United States

Chairman Brady amends key parts of House Tax Bill

Brady amends Tax Reform Bill

TAX ALERT  | 

On Nov. 9, Chairman Brady of the House Ways and Means Committee proposed a second amendment (the “Amendment”) to the House tax reform bill. The Amendment modifies key provisions of the House Tax Reform Bill (H.R. 1), including the proposals that would lower the tax rate on pass-through business income, limit base erosion from cross border transactions, and the rules that would limit the dividends received deduction for corporations. The Joint Committee on Taxation estimates that the revised House bill will cost $1,436.9 billion.

Pass-through Provisions

The Amendment proposes a reduced rate of 9 percent, compared to 12 percent under current-law, on business income for individuals for the first $75,000 in net business taxable income of an active owner or shareholder earning less than $150,000 in taxable income through the pass-through. The reduced rate phases out when taxable income reaches $225,000. The Amendment would allow the reduced rate to apply to all business types and the nine percent rate would be phased in over a five-year period starting in 2018. In addition, the Amendment retains current rules for the application of self-employment taxes to income received through a pass-through, overriding the original H.R.1.

Corporate Tax Provisions

The Amendment makes changes to the laws impacting corporate taxpayers as well. The Chairman’s Amendment lowers the 80 percent dividends received deduction to 65 percent and the 70 percent dividends received deduction to 50 percent, and preserves the current-law effective tax rates on income from such dividends. In addition, there is a change in the treatment of S corporation conversions into C corporations, where distributions from an eligible terminated S corporation would be treated as paid from its accumulated adjustments account and from its earnings and profits on a pro-rata basis. Any Section 481(a) adjustment is taken into account ratably over a six-year period.

International Tax Provisions

The Amendment makes key changes to the international tax proposals of H.R. 1.  In particular, a seven percent rate applies to deferred foreign earnings that are held in cash while a 14 percent rate would apply to offshore earnings that have been reinvested in non-cash assets.  In addition, taxpayers who elect to be taxed on a net basis to avoid the excise tax on payments made to foreign related corporations would not impute a markup on certain “deemed” expenses they may deduct in computing their net basis tax liability.  In addition, such taxpayers would be able to claim a credit for up to 80 percent of the foreign taxes paid on income subject to the excise tax.  Taxpayers would use federal income tax principles to calculate this credit instead of financial accounting concepts, as was required under the prior draft of the legislation.  

Other changes

In addition, the Amendment makes other changes; notably it:

·         Modifies the deductibility of net business interest for taxpayers that paid or accrued interest on, “floor plan financing indebtedness.” Full expensing would no longer be allowed for any trade or business that has floor plan financing indebtedness.

·         Preserves the current-law non-refundable credit for qualified adoption expenses.

·         Allows rollovers from Section 529 plans to ABLE programs.

·         Preserves the treatment for moving expenses in the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order.

·         Preserves current-law tax treatment of nonqualified deferred compensation.

·         Excludes restricted stock units from eligibility for Section 83(b) elections.

·         Prohibits an immediate deduction for an attorney’s advancement of litigation funding to a client in a contingent-fee arrangement until the contingency is resolved.

·         Requires capitalization and amortization of some research or experimental expenditures over a five-year period.

·         Retains the current-law tax treatment of insurance company deferred acquisition costs, life insurance company reserves, and pro-ration, and imposes an eight percent surtax on life insurance income. However, this provision was noted as a placeholder and so may change.

·         Permits Section 501(c)(3) organizations to engage in political speech, if the speech is in the ordinary course of the organization’s business related to such speech are de minimis.

The Amendment text can be found here and the section-by-section summary can be found here.

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