A Summary Of The Tax Cut And Jobs Act

Orrick, Herrington & Sutcliffe LLP

Orrick, Herrington & Sutcliffe LLP

On November 2nd, the House Ways and Means Committee released the much anticipated "Tax Cut and Jobs Act" (H.R. 1). If passed, this initial pass at widespread tax reform would trigger the most sweeping changes to the U.S. tax landscape in more than three decades, for both corporations and individuals alike. As an overview, H.R. 1 would make the following changes (among many others) in various key areas.  We also drafted a tax alert that addresses the impact of H.R. 1 on the taxation of pass-throughs, if H.R. 1 were to become law. The complete text of the alert is available here.

Individual Taxation

  • Double the standard deduction and eliminate the personal exemption
  • Reduce the seven existing income tax brackets to four, while changing the income thresholds for each graduated rate (12%, 25%, 35%, and 39.6%)
  • Eliminate the Alternative Minimum Tax (AMT)
  • Eliminate most itemized deductions (including, for example, the deduction for state and local income taxes) while reducing the mortgage interest deduction and preserving the charitable contribution deduction
  • Eliminate the estate tax

Partnerships, LLCs, and Small Businesses

  • Cut the tax rate on income received by owners of certain entities taxed as partnerships to 25%
  • Restrict the use of the above 25% rate to businesses other than professional services, such as accounting, law, medicine and consulting
  • Allow immediate 100% expensing (bonus depreciation) of capital investments
  • Implement a new 3 year holding period requirement for carried interest holders in order for such holders to enjoy lower capital gains rates

Public Finance and Infrastructure

  • Completely terminate the issuance of tax-exempt private activity bonds
  • Repeal tax-exempt advance refunding bonds and tax credit bonds
  • Prohibit use of tax-exempt bonds to finance stadiums and arenas used for professional sports events

Corporate Tax

  • Cut the corporate tax rate from 35% to 20%
  • Eliminate the corporate AMT
  • Limit deductions for interest expense generally to 30% of adjusted taxable income

International Corporate Tax

  • Move the United States from a "worldwide system" of taxation to a modified "territorial system" by exempting dividends received by U.S. corporations from foreign subsidiaries
  • Limit deductions for interest expense to foreign related parties
  • Tax U.S. multinationals currently on offshore income that is generating high returns in low-tax foreign jurisdictions  
  • Attempt to cure the "offshore lockout" problem by taxing all foreign earnings of U.S. multinationals.
  • Prevent "U.S. base erosion" by imposing a 20% excise tax on certain deductible payments (including, for this purpose, those generating cost of goods sold, inventory and tax basis) by U.S. persons to related foreign entities  

Renewable Energy

  • Substantially and retroactively reduce certain renewable energy incentives, such as the production tax credit for wind facilities
  • Adjust the expiration dates and phase-out schedules for the investment tax credit for solar and certain other energy property

Compensation and Benefits

  • Phase out deferred compensation by subjecting deferred compensation and equity awards, including RSUs and non-qualified stock options, to immediate tax upon vesting whether or not exercised
  • Repeal the performance-based exception to the $1 million deduction limit under section 162(m)

The Republican majority is aiming to pass a version of H.R. 1 before Thanksgiving, however it is unlikely that the bill will pass in its current form. Moreover, the Senate's version of tax reform, expected to be released at the end of this week, is expected to differ significantly from H.R. 1.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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