Press Room: Tax Release
Republicans Reach Deal on Tax Plan; Final Votes Expected Next Week
House and Senate Republicans have announced a compromise on tax reform. 509 pages of legislative text and 560 pages of technical explanation of the bill were released on Friday, December 15, 2017. Both the House and Senate plan to vote on the bill next week with a final bill ready for President Donald Trump’s signature before the Christmas holiday recess. As anticipated, to conform to the Senate Byrd rule, the bill generally sunsets the individual provisions starting in 2026, while the business provisions are generally permanent. Below are highlights of key provisions that affect individuals and businesses.
- Contains individual brackets of 0%, 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The 37% rate begins at a taxable income threshold of $600,000 for married filing joint (MFJ) / $500,000 single taxpayers. The threshold for the top bracket for MFJ taxpayers was reduced from $1 million under the previous House and Senate bills to $600,000.
- Retains the individual alternative minimum tax (AMT) with increased exemption amounts of $1 million for MFJ / $500,000 single taxpayers.
- Repeals personal exemptions and the overall limitation on itemized deductions.
- Repeals state and local tax deductions except for $10,000 in property, income or sales tax (any combination at election of taxpayer). Provides that no deduction is allowed in 2017 for prepayments of tax for taxable years beginning after December 31, 2017.
- Repeals miscellaneous itemized deductions that were subject to the 2% floor.
- Reduces the mortgage interest deduction to interest on $750,000 of mortgage debt each for a principal residence and a second home (rather than $1 million under current law). Mortgages with respect to existing principal residences and second homes remain subject to the $1 million cap. No provision was included to modify the exclusion of gain from the sale of a principal residence, even though such a provision was included in both the House and Senate bills.
- Retains the itemized deduction for medical expenses and lowers the floor to 7.5% of AGI (from 10%) in 2018 and 2019.
- Allows Sec. 529 plans to be used for elementary and secondary education, in addition to higher education.
- Limits excess business losses in excess of $500,000 for taxpayers other than corporations. Such losses are carried forward and treated as a net operating loss carryforward.
- Does not include the Senate bill’s provision requiring the first-in-first-out method of determining cost basis of securities.
- Increases the estate and gift tax basic exclusion amount (doubled from $5.5 million to $11 million). The estate tax is not repealed.
- Provides for a 21% tax rate for C corporations, effective January 1, 2018.
- Provides for a 20% deduction for certain pass-through business income (LLCs, partnerships, sole proprietorships and S corporations) of individuals, trusts, and estates. At a 37% top tax rate, the 20% deduction approximates a marginal tax rate of 29.6%. The deduction is limited to either 50% of allocable W-2 wages of the business or the sum of 25% of W-2 wages plus 2.5% of the adjusted basis of qualified tangible property. Specified service businesses are excluded, except for income thresholds below $315,000 for MFJ / $157,500 single taxpayers.
- Repeals the corporate alternative minimum tax (AMT).
- Full cost recovery/expensing of qualified depreciable assets acquired after September 27, 2017 and before January 1, 2023 with a phase-out from 2024 to 2027. The original-use requirement under present law is removed and qualified property is expanded as under the Senate bill to include films, television and live theatrical productions.
- Retains 39-year and 27.5-year recovery periods for nonresidential real and residential rental property, but allows a 15-year recovery period for qualified improvement property.
- Limits interest expense deduction to 30% of adjusted taxable income, generally following the Senate bill. However, from 2018 to 2021, adjusted taxable income is computed before deductions for depreciation, amortization or depletion. Real estate business can elect out of the limit, but must use ADS depreciation.
- Limits net operating loss carryforward deductions to 80% of taxable income for losses arising in taxable years beginning after December 31, 2017 and repeals NOL carrybacks for losses arising in years beginning after December 31, 2017. This provision is more restrictive than either the House or Senate bills.
- Repeals gain deferrals for like-kind exchanges, other than for real property.
- Repeals technical-termination rules for partnerships.
- Provides a three-year holding period for long-term capital gain treatment with respect to carried interests.
- Requires research expenses to be capitalized and amortized ratably over a five-year period for amounts incurred beginning in 2022.
- Provides rules for revenue recognition for accrual basis taxpayers following the Senate bill.
- Reduces the orphan drug credit following the Senate bill, but to a credit rate of 25%.
- Retains present law rules for private activity bonds but repeals the exemption for advance refunding bonds.
- Modifies the Sec. 162(m) limitation on excessive employee remuneration generally in accordance with the Senate bill, including the transition rule for binding contracts as of November 2, 2017 (with clarification). An excise tax of 21% applies for tax-exempts.
- Creates a territorial-style participation exemption system of taxation with deemed repatriation at reduced 15.5% (cash) and 8% (non-cash) rates and includes anti-base erosion measures that blend elements of both the House and Senate bills.
We will be providing additional details and analysis with respect to the final legislation in the coming days. This is the most significant tax rewrite in decades and the timing for this legislation at year-end presents a number of challenges for taxpayers. Please contact us as soon as possible to discuss how you can position your business and financial affairs in connection with the changes ahead.