2017 Tax Reform – How will it affect you?

By November 16, 2017Tax Reform

On November 9, 2017 there was considerable movement on Capitol Hill – the Senate Joint Committee on Taxation released a tax reform plan that will be reviewed by the Senate Finance Committee, and the House Ways and Means Committee approved a revision to the House bill (Tax Cuts and Jobs Act). Both the House bill and Senate plan envision many changes from the current tax code: decreasing the individual and corporate tax rates, eliminating the alternative minimum tax (AMT), increasing many business expenses, repealing a number of tax credits and deductions, enhancing the child tax credit, etc.

While the Administration is pushing for tax reform legislation to be signed into Law in 2017, the Senate plan and the House bill remain a work-in-progress as much remains to be reconciled between the two plans.

Taxpayers should plan for the future keeping in mind that the bill will follow one of the following paths: pass before year end, pass in early 2018, or fail to move forward in the House and/or Senate. Either way tax planning discussions can begin now as the contemplated tax reform will have a material impact on many taxpayers.

The following provides a high level comparison of the Senate and House proposals:

Senate (as amended November 15, 2017)

House

Under the House bill and the Senate plan, income levels would be indexed for inflation for a “chained consumer price index” instead of the “consumer price index”.  This change should result in slower inflation adjustments.  Further, under the House bill the benefit of the 12 percent rate would be phased out for taxpayers in the 39.6% bracket.  Under the Senate plan the reduction in personal income tax rates would expire after 2025.

Highlights of the Proposed Business Tax Modifications

Maximum Corporate Tax Rate

Senate: A flat 20% for years beginning after 2018.

House: A flat 20% for years beginning after 2017.  25% rate for personal service corporations.

Dividend Received Deduction

Senate: Deduction reduced to 50% for dividends received by C corporations.  Deduction reduced to 65% for a greater than 20% owned corporation.

House: Same as Senate plan.

Corporate Alternative Minimum Tax (“AMT”)

Senate: Repealed.

House: Repealed.

Depreciation

Senate: Immediately expense cost of new investment in most depreciable property.  Investment must be made from September 27, 2017 through December 31, 2022.  Section 179 limit increased to $1 million with the phase-out threshold increased to $2.5 million.

House: Immediately expense cost of new investment in most depreciable property. Investment must be made from September 27, 2017 through December 31, 2022.  Section 179 limit increased to $5 million with the phase-out threshold increased to $20 million.

Depreciation Life of Buildings

Senate: 25 years.

House: 39 years for most non-residential buildings, and 27.5 years for residential rental buildings.

Net Operating Loss (“NOL”) Deduction

Senate: Carryback repealed (except farms – two years), carryover limited to 90% of taxable income determined without regard to the NOL.

House: Carryback repealed (except farms – one year), carryover limited to 90% of taxable income determined without regard to the NOL.

Research and Development Credit

Senate: No direct provision, but intended to be preserved.

House: Same as the Senate plan.

Domestic Production Activity Deduction

Senate: Repealed for taxable years beginning after December 31, 2018.

House: Repealed for taxable years beginning after December 31, 2017.

Deduction of Entertainment Expenses

Senate: Repealed except for the deduction of business meals.

House: Same as the Senate plan.

Cash Method of Accounting

Senate: The cash method of accounting would be available to C corporations and partnerships with C corporation partners with $15 million or less in average annual gross receipts (indexed for inflation).

House: The cash method of accounting would be available to C corporations and partnerships with C corporation partners with $25 million or less in average annual gross receipts (indexed for inflation).

Highlights of the Proposed Individual Tax Modifications

Personal Long-Term Capital Gains and Qualified Dividend Tax Rate

Senate: Maximum of 23.8%.

House: Maximum of 23.8%.

Standard Deduction

Senate: Married filing jointly – $24,000; Head of household – $18,000; Single – $12,000.  The increase in the standard deduction would expire after 2025.

House: Married filing jointly – $24,400; Head of household – $18,300; Single – $12,200.

Individual AMT

Senate: Repealed.

House: Repealed.

Personal Exemption

Senate: Repealed.

House: Repealed.

Child Tax Credit

Senate: Credit would be increased to $2,000 per child; $500 per non-child qualifying dependent.  Credit phase-out would be $500,000 of household income.  This increased benefit would expire after 2025.

House: Credit would be increased to $1,600 per child, and a $300 credit for taxpayer, spouse, and non-child dependents.

State Income Tax, and Property Tax Deductions

Senate: Repealed – no deduction for state or local income taxes paid or for property tax paid.

House: Partial Repeal – no deduction for state or local income taxes paid; up to $10,000 deduction for property taxes paid.

Home Mortgage Interest

Senate: Mortgage interest would be deductible on up to $1 million of qualifying debt.  The deduction for home equity interest would be repealed.

House: Mortgage interest would be deductible on up to $500,000 of qualifying debt.  Existing debt remains subject to the pre-existing limit of $1.1 million of qualifying debt.  The deduction for mortgage interest incurred for a second home and the deduction for home equity interest would be repealed.

Charitable Contribution Deduction

Senate: Increase the income-based percentage limit for certain charitable contributions to 60%.

House: Same as the Senate plan.

Exclusion of Gain from the Sale of a Principal Residence

Senate: Only eligible for the exclusion of gain on the sale or exchange of a principal residence if a taxpayer has owned and used the residence as a principal residence for at least five of the last eight years.

House: Similar to the Senate plan, but in addition there is a phase-out of the exclusion, dollar-for-dollar, when the taxpayer’s average adjusted gross income exceeds $250,000 for individuals, or $500,000 for joint filers.

Medical Expense Deduction

Senate: Current deduction for medical expenses would be maintained.

House: Itemized deduction for medical expenses would be repealed.

Tax Preparation Expense Deduction

Senate: Nondeductible.

House: Same as the Senate plan.

Deduction for Alimony Payments

Senate: Not provided for in the Senate plan.

House: Provisions providing for the deduction of alimony payments and inclusion of alimony payments in income would be repealed.

Limitation of Itemized Deductions

Senate: Repealed.

House: Repealed.

Estate and Gift Tax Exemption

Senate: Exclusion amount for estate and gift tax would be doubled from $5 million to $10 million (indexed for inflation).

House: Exclusion amount for estate and gift tax would be increased to $10 million.  After 2023 the estate and generation-skipping transfer tax would be repealed, and beginning in 2025, the gift tax rate would be reduced to a top rate of 35%.

Squar Milner Insights:

The tax reform legislative process is a work-in-progress, and is far from certain at this point in time.  We will keep you apprised of any major steps forward in the tax reform process.  Please feel free to connect with us if you have any question regarding the proposed legislation, or how the proposed legislation can impact you or your business.  Further, we are happy to discuss potential tax strategies to take advantage of current tax law or the proposed bills should they be signed into law.