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Article 12/03/2017

Senate Passes Amended Tax Reform Bill

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The Senate voted 51-49 to pass an amended version of the Tax Cuts and Jobs Act of 2017 (TCJA) just before 2 a.m. on Saturday, December 2—exactly one month following the bill’s introduction in the House Ways and Means Committee. The bill passed strictly along party lines, with only one Republican voting against the bill due to deficit concerns. Although significant differences exist between the versions of tax reform legislation that passed in the House and Senate Finance Committee on November 16, the bill that passed in the Senate on Saturday similarly includes lower individual and business tax rates and a shift to a territorial tax system as discussed in our previous alert.

The Senate’s approval of the TCJA is a major step toward sending a tax bill to the president for signature by Christmas; however, the same version must pass both the House and Senate before this tax reform legislation can be signed into law. The TCJA was returned to the House, where it originated. Based on remarks from House Speaker Paul Ryan, the next step is a vote this evening that will likely send it to a bicameral conference committee to reconcile the differences between the two versions of the bill; an alternative would be that the Senate-passed bill could be brought directly to the House floor for a vote. Following a majority vote of the committee, which comprises three members each from the House and Senate, both chambers must again vote on the conference committee report. In general, no amendments can be offered once the report is presented to the House and Senate; however, the report can be rejected and sent back to the committee. Any compromise reached must still comply with the Senate’s budget reconciliation rule and advance with only a simple majority in the Senate. Otherwise, a 60-vote majority is necessary to waive that rule. If approved in both chambers, the reconciled bill would then head to the president for his signature or veto.

What’s in the Senate-Passed Bill?
A comparison of key provisions of the House- and Senate-passed bills to current tax law can be found on BKD’s Tax Reform Resource Center. Key amendments included in the bill that passed a full Senate floor vote Saturday include:

For Businesses

  • Increases the proposed 17.4 percent deduction for certain pass-through business income to 23 percent of domestic qualified business incomei
  • Specifies publicly traded partnership unit holders, as well as agricultural and horticultural cooperatives, can claim the 23 percent pass-through deduction
  • Adds a provision contained in the House-passed version of the bill to modify rules on S corporation conversions to C corpsii
  • Maintains the current corporate alternative minimum tax (AMT), an item repealed under the Finance Committee-passed bill (Retaining the corporate AMT is a departure from the House version and the September 27 Unified Framework for Fixing Our Broken Tax Code released by the “Big Six.”)
  • Removes provisions that would have affected insurance companies by modifying the rules for capitalization of certain policy acquisition expenses
  • Allows full deduction for interest expense for motor vehicle floor plan financing
  • Exempts mortgage servicing rights from the income inclusion accounting method provision in the Finance Committee-passed bill
  • Extends the bonus depreciation deduction beyond 2022, with a phasedown of 20 percent lower deduction per year starting in 2023, i.e., 80, 60, 40 and 20 percent bonus depreciation for property placed in service in 2023–2026, respectively
  • Repeals the domestic production activities deduction for noncorporate taxpayers for tax years beginning after December 31, 2017 (repeals for tax years beginning after December 31, 2018, for corporate taxpayers)
  • Prohibits cash, gift cards and other nontangible personal property as deductible employee achievement awards
  • Requires substantiation for the proposed tax credit to certain employers who provide family and medical leave
  • Strikes a number of other provisions included in the Finance Committee-passed bill, including:
    • Repeals deduction for certain unused business credits
    • Conformity of contribution limits for employer-sponsored retirement plans
    • Reporting requirement on opportunity zones and technical changes
    • Zero percent dividends paid deduction and reporting requirements
    • Uniform treatment of expenses in contingency fee case
    • Modifications to the low-income housing program
  • For Individuals

  • Increases the individual AMT exemption amounts and phase-out thresholds, with the current AMT provisions returning after 2025 (Similar to the corporate AMT, the individual AMT also was repealed under the Finance Committee-passed bill, and retaining it is a departure from the House bill and the “Big Six” framework.)
  • Temporarily restores the itemized deduction for individual medical expense deduction for 2017 and 2018 and lowers the limit to include costs that exceed 7.5 percent of adjusted gross income (AGI)
  • Adds a $10,000 itemized deduction for state and local property taxes not paid or accrued in a trade or business, i.e., individual property taxes
  • Removes provision allowing unborn children to qualify as Section 529 plan beneficiaries
  • Allows use of §529 savings plans for K–12 schools and homeschooling
  • Provides retirement plan and casualty loss relief for any area declared as a major disaster area by the president
  • Strikes a number of other provisions included in the Finance Committee-passed bill, including:
    • Simplified filing requirements for individuals exceeding 65 years of age
    • Record keeping for contributions to ABLE accounts
    • Holding individuals harmless on improper levy on retirement plans
  • For Tax-Exempt Organizations

  • Modifies the 1.4 percent excise tax based on investment income of private colleges and universities to increase the asset-per-student threshold to $500,000 (compared to $250,000 in the Senate Finance Committee version)
  • Strikes a number of other provisions included in the Finance Committee-passed bill, including:
    • Repeal of tax-exempt status for professional sports leagues
    • Modification of taxes on excess benefit transactions (intermediate sanctions)
    • Exception to private foundation excess business holdings rules for philanthropic business holdings
    • Require name and logo royalties to be treated as unrelated business taxable income
  • International Provisions

  • Increase tax rates for mandatory repatriation toll tax to 14.49 percent for cash or cash-equivalents and 7.49 percent for illiquid assets
  • Remove the repeal of the interest-charge domestic international sales corporation (IC-DISC) regime
  • Allow an election to increase percentage of domestic taxable income offset by overall domestic loss treated as foreign source income
  • Increase maximum overall domestic loss recapture to 100 percent for pre-2018 losses
  • Add certain qualified derivative payments not treated as base erosion payments
  • Modify the definition of property considered “for a foreign use” for purposes of determining foreign-derived intangible income
  • Restore exclusion applicable to certain passenger aircraft operated by a foreign corporation
  • Key Differences Remain
    As discussed above, differences between the House- and Senate-passed versions of the TCJA remain. Key differences that will need to be reconciled include:

    For Businesses

  • Effective date of the corporate tax rate reduction
    • 2018 in the House-passed bill; 2019 in the Senate-passed bill
  • Approach to reducing the pass-through tax rate
    • Lower 25 percent rate in the Houseiii; deduction of 23 percent of domestic qualified business income in the Senate
  • Corporate AMT
    • Repealed in the House; retained in the Senate
  • Bonus depreciation
    • 100 percent through 2022 in the Houseiv; 100 percent through 2022 followed by 80, 60, 40 and 20 percent for 2023–2026 in the Senatev
  • For Individuals

  • Affordable Care Act individual mandate
    • Not addressed in the House-passed bill; repealed in the Senate-passed bill
  • Number of individual tax brackets
    • Four in the House; seven in the Senate
  • Top individual rate
    • 39.6 percent in the House; 38.5 percent in the Senate
  • Expiration of individual tax rate reduction and other beneficial cuts
    • No expiration in the House; after 2025 in the Senate
  • Individual AMT
    • Repealed in the House; retained with increased threshold and phase-out amounts in the Senate
  • Estate tax
    • 35 percent rate with $11.2 millionvi basic exclusion amount per taxpayer, permanent repeal after 2024 and “stepped-up” income tax basis retained in the House; 40 percent rate with $11.2 millionvii basic exclusion amount per taxpayer in the Senate that expires after 2025
  • Medical expense deduction
    • Repealed in the House; retained with a temporarily lowered limit to include costs that exceed 7.5 percent of AGI for 2017 and 2018 (instead of the 10 percent threshold under current law) in the Senate
  • Mortgage interest deduction
    • Limited in the House to interest paid on first $500,000 of indebtednessviii; limit modified in the Senate to eliminate deduction for interest paid on home equity loans
  • Child tax credit
    • $1,600 per child ($1,000 refundable) with a phaseout at $115,000 for single filers/$230,000 married filing jointly (MFJ) under the House; $2,000 per child ($1,000 refundable) with a phaseout beginning at $500,000 for single filers/$1 million MFJ in the Senate

For Tax-Exempt Organizations

  • Excise tax on private foundations
    • 1.4 percent on net investment income in the House-passed bill; not addressed in the Senate-passed bill
  • Taxation of private activity bond interest
    • Taxable for interest on bonds issued after 2017 in the House; not addressed in the Senate

International Provisions

  • Tax on deemed repatriation of previously untaxed accumulated foreign earnings
    • 14 percent for cash/cash equivalents and 7 percent otherwise in the House-passed bill; 14.49 percent for cash/cash equivalents and 7.49 percent otherwise in the Senate-passed bill
  • Incentive for U.S. production for sale to foreign customers
    • Not addressed in the House; deduction for global intangible low-taxed income reduced from 50 percent to 37.5 percent, while the deduction for foreign-derived intangible income produced in the U.S. would fall from 37.5 percent to 21.875 percent for tax years beginning after December 31, 2025, in the Senate

Passage of a tax reform bill in the Senate represents a significant step forward in the Republicans’ goal of getting a final bill to the president by year-end. While differences between the House and Senate version remain, many commentators don’t anticipate the differences to be deal breakers that can’t be reconciled without losing the necessary votes. Tax reform efforts of late have moved fast, and the weeks ahead promise to continue at that pace. Check in with BKD’s Tax Reform Resource Center often to keep up with developments and contact Jesse, Damien, Julia or your BKD advisor to learn more about how possible tax changes may affect your situation.