United States

The Senate Committee on Finance releases its tax reform proposal

Senate Committee proposes sweeping changes to U.S. tax system

TAX ALERT  | 

On Nov. 9th, the Senate Committee on Finance unveiled its own tax reform proposal, the “Tax Cuts and Jobs Act” following the recent release of the House proposal with the same name. While the actual legislative text has yet to be released, the Committee announced the bill’s main features in a policy highlight summary and the Joint Committee on Taxation released a description of the “Chairman’s Mark” of the bill.

As set forth in the Chairman’s Mark, the Senate proposal contains many significant business tax changes and, if enacted, it would:

·         Eliminate the graduated corporate rate structure and instead taxes corporate taxable income at 20 percent compared to a maximum 35 percent under current-law. However, the reduced rate is delayed a year, effective beginning in 2019.

·         Expand the use of the cash method of accounting; the cash method of accounting could be used by taxpayers, other than tax shelters, that have annual average gross receipts not exceeding $15,000,000 for the three prior taxable-year period.

·         Allow for full and immediate expensing of new business equipment by: (1) increasing the maximum amount a taxpayer may expense under Section 179 to $1,000,000 and (2) increasing bonus depreciation to 100 percent from 50 percent for qualified property placed in service during a five-year window beginning Sept. 27, 2017 and ending Jan. 1, 2023.

·         Modify the treatment of pass-through taxation differently from the House proposal, by generally allowing an individual taxpayer to deduct 17.4 percent of domestic qualified business income from a partnership, S corporation, or sole proprietorship. However, the deduction does not apply to certain services businesses, except for a taxpayer whose taxable income does not exceed $150,000.

·         Shorten the recovery period for determining the depreciation deduction with respect to nonresidential real and residential rental property to 25 years.

·         Modify the international tax system in a variety of ways, including by replacing the current worldwide system with a territorial system, taxing accumulated offshore earnings at rate of either 12 percent (for deferred cash earnings) or five percent (for noncash), and imposing a minimum tax of 10 percent on corporations that pay significant amounts of deductible payments to related foreign parties

·         Preserve business interest deductions for small businesses, but limit the deduction to 30 percent of earnings before interest and taxes.

·         Preserve the research and development tax credit.

·         Repeal the domestic production activities deduction under Section 199.

·         Reduce the 70 percent corporate dividends received deduction to 50 percent and the 80 percent corporate dividends received deduction to 65 percent beginning in 2019.

In addition, the Chairman’s Mark would affect individuals and most notably the proposal would:

·         Establish seven income tax brackets and adjusts the qualifying income levels by expanding the zero bracket, keeping the 10 percent bracket, and includes a 38.5 percent bracket for high-income earners. Thus, the new bracket system would be: 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent, and 38.5 percent.

·         Double the standard deduction for single, head of household, and joint-filers

·         Retain some other itemized deductions including for charitable contributions, medical expenses, and student loan interest.

·         Repeal the deduction for state and local taxes not paid or accrued in a trade or business, unlike the House proposal which continues the deduction for property taxes paid by individuals.

·         Double the estate tax exemption to $11 million, but does not eliminate it as the House proposal would.

·         Preserve current 401(k) rules similar to the House proposal.

·         Retain the home mortgage interest deduction as-is under current law.

·         Preserve education relief for graduate students and the enhanced standard deduction for the blind and elderly.

·         Increase the child tax credit to $1,650.

·         Repeal the AMT.

·         Preserve the low-income housing credit, the earned income credit, and the adoption tax credit.

·         Preserve the child and dependent care tax credit

·         Retain the penalty imposed for failure to maintain health coverage (the ACA individual mandate).

Another important aspect of the proposed legislation is its cost. Since lawmakers intend to pass any tax legislation using the budget process known as reconciliation, the legislation must not cost more than $1.5 trillion. According to The Joint Committee of Taxation, the Senate bill would cost $1.495.7 billion over a ten year period. Thus, based on the Joint Committee on Taxation’s estimate, there is very little margin for error and the bill may not pass if the cost of the final version exceeds $1.5 trillion. So, taxpayers should closely monitor the revenue impact of changes made to bill during the legislative process.

The Senate Committee on Finance policy highlights document can be found here.

The Joint Committee on Taxation description of the Chairman’s Mark can be found here.

The Joint Committee on Taxation revenue estimate can be found here.

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