The Senate Bill - Same Title, Tax Cuts and Jobs Act - More Sweeping Changes
The recently released Senate bill – also titled the Tax Cuts and Jobs Act – includes provisions affecting all taxpayers.
Like the House bill, the Senate bill would make sweeping changes to numerous provisions of US tax law, including changes to the tax rate structure for individuals and corporations and to numerous deductions, as well as significant changes to the treatment of foreign subsidiaries. Note that the draft legislation itself has not yet been released; the following is based on the Joint Committee on Taxation’s summary of the Senate bill (released November 9, 2017) as well as the Joint Committee’s Description of the Chairman’s Modification to the Chairman’s Mark (released November 14, 2017). Changes made by the Chairman’s Modification are noted. Unless otherwise provided, the provisions are intended to take effect in tax years beginning January 1, 2018.
Unlike the House bill, the Senate proposal does not include a carried interest provision. Additionally, the Chairman’s Modification includes a repeal of the Affordable Care Act’s (ACA) individual mandate. House Republicans have indicated an intent to add a similar repeal of the ACA mandate to the House bill.
Senate Proposal - Individuals
- Creates a seven bracket tax rate structure with a top tax rate of 38.5% (the House bill, in contrast, proposed four brackets while maintaining the top 39.6%);
- Repeals the deduction for personal exemptions;
- Increases the standard deduction to $24,000 (married filing jointly), $18,000 (head of household), and $12,000 (non-married filing jointly, non-head of household), mirroring the House bill;
- Repeals the alternative minimum tax;
- Reduces the tax rate on certain qualified business income, through a deduction of 17.4% of qualified business income earned through a partnership, S-corporation, or sole proprietorship (with exclusions for certain professional service activities);1
- Limits the state and local tax deduction to taxes incurred in either a trade or business or activity for the production of income (Section 212). Unlike the House bill, the Senate bill has no provision for property taxes;
- Repeals all miscellaneous itemized deductions, including investment fees and expenses and unreimbursed employee expenses;
- Limits personal casualty losses to those incurred in a presidential-declared disaster;
- Increases the charitable deduction adjusted gross income limitations for purposes of certain cash contributions;
- Repeals the mortgage interest deduction for home equity indebtedness, but unlike the House bill, the Senate bill retains the $1 million limit on acquisition indebtedness (reduced to $500,000 in the House bill);
- Repeals the overall limitation on itemized deductions, but unlike the House bill, retains certain itemized deductions, notably medical expenses;
- Taxes nonqualified deferred compensation to the extent not subject to a substantial risk of forfeiture (i.e. not conditioned on the performance of substantial services);2
- Like the House bill, doubles the estate and gift tax exemption amount to $10 million (which is indexed for inflation) but (unlike the House bill) does not provide for the repeal of the estate and generation skipping taxes.
Note that per the Chairman’s Modification, the individual provisions, including the AMT repeal and increased estate and gift tax exemption amount, will expire after December 31, 2025.
Senate Proposal - Business Taxpayers
- Limits the deductibility of interest to, generally, 30% of adjusted taxable income, with similar exclusions for real estate-related activities;
- Imposes a flat, corporate tax rate of 20% (but without a higher rate for personal services corporations and not effective until 2019);
- Limits net operating losses to 90% of taxable income, reduced to 80% in the Chairman’s Modification;
- Repeals the corporate alternative minimum tax;
- Limits like kind exchanges to exchanges of real property;
- Expands eligibility for the use of the cash method of accounting;
- Provides for temporary 100% expensing of certain qualified property;
- Repeals the deduction for domestic production activities, effective for taxable years beginning in 2019;
- Shortens the depreciable lives of certain real property (25 years for nonresidential real and residential rental property (down from 39 years and 27.5 years, respectively))3
Senate Proposal - International Provisions
- Like the House bill, it establishes a participation exemption with respect to dividends from 10% owned subsidiaries sourced to foreign earnings (but limited in the case of “hybrid dividends,” generally distributions deductible in the source jurisdiction and subject to a holding period requirement);
- Includes a deemed repatriation of undistributed foreign earnings, with allowable deductions targeting effective tax rates between five and ten percent, depending on the nature of the assets in which the foreign earnings are invested;
- Creates a new foreign tax credit basket for “foreign branch income”;
- Imposes a look-through rule to determine effectively connected income (ECI) earned through a partnership, effectively overruling the Grecian Magnesite Tax Court case;
- Includes certain “base erosion” measures, including current taxation of low-taxed global intangible income, denial of interest expense deductions for worldwide affiliated groups with “excess domestic indebtedness,” a limitation on income shifting through intangible transfers, and a “base erosion minimum tax amount,” a minimum tax-like provision designed to mitigate the benefits of base eroding payments to related persons.
Senate Proposal - Other Select Provisions
- An excise tax on the investment income of certain private colleges and universities;
- The repeal of tax exempt status for professional sports leagues;
- The denial of a charitable deduction for amounts paid to acquire college athletic seating rights (under current law, 80% of these amounts are considered charitable deductions);
- The modification of certain low income housing credit provisions (incorporating certain provisions of S.548, the Affordable Housing Credit Improvement Act of 2017);4
- Eligibility for a nonresident alien to be a current beneficiary of an electing small business trust (ESBT).5
Once again, this is just proposed; it is not law. The Senate and House bills will each be marked up in the Finance and Ways and Means Committees, respectively, before a final bill is presented for a vote by the entire chamber. Should both bills pass their respective chambers, negotiations will begin in committee to draft a joint bill before being presented to both chambers for a vote and, ultimately should it pass in both the House and the Senate, signature by the President. Much can be expected to change, however, during the committee and joint committee negotiations, and the shape of ultimate tax reform is still unclear.
For our analysis of the House bill, click here.
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Berdon LLP New York Accountants
1 The Senate bill includes non-CG REIT dividends in qualified business income.
2 Note that the Chairman’s Modification removes this provision from the Senate bill.
3 The Chairman’s Modification reduces the applicable recovery period for residential rental property to 30 years.
4 Added by the Chairman’s Modification.
5 Added by the Chairman’s Modification.