House Ways and Means Committee Releases and Deliberates Major Tax Reform Bill
On November 2, 2017, House Ways and Means Committee Chairman Kevin Brady (R-Texas) presented a comprehensive tax reform bill entitled the Tax Cuts and Jobs Act. The bill was scheduled for consideration, or “mark-up,” by the Ways and Means Committee beginning November 6, 2017.
The Tax Cuts and Jobs Act bill contains widespread changes to the taxation of individuals, families, business entities, exempt organizations, and foreign income taxpayers. It consolidates individual tax brackets, significantly lowers the corporate tax rate, repeals the estate tax, and modifies and repeals many deductions and credits, among numerous changes.
Highlights of key individual, business, and international tax provisions contained in the bill are shown below.
- The corporate tax rate is reduced from 35% to 20%. There is a flat tax rate of 25% for personal service corporations.
- The alternative minimum tax (AMT) is repealed.
- A special 25% tax rate is proposed for certain business income distributed by a pass-through business entity. Specific rules would be included to prevent reclassification of wages to business income.
- A 100% expensing of certain qualified business assets would be allowed if purchased after September 27, 2017 and before January 1, 2023. The 100% expensing of qualified business assets would not apply to any property used in a real property trade or business.
- The ability to use the cash method of accounting is expanded for subchapter C corporations with gross receipts of $25 million or less (formerly $5 million or less). Additionally, these companies would be exempted from Uniform Capitalization (UNICAP) section 263A requirements and the need to account for inventories for tax purposes.
- Business interest deductions would be limited. Deductions exceeding 30% of business adjusted taxable income would be denied. Certain small entities would be exempt from this limitation and it would not apply to real property trades or businesses.
- Like-kind exchanges would be limited to real property.
- The research and development (R&D) and low-income housing tax credits would remain intact.
- The Section 179 expensing limitation would be increased from $500,000 to $5 million and the phase out threshold would be increased from $2 million to $20 million.
- NOL deductions would be restricted to 90% of current year taxable income.
- The Section 199 deduction for domestic production activities would be repealed.
- The partnership technical termination rule would be repealed.
- The U.S. corporate tax system would move away from the current worldwide deferral system to a “territorial” system.
- A “participation exemption” system would be employed in the U.S. for the taxation of foreign income (like many European countries). With this, 100% of the foreign-sourced portion of dividends received from 10% or more owned foreign corporations would be exempt from U.S. tax. No foreign tax credit would be allowed on any dividend qualifying for the participation exemption.
- In transitioning to this new system, the bill would deem a repatriation of previously deferred foreign earnings.
- A current U.S. tax would be imposed on deferred earnings and profits of foreign corporations owned by 10% or more U.S. shareholders. The rate would be 12% on earnings and profits (E&P) comprising cash or cash equivalents and 5% on the remaining E&P that is reinvested in a foreign corporation’s business (e.g., property, plants, equipment). Taxpayers may elect to pay the tax in equal installments over a period of up to eight years. Foreign tax credits would be available to partially offset the tax.
- If foreign E&P is taxed upon the transition to the participation exemption, the E&P may be repatriated tax-free to the U.S. but is subject to a possible foreign withholding tax.
- To address “base erosion,” a U.S. parent company with one or more foreign subsidiaries would be subject to the new 20% U.S. corporate tax rate on 50% of its “foreign high returns” (i.e., a 10% tax). High returns would be measured as the excess of the subsidiaries’ income over a routine return (7% plus the federal short-term rate) on the bases in tangible property, adjusted downward for interest expense.
- The deductible net interest expense of a U.S. corporation that is a member of an international financial reporting group would be limited.
- Excluding interest, payments made by a U.S. corporation to a related foreign corporation that are deductible, inclusive in costs of goods sold, or inclusive in the basis of a depreciable or amortizable asset, would be subject to a 20% excise tax. This excise tax would not apply if the related foreign corporation elects to treat the payments as income that is effectively connected with the conduct of a U.S. trade or business.
- Income tax brackets would be consolidated from seven to four (12%, 25%, 35%, and 39.6%).
- Personal tax exemptions would be eliminated.
- The standard deduction would be increased to $24,000 for married taxpayers filing jointly and $12,000 for single filers.
- Most itemized deductions would be repealed or eliminated:
- State and local taxes would be limited to $10,000 of real property tax
- Mortgage interest would be limited to first $500,000 of principal residence
- The following deductions would be repealed:
- state and local income or sales taxes
- personal casualty losses
- wagering losses
- tax preparation expenses
- medical expenses
- alimony payments
- moving expenses
- contributions to medical savings accounts
- expenses attributable to the trade or business of being an employee
- The pre-tax contribution levels for retirement accounts such as a tax-deferred 401(k) account would not change.
- The individual alternative minimum tax would be repealed.
- The child credit would be increased to $1,600 per child under 17. A credit of $300 would be allowed for non-child dependents.
- Numerous education incentives would be consolidated, modified, or repealed.
- The estate tax would be phased out over six years. The exclusion amount would be doubled from $5 million (as of 2011) to $10 million (indexed for inflation).
- The top gift tax rate would be lowered to 35% in 2024.
What Does CohnReznick Think?
Many things need to happen between now and when tax reform – in whatever form it ultimately takes – becomes law. Senate Republicans are expected to unveil their tax plan later this week and it will likely differ from the House bill. Given this, individuals and businesses should familiarize themselves with the current tax proposals and begin planning for their potential impact.
One thing that is clear from the House bill – its sweeping changes would affect most taxpayers. The magnitude of the changes will vary by industry and the circumstances of the specific taxpayers.
CohnReznick will continue to monitor the tax reform process and release timely updates as more information becomes available.
To discuss the potential impact of tax reform on you or your business, please contact Richard Shevak, Principal, National Tax Services, at Richard.Shevak@CohnReznick.com or at 862-245-5029 or Bob Moss, Principal, National Director of Governmental Affairs, at Bob.Moss@CohnReznick.com or at 617-648-1406.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.