Congress Releases Revised Conference Bill on Tax Reform - A Look at How It Compares with Earlier House and Senate Bills

Holland & Knight LLP

Congress released the "Tax Cuts and Jobs Act" on late Friday evening, Dec. 15, 2017. This version of the bill is the result of a conference committee process to marry the different bills previously passed by the U.S. House of Representatives and the U.S. Senate. The House is expected to vote on Tuesday, Dec. 19, and the Senate will likely vote on the bill Tuesday, Dec. 19, or Wednesday morning, Dec. 20, depending on the length of the debate. The margin of error in the Senate, however, is slim. With no support from Senate Democrats, Republicans can stand to lose only two votes. Nevertheless, it is expected that the bill will be passed by both chambers and sent to President Donald Trump for his signature before the Christmas holiday.

Although the bill is not a complete overhaul of the U.S. Tax Code, the bill contains significant changes to many provisions of the Code and impacts every individual and business. If signed into law, the next challenge will be implementation – many of the provisions are effective in 2018 and much of the statutory language will need to be flushed out by the U.S. Department of the Treasury and the Internal Revenue Service (IRS) through the regulatory process.

Holland & Knight will provide further analysis. However, below is a look at how the House and Senate bills compare with the revised conference bill:

 

House Bill

Senate Bill

Conference
(Final Bill)

Individual Tax Rates

Four brackets:
12 percent,
5 percent,

35 percent and
39.6 percent,
with clawback of income taxed at the 12 percent rate for taxpayers in the 39.6 percent bracket

Seven brackets:
10 percent,
12 percent,
22.5 percent,
25 percent,
32.5 percent,
35 percent,
38.5 percent

Seven brackets:
10 percent,
12 percent,
22 percent,
24 percent,
32 percent,
35 percent,
37 percent

Capital Gains and Qualified Dividends Rates

Zero percent if in 12 percent bracket;

15 percent if in 25 percent bracket;

20 percent if in 35 percent bracket

Zero percent for taxpayers with income of $38,700 or less;

15 percent for taxpayers with income of $426,700 or less;

20 percent for taxpayers with income of more than $426,700

Zero percent for taxpayers with income of $38,600 or less;

15 percent for taxpayers with income of $425,800 or less;

20 percent for taxpayers with income of more than $425,800

Personal Exemption

Repealed

Suspended through 2025

Suspended through 2025

Standard Deduction

$12,200 for single taxpayers, $18,300 for heads of household and $24,400 for married filing jointly

$12,000 for single taxpayers, $18,000 for heads of household and $24,000 for married filing jointly

$12,000 for single taxpayers, $18,000 for heads of household and $24,000 for married filing jointly

Itemized Deductions

Eliminates deduction for medical expenses, state and local income taxes, property tax of more than $10,000, mortgage interest expense on acquisition debt of more than $500,000, certain personal casualty losses, unreimbursed employee expenses and tax preparation fees;

Overall limitation on itemized deductions repealed

Eliminates deduction for state and local taxes, property tax of more than $10,000, unreimbursed employee expenses and tax preparation fees;

Overall limitation on itemized deductions suspended until 2026

Limits combined deduction for state and local taxes and property taxes to $10,000 from 2018 to 2025 and eliminates deduction for mortgage interest expense on acquisition debt of more than $750,000, unreimbursed employee expenses and tax preparation fees through 2025;

Overall limitation on itemized deductions suspended until 2026

Alternative Minimum Tax (AMT)

Repealed

Retained with increased exemptions for individuals through 2025

Retained with increased exemptions for individuals through 2025

Repealed for corporation

Carried Interest

Partnership interests received in exchange for services must be held for at least three years to be eligible for long-term capital gain tax rate

Partnership interests received in exchange for services must be held for at least three years to be eligible for long-term capital gain tax rate

Partnership interests received in exchange for services must be held for at least three years to be eligible for long-term capital gain tax rate

Corporate Tax Rate

20 percent starting in 2018

20 percent starting in 2019

21 percent starting in 2018

Depreciation

Immediate deduction of capital expenditures for property placed in service in the next five years up to $5 million per year with phaseout for income of more than $20 million

Immediate deduction of capital expenditures for property placed in service in the next five years up to $1 million per year with phaseout for income of more than $2.5 million. Starting in 2024, the percentage of a property's cost that may be deducted immediately decreases 20 percent each year

Immediate deduction of capital expenditures for property placed in service in the next five years up to $1 million per year with phaseout for income of more than $2.5 million. Starting in 2023, the percentage of a property's cost that may be deducted immediately decreases 20 percent each year

Pass-Through Taxation

Maximum tax rate of 25 percent on business income of S corporation shareholders, partners of partnerships and sole proprietorships if owners are passive investors and based on capital percentage;

Owners of businesses other than personal-service businesses can elect to apply a default capital percentage of 30 percent or establish the capital percentage based on facts and circumstances; owners of personal-service businesses must establish the capital percentage based on facts and circumstances

S corporation shareholders, partners of partnerships and sole proprietorships can deduct 23 percent of business income, but deduction is limited to 50 percent of wages paid;

Owners of personal services businesses are ineligible unless income is less than $75,000

S corporation shareholders, partners of partnerships and sole proprietorships can deduct 20 percent of business income, but deduction is limited to a percentage of wages paid for taxpayers with income exceeding 157,500 ($315,000 if married) that is phased in to 50 percent over the next $50,000 ($100,000 if married) of income;

For owners of personal services businesses, deduction is phased out over the next $50,000 ($100,000 if married) of income if income exceeds $157,500 ($315,000 if married)

Interest Deduction

Interest deduction limited to 30 percent of earnings before interest, tax, depreciation and amortization (EBITDA) for businesses with gross receipts of more than $25 million

Interest deduction limited to 30 percent of earnings for businesses with gross receipts of more than $15 million

Interest deduction limited to 30 percent of EBITDA for businesses with gross receipts of more than $25 million; depreciation, amortization and depletion are counted toward earnings beginning in 2022

Net Operating Losses

Eliminates net operating loss carrybacks; net operating loss carry forward deduction made indefinite but limited to 90 percent of the taxpayer's taxable income

Eliminates net operating loss carrybacks; net operating loss carry forward deduction made indefinite but limited to 90 percent of the taxpayer's taxable income; starting in 2023, carry forward deduction is reduced to 80 percent of taxable income

Eliminates net operating loss carrybacks; net operating loss carry forward deduction made indefinite but limited to 80 percent of the taxpayer's taxable income

Section 199 Gross Production Activities

Repealed

Repealed

Repealed

Business Tax Credits

R&D and low-income housing tax credits retained

R&D and low-income housing tax credits retained

R&D and low-income housing tax credits retained

Taxation of International Income

Territorial system

U.S. shareholders must include 50 percent of excess returns earned by controlled foreign corporations

Territorial system

Minimum base erosion tax equal to 10 percent of the excess of modified taxable income over regular tax liability

Territorial system

Minimum base erosion tax equal to 10 percent of the excess of modified taxable income over regular tax liability

Earnings of Foreign Subsidiaries

One-time deemed repatriation tax of 14 percent on income held as cash and 7 percent on non-cash holdings of foreign subsidiaries payable over eight years

One-time deemed repatriation tax of 14.49 percent on income held as cash and 7.49 percent on non-cash holdings of foreign subsidiaries

One-time deemed repatriation tax of 15.5 percent on income held as cash and 8 percent on non-cash holdings of foreign subsidiaries payable over eight years

Dividends from Foreign Subsidiaries

Excluded from income of U.S. corporations that own at least 10 percent of the foreign subsidiary

Excluded from income of U.S. corporations that own at least 10 percent of the foreign subsidiary

Excluded from income of U.S. corporations that own at least 10 percent of the foreign subsidiary

Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income

50 percent of foreign high-return amounts included currently in income of U.S. shareholders of a controlled foreign corporation

Global intangible low-taxed income (GILTI) included currently in income of U.S. shareholders of a controlled foreign corporation. Domestic C corporations may deduct 50 percent of GILTI and 37.5 percent of foreign-derived intangible income (FDII) through 2025; deductions are reduced to 37.5 percent of GILTI and 21.875 percent of FDII after 2025

GILTI included currently in income of U.S. shareholders of a controlled foreign corporation. Domestic C corporations may deduct 50 percent of GILTI and 37.5 percent of FDII through 2025; deductions are reduced to 37.5 percent of GILTI and 21.875 percent of FDII after 2025

Subpart F Income

Retained

Retained

Retained

Gift Tax

Retained; rate decreased to 35 percent beginning in 2024; exemption amount increased to $10 million

Silent; exemption amount increased to $10 million

Silent; exemption amount increased to $10 million

GST

Repealed beginning in 2024; exemption amount increased to $10 million

Silent; exemption amount increased to $10 million

Silent; exemption amount increased to $10 million

Estate Tax

Repealed beginning in 2024; exemption amount increased to $10 million

Exemption amount increased to $10 million

Exemption amount increased to $10 million

Step-Up in Basis at Death

Retained

Silent

Retained

 

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