House Republicans Release Highly-Anticipated Tax Bill, Revealing Details of Reform
Yesterday, House Ways and Means Committee Republicans released the “Tax Cuts and Jobs Act,” their long-awaited tax reform legislation. The bill text and section by section analysis can be found here.
The bill’s release ends weeks of speculation and closed-door negotiations concerning the contents of the reform package. Some principles set forth in the unified framework for tax reform released by the “Big Six” in September were confirmed in the legislative text, while others were scaled back to appease certain lawmakers and interest groups whose strong reactions to specific provisions of the framework have made headlines in the last several weeks.
It is expected that House Ways and Means Committee Chairman Kevin Brady (R-TX) will introduce a “manager’s amendment” to the legislation, likely to be unveiled today (Friday, November 3), which will likely include adjustments based on the views expressed by his colleagues and stakeholders in the coming hours.
After the expected manager’s amendment, the Ways and Means Committee plans to begin full committee mark-up of the legislation on Monday, November 6, leading to a potential full House vote on the legislation the week of November 13. Reports indicate the Senate is moving roughly one week behind the House on its own tax reform package, meaning its text could be released late the week of November 6, if not the week of November 13.
This is a very complicated piece of legislation that impacts almost every American in some fashion. Given the complexity, it is very difficult to imagine a scenario where the bill “races” through Congress. The House will likely keep on schedule, and there is a reasonably good chance they will vote a bill out before the Thanksgiving recess (although that is no guarantee).
However Senate rules and politics will slow the process down and threaten to grind the bill to a halt. Given the politics of statewide elections, Senators have different political calculus, and therefore will need to draft a bill that will almost certainly have significant differences than the House bill. So while the Senate Committee hopes to follow shortly after House action, expect the Senate debate on a tax reform package to extend in to 2018.
Assuming the Senate is able to pass a bill, it would then need to be reconciled with the House, all while remaining within the confines of the Budget that was passed earlier this year. Realistically this will be a very, very difficult tight rope to walk.
Based on the current political climate and the complexity of this legislative effort, our consultants in Washington believe there is a less than 50% chance of passage for comprehensive tax reform…far less.
What does it mean for infrastructure?
Aside from the tax provisions within the bill that impact infrastructure investment, the outcome of the tax bill also impacts the third Trump priority, an infrastructure package. Should the tax reform package fail to pass, this could open up revenue for infrastructure investment. However the converse is true as well. If tax reform does pass, it may slam the door on the ability to pay for any substantial infrastructure investment program.
The prospects of a tax reform package being signed in to law before the end of the year are very slim. The odds of a tax package being signed in to law at all are less than 50-50. However it is important that stakeholders remain attentive to the progress of the bill, and vigilant in support or opposition to provisions in the bill that impact their bottom line.
The following is a summary of the key provisions of the bill and the likely next steps in the legislative process. (taken from the Ways and Means Section-by-Section analysis and Committee resources)
For businesses – small and large – the legislation aims to enhance the competitiveness of the U.S. tax code, particularly on the international stage, by providing incentives for companies to keep jobs in America rather than moving them offshore. Major reforms include:
- Corporate tax rate: The legislation would replace the current system of graduated income taxation for corporations – topping out at 35 percent – with a flat, across-the-board corporate tax rate of 20 percent.
- Pass-through tax rate: The bill would lower the tax rate on the “business income” of pass-through entities such as partnerships and S corporations to 25 percent. The proportion of an entity’s overall income eligible for the reduced rate would generally be 30 percent, unless otherwise justified by the facts and circumstances. The legislation includes new safeguards to prevent individual wage income from being taxed at the new, reduced business income rate, as well as a presumption that all income earned by certain personal services businesses is wage income subject to tax at the otherwise-applicable rates of the individual owners.
- Shift to territorial taxation: In a departure from the current approach to taxing the earnings of American corporations on a worldwide basis, the bill would shift to a dividend-exemption territorial system.
- Repatriation of foreign earnings: In connection with the transition to a territorial system, the legislation would levy a one-time tax on corporate earnings and profits currently held overseas at a rate of 12 percent for cash holdings and 5 percent for illiquid holdings.
- Base erosion and profit shifting: The bill includes measures to limit opportunities for tax avoidance through the reporting of income in low-tax jurisdictions, including by imposing a 50 percent tax on certain “high returns” of overseas subsidiaries, and by imposing an excise tax on certain foreign related-party transactions.
- Interest expense deductibility: The reform plan caps the deduction of net interest expense in excess of 30 percent of an entity’s adjusted gross income, but exempts small businesses – defined as those with average gross receipts under $25 million – from the new cap.
- Expanded business expensing: The legislation would allow businesses to fully and immediately expense the cost of certain qualified property placed in service between September 27, 2017 and January 1, 2023. In addition, the bill would increase the phase-out amount and make certain other enhancements to the small business expensing provision under section 179.
- Retains the research and development and low-income housing tax credits, among others.
Individual & Family Provisions
The legislation makes a number of major changes to the current tax code aimed at simplification of the tax-filing process, reducing tax rates, and providing assistance to families. Key provisions include:
- Individual tax rates: Seven individual income tax brackets become four in the legislation, at 12 percent, 25 percent, 35 percent, and 39.6 percent. The top tax bracket will apply to married couples making over $1 million per year and individuals making over $500,000 per year. The bottom tax bracket applies to married couples making up to $90,000 per year and individuals making up to $45,000 per year.
- Standard deduction: The bill nearly doubles the standard deduction – from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples – and preserves “head of household” filing status, allowing individuals a standard deduction midway between the level for individuals and married couples.
- Child tax and related credits: The reform draft increases the child tax credit from $1,000 to $1,600, and allows a $300 credit for each parent and each non-child dependent.
- Estate tax: The plan gradually works toward complete elimination of the estate tax beginning in 2024 via an immediate doubling of the exemption – currently $5.6 million per person and $11.2 million per married couple.
- Home mortgage interest: The bill reduces the maximum allowable home mortgage interest deduction from $1 million to $500,000 for new home loans and grandfathers in existing loans.
- State and local tax deduction: The legislation partially repeals the deduction for state and local taxes by allowing taxpayers to deduct only up to $10,000 of their state and local property taxes – leaving no deduction for state and local income and sales taxes.
- Retirement savings plans: The reform leaves largely untouched retirement savings plans like 401(k)s and IRAs.
- Alternative Minimum Tax and other repeals: The bill eliminates the Alternative Minimum Tax (AMT), the itemized deduction for medical expenses, and the tax credit for adoption.
Tax Cuts and Jobs Act – Table of Contents
TITLE I—TAX REFORM FOR INDIVIDUALS
Subtitle A—Simplification and Reform of Rates, Standard Deduction, and Exemptions
Sec. 1001. Reduction and simplification of individual income tax rates.
Sec. 1002. Enhancement of standard deduction.
Sec. 1003. Repeal of deduction for personal exemptions.
Sec. 1004. Maximum rate on business income of individuals.
Sec. 1005. Conforming amendments related to simplification of individual income tax rates.
Subtitle B—Simplification and Reform of Family and Individual Tax Credits
Sec. 1101. Enhancement of child tax credit and new family tax credit.
Sec. 1102. Repeal of nonrefundable credits.
Sec. 1103. Refundable credit program integrity.
Subtitle C—Simplification and Reform of Education Incentives
Sec. 1201. American opportunity tax credit.
Sec. 1202. Consolidation of education savings rules.
Sec. 1203. Reforms to discharge of certain student loan indebtedness.
Sec. 1204. Repeal of other provisions relating to education.
Subtitle D—Simplification and Reform of Deductions
Sec. 1301. Repeal of overall limitation on itemized deductions.
Sec. 1302. Mortgage interest.
Sec. 1303. Repeal of deduction for certain taxes not paid or accrued in a trade or business.
Sec. 1304. Repeal of deduction for personal casualty losses.
Sec. 1305. Limitation on wagering losses.
Sec. 1306. Charitable contributions.
Sec. 1307. Repeal of deduction for tax preparation expenses.
Sec. 1308. Repeal of medical expense deduction.
Sec. 1309. Repeal of deduction for alimony payments.
Sec. 1310. Repeal of deduction for moving expenses.
Sec. 1311. Termination of deduction and exclusions for contributions to medical savings accounts.
Sec. 1312. Denial of deduction for expenses attributable to the trade or business of being an employee.
Subtitle E—Simplification and Reform of Exclusions and Taxable Compensation
Sec. 1401. Limitation on exclusion for employer-provided housing.
Sec. 1402. Exclusion of gain from sale of a principal residence.
Sec. 1403. Repeal of exclusion, etc., for employee achievement awards.
Sec. 1404. Repeal of exclusion for dependent care assistance programs.
Sec. 1405. Repeal of exclusion for qualified moving expense reimbursement.
Sec. 1406. Repeal of exclusion for adoption assistance programs.
Subtitle F—Simplification and Reform of Savings, Pensions, Retirement
Sec. 1501. Repeal of special rule permitting recharacterization of Roth IRA
contributions as traditional IRA contributions.
Sec. 1502. Reduction in minimum age for allowable in-service distributions.
Sec. 1503. Modification of rules governing hardship distributions.
Sec. 1504. Modification of rules relating to hardship withdrawals from cash or deferred arrangements.
Sec. 1505. Extended rollover period for the rollover of plan loan offset amounts in certain cases.
Sec. 1506. Modification of nondiscrimination rules to protect older, longer service participants.
Subtitle G—Estate, Gift, and Generation-skipping Transfer Taxes
Sec. 1601. Increase in credit against estate, gift, and generation-skipping transfer tax.
Sec. 1602. Repeal of estate and generation-skipping transfer taxes.
TITLE II—ALTERNATIVE MINIMUM TAX REPEAL
Sec. 2001. Repeal of alternative minimum tax.
TITLE III—BUSINESS TAX REFORM
Subtitle A—Tax Rates
Sec. 3001. Reduction in corporate tax rate.
Subtitle B—Cost Recovery
Sec. 3101. Increased expensing.
Subtitle C—Small Business Reforms
Sec. 3201. Expansion of section 179 expensing.
Sec. 3202. Small business accounting method reform and simplification.
Sec. 3203. Small business exception from limitation on deduction of business interest.
Subtitle D—Reform of Business-related Exclusions, Deductions, etc.
Sec. 3301. Interest.
Sec. 3302. Modification of net operating loss deduction.
Sec. 3303. Like-kind exchanges of real property.
Sec. 3304. Revision of treatment of contributions to capital.
Sec. 3305. Repeal of deduction for local lobbying expenses.
Sec. 3306. Repeal of deduction for income attributable to domestic production activities.
Sec. 3307. Entertainment, etc. expenses.
Sec. 3308. Unrelated business taxable income increased by amount of certain fringe benefit expenses for which deduction is disallowed.
Sec. 3309. Limitation on deduction for FDIC premiums.
Sec. 3310. Repeal of rollover of publicly traded securities gain into specialized small business investment companies.
Sec. 3311. Certain self-created property not treated as a capital asset.
Sec. 3312. Repeal of special rule for sale or exchange of patents.
Sec. 3313. Repeal of technical termination of partnerships.
Subtitle E—Reform of Business Credits
Sec. 3401. Repeal of credit for clinical testing expenses for certain drugs for rare diseases or conditions.
Sec. 3402. Repeal of employer-provided child care credit.
Sec. 3403. Repeal of rehabilitation credit.
Sec. 3404. Repeal of work opportunity tax credit.
Sec. 3405. Repeal of deduction for certain unused business credits.
Sec. 3406. Termination of new markets tax credit.
Sec. 3407. Repeal of credit for expenditures to provide access to disabled individuals.
Sec. 3408. Modification of credit for portion of employer social security taxes paid with respect to employee tips.
Subtitle F—Energy Credits
Sec. 3501. Modifications to credit for electricity produced from certain renewable resources.
Sec. 3502. Modification of the energy investment tax credit.
Sec. 3503. Extension and phaseout of residential energy efficient property.
Sec. 3504. Repeal of enhanced oil recovery credit.
Sec. 3505. Repeal of credit for producing oil and gas from marginal wells.
Sec. 3506. Modifications of credit for production from advanced nuclear power facilities.
Subtitle G—Bond Reforms
Sec. 3601. Termination of private activity bonds.
Sec. 3602. Repeal of advance refunding bonds.
Sec. 3603. Repeal of tax credit bonds.
Sec. 3604. No tax exempt bonds for professional stadiums.
Sec. 3701. Net operating losses of life insurance companies.
Sec. 3702. Repeal of small life insurance company deduction.
Sec. 3703. Computation of life insurance tax reserves.
Sec. 3704. Adjustment for change in computing reserves.
Sec. 3705. Modification of rules for life insurance proration for purposes of determining the dividends received deduction.
Sec. 3706. Repeal of special rule for distributions to shareholders from pre- 1984 policyholders surplus account.
Sec. 3707. Modification of proration rules for property and casualty insurance companies.
Sec. 3708. Modification of discounting rules for property and casualty insurance companies.
Sec. 3709. Repeal of special estimated tax payments.
Sec. 3710. Capitalization of certain policy acquisition expenses.
Sec. 3801. Nonqualified deferred compensation.
Sec. 3802. Modification of limitation on excessive employee remuneration.
Sec. 3803. Excise tax on excess tax-exempt organization executive compensation.
TITLE IV—TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS
Subtitle A—Establishment of Participation Exemption System for Taxation of Foreign Income
Sec. 4001. Deduction for foreign-source portion of dividends received by domestic corporations from specified 10-percent owned foreign corporations.
Sec. 4002. Application of participation exemption to investments in United States property.
Sec. 4003. Limitation on losses with respect to specified 10-percent owned foreign corporations.
Sec. 4004. Treatment of deferred foreign income upon transition to participation exemption system of taxation.
Subtitle B—Modifications Related to Foreign Tax Credit System
Sec. 4101. Repeal of section 902 indirect foreign tax credits; determination of section 960 credit on current year basis.
Sec. 4102. Source of income from sales of inventory determined solely on basis of production activities.
Subtitle C—Modification of Subpart F Provisions
Sec. 4201. Repeal of inclusion based on withdrawal of previously excluded subpart F income from qualified investment.
Sec. 4202. Repeal of treatment of foreign base company oil related income as subpart F income.
Sec. 4203. Inflation adjustment of de minimis exception for foreign base company income.
Sec. 4204. Look-thru rule for related controlled foreign corporations made permanent.
Sec. 4205. Modification of stock attribution rules for determining status as a controlled foreign corporation.
Sec. 4206. Elimination of requirement that corporation must be controlled for 30 days before subpart F inclusions apply.
Subtitle D—Prevention of Base Erosion
Sec. 4301. Current year inclusion by United States shareholders with foreign high returns.
Sec. 4302. Limitation on deduction of interest by domestic corporations which are members of an international financial reporting group.
Sec. 4303. Excise tax on certain payments from domestic corporations to related foreign corporations; election to treat such payments as effectively connected income.
Subtitle E—Provisions Related to Possessions of the United States
Sec. 4401. Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.
Sec. 4402. Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands.
Sec. 4403. Extension of American Samoa economic development credit.
Subtitle F—Other International Reforms
Sec. 4501. Restriction on insurance business exception to passive foreign investment company rules.
Sec. 4502. Limitation on treaty benefits for certain deductible payments.
TITLE V—EXEMPT ORGANIZATIONS
Subtitle A—Unrelated Business Income Tax
Sec. 5001. Clarification of unrelated business income tax treatment of entities treated as exempt from taxation under section 501(a).
Sec. 5002. Exclusion of research income limited to publicly available research.
Subtitle B—Excise Taxes
Sec. 5101. Simplification of excise tax on private foundation investment income.
Sec. 5102. Private operating foundation requirements relating to operation of art museum.
Sec. 5103. Excise tax based on investment income of private colleges and universities.
Sec. 5104. Exception from private foundation excess business holding tax for independently-operated philanthropic business holdings.
Subtitle C—Requirements for Organizations Exempt From Tax
Sec. 5201. Churches permitted to make statements relating to political campaign in ordinary course of religious services and activities.
Sec. 5202. Additional reporting requirements for donor advised fund sponsoring organizations.