President Trump’s massive tax reform bill – adopted earlier this month on a 51-49 vote in the Senate – with all “yea” votes coming from Republicans — will soon be reconciled by the House and Senate into a bill acceptable to all members of Congress.
As the “Tax Cuts and Jobs Act” moves through the redrafting process, businesses leaders across the nation need to stay aware of what is happening—and how tax reform may affect their future planning.
To date, U.S. stock markets have rallied strongly on hopes that Washington would provide significant tax cuts for corporations.
“We have an opportunity now to make America more competitive, to keep jobs from being shipped offshore and to provide substantial relief to the middle class,” said Senate Majority Leader Mitch McConnell, R-Ky. Democrats have complained that last-minute amendments added to win over skeptical Republicans on the final vote were poorly drafted and vulnerable to being gamed later. “The Republicans have managed to take a bad bill and make it worse,” said Senate Democratic leader Chuck Schumer, (D-N.Y.). “Under the cover of darkness and with the aid of haste, a flurry of last-minute changes will stuff even more money into the pockets of the wealthy and the biggest corporations.”
With legislative reconciliation about to start, the House and Senate bills on the table would permanently lower the top corporate tax rate to 20% from its current 35% and repeal the corporate alternative minimum tax.
The Senate bill would delay the rate cut until 2019. Some Senate Republicans are reportedly pushing for a slightly higher corporate tax rate, perhaps of 22%, to fund a higher child tax credit or reduce the bill’s impact on the deficit.
The House bill would allow businesses to immediately write off the costs of new equipment, rather than depreciating the value of these assets over time, but the provision would end after five years.
The Senate bill would also allow full expensing of capital investments for five years, but phase the change out by 20 percentage points a year thereafter. It would shorten the depreciation schedule for real property to 25 years. Section 179 expensing would be capped at $1 million, and the phase-out threshold would rise to $2.5 million.
The House would create a top pass-through rate of 25%. Owners of pass-through businesses – which include sole proprietorships, partnerships and S-corporations – currently pay taxes on their firms’ earnings through the personal tax code, meaning the top rate is 39.6%.
In addition, the Senate bill would create a 23% deduction for pass-through income – up from 17.4% in the original bill – subject to phase-out. Certain industries, including health, law and financial services, are excluded, unless household income is below $500,000 (for married couples filing jointly). To discourage people from recharacterizing regular wages as pass-through income, the deduction would be capped at half of the entity’s W-2 wages. The restriction would not apply to married couples with less than $500,000 in taxable income.
Among other changes approved in the early December vote:
- The House bill would eliminate a number of business credits and deductions, including the section 199 (domestic production activities) deduction, the new market tax credit, the orphan drug creditand like-kind exchanges.
- The Senate bill would eliminate the section 199 deduction.
- The House bill would extend eligibility to use the cash accounting method to small businesses with up to $25 million in annual gross receipts, from $5 million under current law.
- The Senate bill would cap eligibility at $15 million in annual gross receipts.
Both the House and Senate bills would enact a deemed repatriation of overseas profits. Under the House bill, the rates would be 14% for cash and equivalents and 7% for reinvested earnings. Under the Senate bill, they would be 14.5% for cash and equivalents and 7.5% for reinvested earnings.
- The House bill would alter the rules governing tax-exempt groups such as religious organizations, potentially allowing them to support or oppose political candidates without giving up their tax-exempt status.
- Treasury Secretary Steven Mnuchin has claimed that the Republican tax plan would spur sufficient economic growth to pay for itself and more. Estimates by various organizations vary, but generally they agree that the reforms will add about a trillion dollars to the debt in 10 years.
- Medicare cuts are limited to about 4% of the program’s budget, and some programs such as Social Security are protected entirely.
- The House bill would roughly double the estate tax deduction to $10 million, indexed to inflation, and eliminate the tax entirely in six years. The Senate would raise the exemption to $11.2 million, but not repeal the tax.
Watch this column for details as the reconciliation process continues.