The Senate Finance Committee Chairman’s Mark for the “Tax Cuts and Jobs Act,” released Nov. 9, describes in detail the Senate tax bill and is significantly different than the House bill, as it currently stands.
To view the two other e-alerts Polsinelli has published since the Tax Cuts and Jobs Act was released on Nov. 2, click here
PROVISIONS AFFECTING BUSINESSES
Treatment of Pass-Through Income:
- Corporate Rate Delay. The House bill cuts the corporate tax rate to 20 percent effective in tax years after Dec. 31, 2017. The Senate bill also cuts the corporate tax rate to 20 percent, but delays the effective date until 2019.
- House Bill: Allows all passive income to be taxed at 25 percent, and, except for certain service businesses, allows businesses organized as pass-through entities to elect to have 30 percent of its income taxed at 25 percent as income from capital. Alternatively, pass-through entities and service entities with significant capital investments can elect to calculate the percentage of income earned on capital investments, and that percentage of their income would be subject to the 25 percent rate.
- Senate Bill: Rather than adopting a lower tax rate on pass-through income, the Senate bill allows pass-through entities to deduct 17.4 percent of their pass-through income in determining taxable income. This deduction is limited to 50 percent of the wages paid to the owner by the business. Pass-through entities are still subject to ordinary income tax rates. The deduction is not available to specified service businesses including law, accounting and other businesses whose income is above $150,000 and whose principal assets are the reputation and skill of employees.
Expensing and Depreciation:
- House Bill: The House bill allows corporations and partnerships with a corporate partner to use the cash method of accounting if their average gross receipts have not exceeded $25 million in prior years.
- Senate Bill: The Senate bill limits the use of cash accounting to businesses whose average gross receipts have not exceeded $15 million in prior years.
- House bill: Allows immediate expensing of qualified property, generally property not related to real estate business and that is depreciable over 20 years or less. The bill increases the limits under section 179, which allows small businesses to expense certain property (generally not subject to the immediate expensing rule above), from $500,000 to $5 million, and phases out the benefit where companies purchase more than $20 million of qualifying property.
- Senate Bill: The Senate bill also provides for immediate expensing of qualified property. However, the Senate bill raises the expensing cap under section 179 to only $1 million and begins phasing out the benefit when purchases reach $2.5 million. The Senate bill also shortens the depreciation period of real property to 25 years.
PROVISIONS RELATING TO INTERNATIONAL INCOME
Taxation of Foreign Income:
- House Bill: The House bill imposes taxes on previously untaxed income held outside the United States at 14 percent on liquid assets 7 percent on illiquid assets.
- Senate Bill: The Senate bill imposes similar taxes but at 10 percent on liquid assets and 5 percent on illiquid assets.
- House Bill: The House bill moves to a “participation exemption” system of taxation whereby 100 percent of the foreign-source portion of dividends paid by a foreign corporation to a U.S. corporate shareholder that owns 10 percent or more of the foreign corporation would be exempt from U.S. taxation. The House bill also has a provision designed to limit base erosion by imposing U.S. tax on 50 percent of a U.S. parent company’s “high returns,” which are earnings of foreign subsidiaries that exceed routine amounts (the federal short term rate plus 7 percent). The provision would be effective for distributions made after 2017.
- Senate Bill: The Senate bill provides the same participation exemption of dividends as the House bill. However, the Senate bill also has anti-abuse rules and provides for a tax of up to 10 percent tax on certain amounts that represent income from base erosion. The provision would also be effective for distributions made after 2017.
PROVISIONS RELATING TO INDIVIDUALS
Tax Rates and Brackets:
State and Local Taxes and Mortgage Interest:
- House Bill: The House bill has four brackets, and individual rates from 12 percent to 39.6 percent, and a “bubble” tax bracket of 45.6 percent for income between $1 million and $1.2 million for individual filers, and between about $1.2 million and $1.64 million for joint filers.
- Senate Bill: The Senate bill has seven tax brackets, from 10 percent to 38.5 percent, and no bubble tax bracket.
- House Bill: The House bill eliminates the deduction for state and local taxes, but retains a deduction for local property taxes up to $10,000. The bill limits the mortgage interest deduction to the first $500,000 in mortgage value.
- Senate Bill: The Senate bill completely eliminates the deduction for state and local taxes, but keeps the mortgage interest deduction for home purchases. The bill eliminates the deduction for home equity loans.
- House Bill: The House bill doubles the estate tax deduction immediately, and completely eliminates the estate tax in six years.
- Senate Bill: The Senate bill doubles the estate tax deduction but does not eliminate the estate tax.
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