Conference Agreement Reached on Tax Cuts and Jobs Act of 2017
A conference committee, formed to reconcile the versions of the Tax Cuts and Jobs Act of 2017 (TCJA) passed by the House on November 16, 2017, and Senate on December 2, 2017, issued its report on December 15, 2017, detailing the provisions included in the reconciled bill. As discussed in our previous alert, both chambers must now vote to either approve or reject the report. If rejected, the report will go back to the conference committee for revision. If approved, the reconciled bill will be presented to President Donald Trump for his signature or veto, keeping congressional Republicans on their timeline of having a bill ready for the president’s signature by Christmas.
As the House and Senate move to vote on the reconciled bill later this week, here’s a look at how several of the significant differences between the House and Senate bills were reconciled in the joint conference report. Visit BKD’s Tax Reform Resource Center for a comparison of the final bill agreed to by the conference committee with current tax law, which we’ll update shortly.
Individual Rates on Ordinary Income: Similar to the Senate-based version of the bill, the conference agreement would retain the current seven-bracket structure but with new rates. The reconciled bill provides a reduced top marginal rate and new rates of 10, 12, 22, 24, 32, 35 and 37 percent as follows:
The tax brackets would be adjusted for inflation using a chained measurement method of the U.S. Consumer Price Index. The new tax rate brackets would sunset December 31, 2025; however, this alternative inflation measure would remain in effect.
Individual Alternative Minimum Tax (AMT): The conference agreement again favored the Senate bill and retains the individual AMT but with increased exemption amounts of $70,300 for single filers ($109,400 for MFJ). The agreement also would increase phase-out amounts of this increased exemption amount to $500,000 for single filers ($1 million MFJ). The increased exemption and phase-out amounts would sunset December 31, 2025.
Standard Deduction: The final bill includes the Senate-passed provision that would nearly double the standard deduction under current law for single and married filers to $12,000 and $24,000, respectively. This modification to the standard deduction would sunset December 31, 2025.
Personal Exemption: The personal exemption would be consolidated into the larger standard deduction under the bill and repealed along with the current deduction phaseout, a feature in both the House- and Senate-passed bills. The repeal would sunset December 31, 2025.
Child Tax Credit (CTC): Like the Senate bill, the conference report provides a nonindexed CTC of $2,000. However, it also features an enhanced refundable amount of $1,400, $400 higher than the Senate-passed version. In addition, the bill would generously increase the credit’s phase-out limit to begin at $200,000 for single filers ($400,000 MFJ).
Individual Mandate: The final bill includes one of the most notable additions to the Senate-passed bill, which would eliminate the individual shared responsibility payment under the Affordable Care Act (ACA). Under the ACA, unless an exemption applies, individuals must be covered by a health plan that provides at least minimum essential coverage or an additional tax is assessedi. The conference committee agreement would effectively remove the individual mandate by decreasing this additional tax to zero for months beginning after December 31, 2018.
Alimony Paid: The above-the-line deduction for alimony payments (payor) along with the corresponding income inclusion (payee) would be repealed under the conference agreement. This provision was included in the House-passed bill; however, the final bill delayed the effective date one year to apply to divorce decrees executed after December 31, 2018.
Medical & Dental Expense Deduction: Similar to the Senate bill, the conference report would allow a deduction for qualifying out-of-pocket medical expenses paid or incurred during 2017 and 2018 to the extent this amount exceeds 7.5 percent of adjusted gross income (AGI). The threshold would rise to 10 percent beginning in 2019.
State & Local Income, Real Estate & Personal Property Tax (SALT) Expense#: The conference agreement features a provision included in both the House- and Senate-passed bills that would combine the deductions for SALT not paid or accrued in a trade or business and cap them at $10,000. The agreement also prevents taxpayers from claiming a deduction on a state and local income tax prepayment for a future taxable year by providing that amounts paid in 2017 for income taxes imposed for the 2018 or later tax year would be treated as paid in 2018.
Home Mortgage Interest Expense#: Under the conference agreement, the deduction for home mortgage interest expense for mortgages after December 15, 2017, would be limited to interest paid on the first $750,000 of indebtedness, an amount $250,000 higher than what was included in the Senate bill. In addition, while the deduction would be retained for second homes, no deduction would be allowed for interest paid on home equity loans effective January 1, 2018.
Gifts to Charity#: The conference agreement would maintain most of the current deductibility rules and limitations for charitable contributions but would increase the cash contribution limitation from 50 percent of AGI to 60 percent—a feature of both the House and Senate bills. The reconciled bill also would repeal the special rule that allows an 80 percent deduction of the amount paid to colleges for the right to purchase tickets for athletic events.
Transfer Taxes: As provided in the Senate bill, the conference agreement would retain the current 40 percent estate, gift and generation-skipping tax rate but double the 2011 basic exclusion amount from $5 million to $10 million, adjusted for inflation. This would result in an $11.2-million exemption per person for 2018. Also, under the final bill, transfers occurring at death would still benefit from a step-up in basis in the beneficiary’s hands.
Other Notable Provisions: Several provisions included in the House- and Senate-passed bills drew controversy and did not appear in the conference agreement, including:
- Repeal of the specific identification method when less than the entire holding of a particular stock is sold, exchanged or otherwise disposed of
- Elimination of the additional standard deduction of $1,300 ($1,600 for unmarried taxpayers) for taxpayers over age 65, blind or disabled
- Consolidation of the American Opportunity Tax Credit and Lifetime Learning Credit
- Repeal of the deduction for:
- Student loan interest
- Qualified tuition and related expenses
- Repeal of the exclusion for:
- Qualified tuition reductions
- Interest on U.S. savings bonds used for higher education expenses
- Education assistance programs
- Repeal of the credit for:
- The elderly and permanently disabled
- Plug-in electric drive motor vehicles
Corporate Tax Rate: The conference report provides for a 21 percent flat rate that would be effective for tax years beginning after December 31, 2017. This one percent increase over the 20 percent rate featured in the House- and Senate-passed bills was included to help offset items included in the conference agreement that lose revenue beyond the budget window.
Corporate AMT: The conference agreement would repeal the corporate AMT, as done in the House-passed bill, with the ability to recognize remaining credit carryforwards over a four-year period.
Pass-Through Business Deduction: Effective in 2018, the conference agreement provides a deduction of 20 percent of domestic qualified business incomeii (QBI) from a partnership, S corporation or sole proprietorship. This deduction, which also is available to trusts and estates under the final bill, was similarly provided to pass-through business owners under the Senate bill; however, the amount of this deduction was ultimately reduced in the conference agreement. A deduction also is available for 20 percent of qualified real estate investment trust dividends, qualified cooperative dividends and qualified publicly traded partnership income. Two limitations apply starting when the owner’s taxable income exceeds $157,500 for single filers ($315,000 MFJ). First, the deduction is limited to the greater of 50 percent of W-2 wages paid with respect to the business or 25 percent of W-2 wages paid plus 2.5 percent of the unadjusted basis, immediately after acquisition, of all qualified property. Second, the deduction isn’t allowed for specified service trade or businessesiii (SSTB) once the owner’s income exceeds the threshold amounts, which are indexed for inflation and phase out beginning at the same levels over the next $50,000 for single filers ($100,000 MFJ) of taxable income. This provision would sunset December 31, 2025.
Nonpassive Losses: The conference agreement includes a provision from the Senate-passed bill that limits the amount of nonpassive losses from a pass-through entity an individual may deduct to $250,000 for single filers ($500,000 MFJ). Any excess loss is treated as part of the taxpayer’s net operating loss (NOL) carryforward to subsequent years. This provision would sunset December 31, 2025.
Carried Interest: Under current law, the carried interest received in exchange for the performance of services is subject to favorable capital gains rates if held longer than one year, rather than the higher ordinary income tax rates typically applicable to compensation received for the performance of services. Under the conference agreement, these interests only would be subject to favorable capital gains tax rates if held for a period of three years or more after 2018.
Full & Immediate Capital Asset Expensing: Much like the House- and Senate-passed bills, the conference agreement would expand both the bonus depreciation and Section 179 expensing limitations. Under the final bill, the eligible bonus percentage would increase to 100 percent for qualified property placed in service after September 27, 2017, and before December 31, 2022, and then phase down to 80, 60, 40 and 20 percent for property placed in service in 2023–2026, respectively. For bonus depreciation purposes, the new bill also would expand the definition of “qualified property” by removing the requirement that original use must begin with the taxpayer. However, qualified property wouldn’t include any property used by a regulated public utility company or floor plan financing property. The agreement also would provide for $1 million of assets to be expensed under §179 (beginning in 2018) with a phase-out amount of $2.5 million.
Net Interest Expense: Only businesses with average gross receipts of $25 million or less a regulated public utility business (including electric cooperatives) or a real property trade or business would be allowed to take a net interest expense deduction under the conference agreement. For all other businesses, interest expense deductions would be limited to 30 percent of the entity’s adjusted taxable income as defined under the Senate-passed bill, i.e.,taxable income without regard to items not properly allocable to a trade or business, any business interest expense or business interest income, the 20 percent pass-through income deduction, floor plan financing interest, any NOL deduction and, for taxable years beginning before January 1, 2022, any deduction for depreciation, amortization or depletion. Any excess is eligible for carryover indefinitely.
Dividend Exemption System: Similar to the House and Senate bills, the conference agreement would provide a 100 percent exemption for the foreign-source portion of dividends paid by a foreign corporation to a U.S. corporate shareholder owning 10 percent or more of the foreign corporation’s stock.
Repatriation of Foreign Earnings: The conference agreement would enact deemed repatriation of deferred foreign profits at 15.5 percent for cash or cash equivalents with the remainder taxed at a reduced rate of 8 percent. The taxpayer can elect to pay the tax over a period of up to eight years.
Other Notable Provisions: Additional current-law provisions that would be repealed or modified under the conference agreement include:
- The domestic production activities deduction would be repealed.
- NOL carryovers would be limited to 80 percent of the taxpayer’s taxable income for the year. The final agreement generally would only allow NOLs to be carried forward; however, current law treatment would be retained for property and casualty insurance companies.
- Like-kind exchanges under §1031 only would be allowed for real property transactions.
- The deduction for entertainment, amusement or recreation activities is repealed; however, the deduction for qualified meal expenses will remain, subject to the same 50 percent limitation. Meals provided for employees on employer premises also would be subject to the 50 percent limitation.
- Starting in tax year 2022, certain research and experimentation expenditures, including software development costs but excluding land acquisition and improvement costs and mine exploration costs (including oil and gas), would be required to be capitalized and amortized over a five-year period. For foreign research projects, this amortization period increases to 15 years.
- The research and development tax credit under current law would be retained.
- The conference agreement would modify several provisions affecting insurance companies, including NOLs, computation of reserves, modification of proration and discounting rules, capitalization of certain policy acquisition expenses and repeal of the small life insurance company deduction.
- Financial institutions with more than $10 billion in consolidated assets will receive a limited or no deduction for Federal Deposit Insurance Corporation premiums paid.
Check in with BKD’s Tax Reform Resource Center often to keep up with developments and contact Jesse, Damien, Julia or your trusted BKD advisor to learn more about how possible tax changes may affect your situation.
* Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $200,000 ($250,000 MFJ).
^ Expires after December 31, 2025.
# Subject to phase out based on AGI under current law. This limitation would be repealed under the conference agreement, except would revert back to its pre-January 1, 2018, form after December 31, 2025.
i Tax imposed for any month an individual doesn’t have minimum essential coverage unless an exception applies. Tax for any calendar month is one-twelfth of tax calculated as an annual amount. Annual amount is equal to greater of flat dollar amount (lesser of sum of individual annual dollar amounts for members of taxpayer’s family or 300 percent of adult individual dollar amount of $695 for 2018) or excess income amount (2.5 percent of excess of taxpayer’s household income for taxable year over threshold amount of income for requiring taxpayer to file income tax return).
ii QBI is the net amount of qualified items of income, gain, deduction and loss with respect to a qualified trade or business. These items must be effectively connected with the conduct of a trade or business within the U.S. and doesn’t include S corp shareholder’s reasonable compensation or guaranteed payments. QBI also doesn’t include specified investment-related income, deductions or losses.
iii SSTBs include any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services or any business where the principal asset of the business is the reputation or skill of one or more of its employees. Engineering and architecture services are explicitly excluded from this definition.