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Tax Reform Update

On Thursday, November 2nd, the House Ways and Means Committee introduced the Tax Cuts and Jobs Act, H.R. 1. Click here to view a full section-by-section summary of the bill.

The Tax Cuts and Jobs Act incorporates many of the provisions listed in the September tax reform framework while providing additional details. The bill outlines Congressional Republicans’ plan to deliver significant tax cuts to businesses and individuals. Republican leadership is hoping to enact the legislation before the end of the year, so stakeholders will need to act quickly to understand the bill and determine how their interests would be affected. Here is a summary of the key provisions of the bill, most of which would be effective for tax years beginning after 2017:

Businesses

  • It establishes a 20% flat corporate tax rate (25% for personal service corporations).
  • The Alternative Minimum Tax (“AMT”) would be repealed.
  • 100% expensing of qualified property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023.
  • Section 179 expensing would increase from $500,000 to $5 million.
  • The cash accounting method would be more widely available by increasing the current $5 million average gross receipts ceiling for corporations to $25 million and extend it to businesses with inventories.
  • Deductions of net operating losses (NOLs) would be limited to 90% of taxable income. NOLs would have an indefinite carryforward period, but carrybacks would no longer be available for most businesses.
  • The domestic production activities deduction (“DPAD”) would be repealed.
  • Every business, regardless of its form, would be subject to a disallowance of a deduction for net interest expense in excess of 30 percent of the business’ adjusted taxable income. The only exceptions would be certain regulated public utilities and real property trades or businesses.
  • A number of business and energy credits would be repealed, including the work opportunity tax credit (“WOTC”), the credit for employer-provided child care and the new markets tax credit.
  • The Research & Development Credit and the Low Income Housing Credit would be preserved.

Passthrough Entities

  • A portion of net income distributions from passthrough entities would be taxed at a maximum rate of 25%, instead of at ordinary individual income tax rates.
  • For income from nonpassive business activities (including wages), owners and shareholders could elect to treat 30% of the income as eligible for the 25% rate; the other 70% would be taxed at ordinary income rates.
  • Certain activities would not be eligible for the favorable 25% rate. These activities would include any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services.

Individuals

  • The current seven tax brackets would be consolidated into four brackets: 12 percent, 25 percent, 35 percent, and 39.6 percent.
  • The standard deduction would almost double to $12,000 for individual filers and $24,000 for joint filers.
  • Personal exemptions would be eliminated.
  • The Alternative Minimum Tax (“AMT”) would be repealed.
  • Many itemized deductions would be eliminated including the deductions for state and local income taxes, personal casualty losses, tax preparation expenses and medical expenses. The itemized deduction for mortgage interest would be limited to $500,000 of debt ($1.1M currently). Property taxes would continue to be deductible, but only up to $10,000 (not limited currently). The overall imitation on itemized deductions would be repealed.
  • The deduction for alimony would be eliminated for divorces or separations occurring after 2017.
  • The Child Tax Credit would increase from $1,000 to $1,600 and a new “family flexibility” credit of $300 for nonchild dependents.
  • The American Opportunity Tax Credit (AOTC), the Hope scholarship credit, and the lifetime learning credit would be combined into one credit similar to the current AOTC.
  • Deductions for student loan interest and for qualified tuition expenses would be repealed.
  • Exclusions for interest on US savings bonds used to pay qualified higher education expenses, qualified tuition reduction programs and employer-provided education assistance programs would be repealed.
  • Elementary and high school expenses of up to $10,000 per year would be considered qualified expenses for 529 plans.
  • The Adjusted Gross Income limitation on cash contributions would increase from 50% to 60%.
  • Up to $250,000 ($500,000 for joint filers) would continue to be excluded from the sale of a principal residence, but only if the taxpayer owned and used the home as such for five out of the previous eight years.
  • Exclusions for employee achievement awards and qualified moving expense reimbursements would be repealed and would constitute taxable income. Exclusions for adoption assistance and dependent care assistance programs would also be repealed.

Estate & Gift

  • The estate tax would be repealed after 2023 (with the step-up in basis for inherited property retained).
  • In the meantime, the estate tax exclusion amount would double (currently it is $5,490,000, indexed for inflation).
  • The top gift tax rate would be lowered to 35%.

Not-for-Profits

  • Imposes a 20% excise tax on compensation exceeding $1 million paid to any of a tax-exempt organization’s five highest-paid employees.
  • Permits statements about political campaigns to be made by religious organizations.
  • Simplifies the private foundation excise tax on investment income and would reduce the rate from 2% to 1.4%.
  • Imposes a 1.4% excise tax on investment income of certain private colleges and universities.

International

  • 100% deduction for foreign-source portion of dividends received from “specified 10-percent owned foreign corporations” by U.S. shareholders.
  • Repeal of indirect foreign tax credit under IRC 902. No foreign tax credit or deduction permitted for taxes paid or accrued with respect to exempt dividends.
  • Repeal of current taxation of previously excluded qualified investments under IRC 955 (Subpart F).
  • U.S. shareholders of CFCs subject to current U.S. taxation on 50% of “foreign high return amounts”.
  • Large international corporations may be subject to a 20 percent excise tax on payments to related foreign corporations.
  • U.S. shareholders of foreign companies with earnings and profits (E&P) would be required to pay U.S. tax on E&P that has not previously been subject to U.S. tax. For cash and cash equivalents, the rate would be 12 percent. For non-liquid assets, the rate would be 5 percent. The tax liability could be paid over a period of up to 8 years.

Due to the amount of extreme lobbying already taking place, it is difficult to predict the end result at this time. We will continue to report on tax reform efforts as they develop. In the meantime, please contact your GBQ representative if you have any questions, or if you’d like to discuss the potential impact to you and your business’ unique tax circumstances.


Article written by:
Scott Eichar, CPA, CFP®
Senior Manager, Tax & Business Advisory Services

With contributions by:

Rich Lundy, CPA
Director, Tax & Business Advisory Services

Chris Dean, CPA
Director, Tax & Business Advisory Services

Contact
  • Scott Eichar
  • Senior Manager, Tax & Business Advisory Services
  • (614) 947-5233
  • seichar@gbq.com
Contact
  • Chris Dean
  • Director, Tax & Business Advisory Services
  • (614) 947-5232
  • cdean@gbq.com
Contact
  • Rich Lundy
  • Director, Tax & Business Advisory Services
  • (614) 947-5264
  • rlundy@gbq.com