Fifteen Provisions to Watch in the Tax Reform Proposals

by Cadwalader, Wickersham & Taft LLP

Cadwalader, Wickersham & Taft LLP

On November 14, 2017, Senate Finance Committee Chairman, Orrin Hatch (R-Utah), released his modified tax reform plan (“Senate Bill”),  which adopts some of the House Bill proposals (as amended) (“House Bill”),  but also includes some important differences as highlighted below.  Discussions are ongoing and the notable provisions summarized below may change and/or be replaced by new provisions.  We will update you as significant developments unfold.

1. Corporate Tax Rate

House Bill: Reduce the maximum corporate tax rate to 20% from 35% effective 2018. 

Senate Bill: Same, except that the reduction would be deferred until 2019.

2. Partnership and S Corporation Tax Rate

House Bill: Qualified business income of owners/shareholders of a partnership or S corporation would be subject to a maximum tax rate of 25% rather than the current 39.6% maximum individual tax rate. 

  • For service businesses such as law, accounting, consulting and financial services, qualified business income is limited to the “capital percentage” of each owner’s net income derived from active business activities. Owners/shareholders in non-service businesses may elect to treat qualified business income (which includes any net income derived from a passive business activity) as equal to 30% of its net business income from active business activities.

Senate Bill: An individual taxpayer generally may deduct 17.4% of domestic qualified business income from a partnership, S corporation, or sole proprietorship, capped at 50% of the taxpayer’s allocable or pro rata share of W-2 wages paid by the partnership, S corporation or sole proprietorship.

  • The deduction generally does not apply to specified service businesses, except in the case of a taxpayer whose taxable income does not exceed $500,000 for married individuals filing jointly or $250,000 for single individuals.

3. Carried Interest

House Bill: The required holding period for long-term capital gains is increased to three years in respect of certain partnership interests transferred in connection with the performance of services by taxpayers.

Senate Bill: No current proposal.

4. 30% Limitation on Interest Deductions

House Bill: Interest deductions for all business entities would be limited to 30% of the business’s adjusted taxable income (as defined, similar to EBITDA).  Any disallowed interest expense may be carried forward for up to five tax years.

Senate Bill: Similar to the House Bill, except that “adjusted taxable income” under the Senate Bill excludes depreciation and amortization.  Any disallowed interest expense may be carried forward indefinitely.

5. Deductions of Domestic Corporations in International Groups Separately Limited

House Bill: The interest deductions of a U.S. corporation that is a member of an international financial reporting group would be limited if the corporation’s net interest expense exceeds 110% of its share of the group’s net interest expense (allocated in proportion to each member’s EBITDA).  Any disallowed interest expense may be carried forward for up to five tax years.

Senate Bill: The interest deductions of a U.S. corporation that is a member of a worldwide affiliated group is reduced by the corporation’s net interest expense multiplied by the debt-to-equity differential percentage of the group (generally, comparing the amount by which the total U.S. group indebtedness exceeds 110% of the debt the U.S. group would hold if the group had proportionate debt-to-equity ratios).  Any disallowed interest expense may be carried forward indefinitely.

6. Dividends Received Deduction

House Bill: Effective In 2018, a corporation may only deduct 65% (rather than 80% under current law) of dividends received from U.S. corporations in which the receiving corporation owns more than 20% of the stock, and a corporation may only deduct 50% (rather than 70% under current law) of dividends received from other U.S. corporations.

Senate Bill: Similar proposal, except that the change would be effective in 2019.

7. Shift to Quasi-Territorial International Tax System

House Bill: Generally, the current worldwide tax system would be converted into a quasi-territorial system through the exemption of 100% of the foreign-source portion of dividends paid by a foreign corporation to a U.S. corporate shareholder that owns 10% or more of the foreign corporation.

  • Each 10% U.S. shareholder of a foreign subsidiary would be subject to a one-time tax on its share of the foreign subsidiary’s historical earnings and profits (“E&P”) not previously subject to U.S. tax. Foreign tax credits may be available to offset a portion of this tax and a taxpayer may elect to pay the tax liability over 8 equal annual installments. Future distributions of E&P subject to the one-time tax would not be subject to a second tax upon receipt.
  • A 14% rate would apply to E&P attributable to cash and 7% rate to the remaining amount of E&P.

Senate Bill: Similar proposal except that a 10% rate would apply to E&P attributable to cash and a 5% rate to the remaining amount of E&P, and taxpayers may elect to pay the tax liability over 8 annual installments (first five installments each equal to 8% of the liability and sixth, seventh and eighth installments equal to 15%, 20% and 25%). 

8. Excise Tax on Related Party Payments / Minimum Tax on Base Erosion Payments

House Bill: A 20% excise tax would be imposed on payments (other than interest) from U.S. corporations to related foreign corporations that are deductible, includible in costs of goods sold, or includible in the basis of a depreciable or amortizable asset, unless the related foreign corporation elects to treat the payments as income effectively connected with the conduct of a U.S. trade or business.

Senate Bill: 10% (increased to 12.5% beginning in 2026) base erosion minimum tax would be imposed on corporations (other than a RIC, REIT or S corporation) calculated on a modified tax base that excludes certain items, such as deductions for payments made to a related foreign party.  The base erosion minimum tax would only apply to corporations with average annual gross receipts of at least $500 million, at least 4% of whose deductions are derived from payments made to a related foreign party.  

9. Foreign High Returns / Global Intangible Low-Taxed Income

House Bill: A U.S. parent of foreign subsidiaries would be subject to current U.S. tax on 50% of the U.S. parent’s “foreign high returns”, which are the excess of the U.S. parent’s foreign subsidiaries’ aggregate net income over a routine return (7% plus the Federal short-term rate) on the foreign subsidiaries’ aggregate adjusted bases in depreciable tangible property, reduced by interest expense.

Senate Bill: A U.S. parent would be subject to current U.S. tax on the global intangible low-taxed income earned by its foreign subsidiaries (“GILTI”), which is the amount by which the net income of a foreign subsidiary exceeds a 10% rate of return on certain of its business assets.

  • A U.S. parent may deduct 37.5% (reduced to 21.875% beginning in 2026) of the lesser of (i) the amount of its foreign-derived intangible income plus GILTI, or (ii) its taxable income, determined without regard to the proposal.
  • Certain inbound distributions of intangible property to a U.S. parent would be tax-free.

10. Limitation of Treaty Benefits for Deductible Payments

House Bill: Payments of interest, dividends, rents and annuities that are deductible in the U.S. and made by an entity that is controlled by a foreign parent to an affiliate in a tax treaty jurisdiction will be subject to 30% withholding tax without reduction for any treaty benefits, unless the withholding tax would be reduced if the payment were made directly to the foreign parent.  This provision was omitted in Chairman Brady’s markup of the Bill.

Senate Bill: None.

11. S. Tax on Sale of Certain Partnership Interests

House Bill: None.

Senate Bill: A non-U.S. partner in a partnership would recognize gain or loss treated as “effectively connected” to a U.S. trade or business upon the sale of the partner’s partnership interest if the partner would be treated as having effectively connected income in a hypothetical sale of all the partnership assets. The transferee would be required to withhold 10% of the amount realized, unless the transferor certifies that it is not a foreign person.  This provision would effectively codify the IRS’s current view and override Grecian Magnesite, a recent Tax Court decision.

12. Capital Expensing

House Bill: Generally, businesses would be able to immediately “write off” or expense 100% of the cost of qualified property acquired and placed in service between September 28, 2017 and January 1, 2023.

Senate Bill: The Senate includes a similar proposal, except that “qualified property” may include real property.

13. Net Operating Losses

House Bill: The use of net operating losses would be limited to 90% of taxable income with changes to the carryback and carryforward rules.

Senate Bill: The Senate Bill includes a similar proposal, except that the use of net operating losses would be further limited to 80% of taxable income beginning in 2023 (but would return to 100% in 2026 if revenue targets are met).

14. Like-Kind Exchanges

House Bill: Like-kind exchanges would generally be limited to only real property.

Senate Bill: The Senate Bill includes a similar proposal.

15. Insurance Companies

Both the House and Senate proposals include extensive changes to the taxation of insurance companies.


1 See Description of the Chairman’s Mark of the “Tax Cuts and Jobs Act”, dated as of November 9, 2017, and Description of the Chairman’s Modification to the Chairman’s Mark of the “Tax Cuts and Jobs Act”, dated as of November 14, 2017.  This summary does not reflect a review of the proposed statutory text of the Senate Bill, which has not yet been released at the time of drafting.

2 H.R. 1, Tax Cuts and Jobs Act.

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.

© Cadwalader, Wickersham & Taft LLP | Attorney Advertising

Written by:

Cadwalader, Wickersham & Taft LLP

Cadwalader, Wickersham & Taft LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.