000,000 |
10% – under $19,050
12% – under $77,400 22% – under $140,000 24% – under $320,000 32% – under $400,000 35% – under $1,000,000 38.5% – over $1,000,000 Rates adjusted after 2025 |
4 tax bracket for House bill and 7 tax bracket for Senate bill; Senate bill tax rates will sunset after 2025 and it is a temporary rate reduction. For the same amount of taxable income, taxpayer’s overall tax liability will be reduced under both House bill and Senate bill. Senate bill provides deeper tax savings for high income earners as Senate bill top rate is 1.1% lower than House bill top rate (House top rate of 39.6% vs. Senate top rate of 38.5% for income above $1 million). |
| Individual – Single* | 2017 Tax Year
10% – under $9,325 15% – under $37,950 25% – under $91,900 28% – under $191,650 33% – under $416,700 35% – under $418,400 39.6% – over $418,400 |
12% – under $45,000
25% – under $130,000 35% – under $500,000 39.6% – over $500,000 |
10% – under $9,525
12% – under $38,700 22% – under $70,000 24% – under $160,000 32% – under $200,000 35% – under $500,000 38.5% – Over $500,000 Rates adjusted after 2025 |
4 tax brackets for House bill and 7 tax brackets for Senate bill; Senate bill will sunset after 2025 and it is a temporary rate reduction; Senate rates are more beneficial for incomes under $160,000. |
*for other rates, see the detailed documents
| Alternative Minimum Tax (AMT) | ||||
| Rule | Present Law | House | Senate | GHJ Insights |
| Corporate AMT | AMT imposed when minimum tax exceed regular income tax | Repeal corporate AMT after 2017, but allow prior year minimum tax credit. | No corporate AMT repeal | A key difference between House bill and Senate bill is one removes AMT and one retains AMT. |
| Individual AMT | AMT imposed when minimum tax exceeds regular income tax | Repeal individual AMT after 2017, but allow minimum tax credit to offset regular tax after December 31, 2018. | No individual AMT repeal but provide higher AMT exemption amounts for tax years beginning after 2017 and before 2026 | A key difference between House bill and Senate bill is that the Senate bill increases the exemption and AMTI phase out amounts but it does not significantly reduce AMT tax liabilities. Because of the proposed disallowance of state income/sales tax deduction and the limitation of property tax deduction to $10,000, it is not certain how much impact AMT will have for individual taxpayers going forward. |
| Individual Deduction and Exemptions | ||||
| Rule | Present Law | House | Senate | GHJ Insights |
| Standard Deduction | $12,700 (joint return)
$9,350 (head of Household) $6,350 (single filer) |
Increase standard deduction after 2017 to:
$24,400 (joint return) $18,300 (head of Household) $12,200 (single filer) |
Increase standard deduction after 2017 to:
$24,000 (joint return) $18,000 (head of Household) $12,000 (single filer) |
The enhanced standard deduction will allow more taxpayers to use standard deduction rather than itemized deduction. Taxpayer will not be subject to any taxes (zero tax rate) if taxpayer’s AGI is below enhanced deduction amount. |
| Personal Exemption | $4,050 per individual, but subject to phase-out | Repeal personal exemption deduction after 2017. | Repeals deduction for personal exemptions, the repeal sunsets after 2025 | Both House and Senate bill call for repeal of personal exemption. The difference is Senate bill is temporary and will sunset after 2025, but House bill is permanent. |
| Miscellaneous Itemized Deduction, Subject to 2% AGI | Miscellaneous itemized deductions allowed (such as investment management fees, tax preparation fees, employee expenses and etc.), subject to 2% of AGI. | Disallow a deduction for expenses related to the trade or business of performance services as an employee, except reimbursed employees included in employee’s income | Suspend all miscellaneous itemized deductions such as investment management fees, tax preparation fees, employee expenses, and etc. until tax years beginning after 1/1/2026. | Senate bill calls for suspension of all miscellaneous itemized deductions that are subject to the 2% floor under present law for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026 and House bill will disallow most miscellaneous itemized deductions. For 2017 year end planning, taxpayer may consider to prepay some of the expenses to take the deduction in 2017 if they are not subject to AGI phase out. |
| Mortgage interest Deduction | Mortgage interest deduction for $1 million of acquisition indebtedness plus $100,000 in home equity indebtedness | Decrease mortgage interest deduction to $500,000 for debt incurred after November 2, 2017, and only on the principal residence. | Retain the mortgage interest deduction for acquisition indebtedness of up to $1 million ($500,000 for married filing separately), but repealing mortgage interest deduction on home equity indebtedness after December 31, 2017. | House bill is significantly more limiting. |
| State and Local Tax Deduction | Income or Sales Tax Itemized deduction – Generally, no limitation subject to AMT | After 2017, elimination of itemized deduction for state and local income and sales tax. | Same as House | Both Senate bill and House bill call for elimination of the state and local income and sales tax deduction. It is a significant deduction item for taxpayers in high-tax states. |
| Property Tax Itemized deduction – Generally, no limitation subject to AMT | After 2017, deduction of up to $10,000 ($5,000 for married filing separately) of state and local real property tax. However, no deduction for personal property tax and foreign real property taxes. | Deduction of up to $10,000 | This is a Senate bill last-minute change and it retained the $10,000 property tax write-off—making the Senate bill more like the House version. Taxpayer should consider prepaying property tax bill by 12/31/2107 if taxpayer is not expecting to be subject to AMT. | |
| Business and Corporate | ||||
| Rule | Present Law | House | Senate | GHJ Insights |
| Interest Expense | Currently, a U.S. C corporation meeting certain requirements (e.g., debt-to-equity ratio of 1.5:1, debt issued to a related foreign or tax exempt lender, etc.) can generally deduct it net interest expense up to 50% of adjusted taxable income. The disallowed amount carries forward to following years. | Tax years beginning after 2017, the deduction for net interest expense would be limited to 30% of the business’s adjusted taxable income. This rule is not applicable for business with average gross receipt of $25 million or less. | Tax years beginning after 2017, the deduction for net interest expense would be limited to 30% of the business’s adjusted taxable income. This rule is not applicable for business with average gross receipt of $15 million or less. Disallowed interest could be carried forward indefinitely. There are certain exceptions to real property trades or business that use the ADS or farming businesses. | The House and Senate are broadening the scope of the current law to include C corporations, partnerships and S corporations. Also, the House and Senate bills limit net interest expense deduction to 30% of adjusted taxable income. In addition, there does not appear to be the debt-to-equity ratio requirement or related foreign or tax exempt lender requirement in order to be subject to this provision. Note there are some differences in defining adjusted taxable income by the House and Senate. This will be one of the issues they have resolve. |
| Bonus Depreciation | An additional 50% deduction can be claimed for certain new property placed in service in 2017 (40% for 2018 and 30% for 2019). | The first year additional deduction would be increased to 100% for qualified properties, not limited to new properties, placed in service after September 27, 2017 and before January 1, 2023 | The first year additional deduction would be increased to 100% for qualified properties placed in service after September 27, 2017 and before January 1, 2023; 80% in 2023; 60% in 2024; 40% in 2025; and 20% in 2026. Taxpayers can elect to take 50% in lieu of 100% first year deduction. The definition of qualified properties would include tangible personal properties plus certain film, TV, and live theatrical productions. | This gives businesses an opportunity to invest in capital equipment and deduct the entire amount in the first year rather than over several years. The House proposal also includes used assets as well as new, while the present law and the Senate proposal only include new assets. |
| Section 179 Expensing | A taxpayer can expense cost of properties in the year of placing in service up to $500,000. This amount should be subject to phase-out after $2 million of purchase in a given year. | Effective for tax years 2018 through 2022, Section 179 expensing would be increased to $5 million and the phase-out amount to $20 million. | After 2017, Section 179 expensing would be increased to $1 million and the phase-out amount to $2.5 million. | It might be beneficial to wait until January to make additional capital purchases if your business has already hit or exceeds the current thresholds effective for 2017. |
| Real Property Depreciation | Nonresidential real properties should be depreciated for 39 years; and residential rental properties for 27.5 years. | Not addressed | Nonresidential real and residential rental properties would be depreciated for 25 years; and improvement property for 10 years. | The change would mean businesses would be able to depreciate over a shorter life and have larger depreciation deductions each year. |
| Accounting Method | Corporations and partnerships with corporate partners should use accrual method of accounting with average gross receipt of over $5 million. | For tax years beginning after 2017, the average gross receipt threshold would be increased to $25 million. | The threshold would be increased to $15 million effective for tax years beginning after 2017. | Opportunity for larger businesses to use cash method that want to manage their cash flow. |
| Taxpayers with average gross receipt of less than $10 million should be permitted to account for inventory as material and supplies. | The average gross receipt would be increased to $25 million, regardless of industry for tax years beginning after 2017. | The threshold would be increased to $15 million. | Larger businesses would be able to expense inventory items rather than capitalize them. | |
| Taxpayers with average gross receipt of $10 million should consider Uniform Capitalization (UNICAP) rules. | The average gross receipt would be increased to $25 million, for tax years beginning after 2017. | The threshold would be increased to $15 million, effective for tax years beginning after 2017. | N/A | |
| Like-Kind Exchange | Allows deferral of gain from an exchange of like-kind property. | After 2017, it would limit gain deferral on like-kind exchange to only real property. | After 2017, it would limit the non-recognition of gain for like-kind exchange to only real property that is not held primarily for sale. | House and Senate have similar proposals that limit the type of property applicable. |
| Net Operating Loss (NOL) Deduction | NOL can be carried back 2 years and carried forward 20 years to offset taxable income | NOL carry back generally would be eliminated, for losses arising after 2017 NOL deduction would be limited to 90% of taxable income with indefinite carryforward. | Substantially same as House except the tax years beginning after 12/31/2022, the NOL deduction is limited to 80% with certain other exceptions. | The Senate proposes a limitation of 80% (rather than 90%) starting in 2023. |
| Domestic Production Deduction | Section 199 | The bill would repeal the deduction allowed for domestic production activities after 2017 | The bill would repeal the deduction allowed for domestic production activities after 2017, for corporations the repeal is after December 31, 2018. | N/A |
| Pass-through Entities | ||||
| Rule | Present Law | House | Senate | GHJ Insights |
| Shareholder Rate on Pass-through Entities Income | Pass-through entities income (partnership, LLC, S corporation) generally taxed at the owner’s rate. | After 2017, a portion of income received by pass-through entities owners would be subject to a maximum rate of 25% (70% wage income/30% business income) with major exceptions for owners receiving distributions from active business activities and personal businesses | After 2017, would allow a new deduction of the lesser of 23% of qualified business income (QBI) from a pass-through entity or 50% of the W-2 wages. | These two approaches can produce substantially different results for pass-through owners and Congress will need to reconcile the two approaches and work through certain aspects of both in writing the final bill. On its face it appears to be a substantial benefit for pass-through owners but in application this is not as clear. For example, under the House bill, pass-through owners who are actively involved in their business may only get to apply the lower 25% rate to 30% of earnings, while the other 70% is still subject to maximum tax rates. However, the House bill greatly benefits passive owners of pass-through entities, as 100% of their income would automatically qualify for the maximum 25% rate. Under the Senate bill, both active and passive owners alike would get a 23% deduction of pass-through income, (no deduction for service businesses) but the W-2 limitation could come into play to limit this benefit. Consider an owner of related pass-through that pays a majority of its wages through one entity, which reduces income for that entity to zero but leaves the others profitable. The profitable entities would not create a deduction for the owner, as it is limited to 50% of wages (in this case $0) while there would also be no benefit for the wage-paying entity if it has no current income. In its current form, planning and management of compensation payments, particularly in the context of related pass-through entities, will be important in order to maximize the benefit of the 23% deduction. The House bill does not impose this restriction, but planning regarding the level of owners’ participation may be needed, as passive owners would benefit more than active participants in terms of the lower tax rate. |
| Carried Interest | Carried Interest (subject to the Safe Harbor under Rev Rul 93-27) – one year hold period | After 2017, transfers of certain partnership interests held for less than three years would be treated as a short-term capital gain. | Substantially same as House | This provision increases the required holding period for certain partnership interests, particularly those received in connection with the performance of investment services, from more than one year to more than three years in order to be considered a long-term capital gain upon sale. This is targeted at limiting the “carried interest loophole” by requiring the holders of the carried interest to retain their interest for two additional years in order to receive the favorable long-term capital gain rate on their gain on a sale. |
| Pass-through Entities Loss Limitation | Active trade or business losses of pass-through entities can be deducted by owner | Not Addressed | Tax years beginning in 2017, pass-through entities active business loss deduction would be limited to $250,000 ($500,000 joint filers). The limitation would apply at the partner or S corporation shareholder level. | Traditionally, losses from a pass-through business in which the owner materially participates can be used to offset income from other sources. The Senate bill would limit the deduction of losses from active pass-through entities to $250,000 ($500,000 for joint filers) per year. Any active pass-through losses in excess of the limitation would be carried forward to future tax years. This is another significant difference in pass-through treatment between the House and Senate bills that will need to be reconciled. |
| Foreign Repatriation | ||||
| Rule | Present Law | House | Senate | GHJ Insights |
| Tax Regime | Worldwide tax regime | Move from worldwide tax regime to territorial tax regime and foreign tax credit is no longer applicable.
Applies to 10% U.S. corporate shareholders. |
Same as House proposal | Fundamental shift of taxing foreign profits; however, only applies to foreign subsidiaries with certain U.S. corporate shareholders. |
| Transition to Territorial / Repatriation Tax Rate | N/A | Deemed repatriation of all deferred foreign earnings and profits. Earnings that are cash or cash equivalents taxed at 14%; all other earnings at 7%. | Essentially same as House with slightly different rates at 14.5% for earnings that are cash or cash equivalents; all other earnings at 7.5%. | These rates have increased from previous proposals but still a significant reduction of tax than if repatriated under current law.
Significant revenue raising within both proposals. |
| Prevention of Inbound Base Erosion | N/A | Excise tax of 20% imposed on certain related party outbound payments made by U.S. corporation (foreign affiliate may elect to treat payments as ECI rather than subject to excise tax). | A minimum tax is applied to a U.S. corporation that makes certain related party outbound payments if 10% of such payments exceed the corporation’s regular tax. | House rules apply to companies with excess of $100 million in payments and Senate rules apply to companies with gross receipts in excess of $500 million. |
| Passive and Mobile Income | U.S. tax paid on pro rata share of Subpart F income. | A 10% minimum tax is imposed on U.S. shareholder’s “foreign high return income” regardless of repatriation and foreign tax credits would be limited to 80%. | A 10% minimum tax is imposed on U.S. shareholder’s “global intangible low-taxed income” and foreign tax credits would be limited to 80%. Further, a deduction may be allowed for U.S. corporation’s “foreign-derived intangible income”, subject to certain limitations. | Designed to prevent base erosion (reduction of U.S. tax) by holding IP offshore. |
| Estate Taxes | ||||
| Rule | Present Law | House | Senate | GHJ Insights |
| Estate Exemption | Current exclusion amount is $5.6 million. | The federal estate and gift tax unified credit basic exclusion amount is increased to $10 million (inflation adjusted) effective after 2017. The federal estate tax would be repealed for decedents dying after 2024 but still provides a step up in the decedent’s assets. | The federal estate and gift tax unified credit basic exclusion amount is increased to $11 million effective after 2017 and before 2026. It is silent on any repeal of the estate tax. | The ultimate fate of the estate tax represents a significant difference in the two bills. While both the House and Senate’s versions would double the exemption amount to $11 million per person, the Senate’s does so only temporarily, while the House eventually repeals the tax entirely. Even though the estate tax would be repealed, recipients of inherited property would still receive the property with its basis stepped up to fair market value. Therefore, under the House bill, appreciated property could be held until death and then sold by the beneficiaries without ever incurring either estate or capital gains tax. Under the Senate bill the property in excess of the exemption would remain subject to estate tax. This significant difference between the two bills must ultimately be reconciled, with a possible compromise being to repeal the tax but eliminate the basis step-up. |
Please contact your GHJ advisor with any questions or to discuss how the proposed tax changes may affect you or your business.
