On November 2, 2017, the US House Ways and Means Committee released its sweeping bill to reform the federal tax code.
The 429-page Tax Cuts and Jobs Act would substantially overhaul US tax law if enacted in its current form, although a lot of work remains to get to an enacted piece of legislation. Most of the changes would go into effect after December 31, 2017, but there are exceptions.
Here’s a brief rundown of some of the proposed changes included in the bill that would significantly impact businesses and individual taxpayers.
Businesses
Corporate Tax Rate Reduced and Alternative Minimum Tax (AMT) Repealed
The current maximum corporate rate of 35% would decrease to 20%. Personal service corporations, such as law, architecture, and accounting firms, would be subject to a 25% tax rate. In addition, the corporate AMT would be repealed.
Special Rate for Certain Pass-Through Entities
Currently, owners and shareholders of businesses organized as sole proprietorships, partnerships, LLCs, and S corporations report net income on their individual tax returns at rates of up to 39.6%.
Under the proposal, a portion of net income distributed by a pass-through entity to an owner or shareholder could be treated as business income subject to a maximum rate of 25%. The remaining net business income would be treated as compensation and continue to be subject to ordinary individual income tax rates.
A number of additional rules would be added for pass-through entities.
Full Expensing of Qualified Property
Under the proposed bill, businesses could immediately expense 100% of the cost of qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023—with an additional year for certain property with a longer production period.
Qualified property would include used property but wouldn’t include property used in real property trades or businesses. The bill would also increase the Section 179 expensing threshold to $5 million from $500,000 and increase the phaseout threshold to $20 million from $2 million.
Certain Business Breaks Limited or Repealed
Limitations would be placed on several popular business tax provisions, such as:
- Net operating losses would be limited to 90% of taxable income and would only be permitted to be carried forward.
- Interest deductions would be limited for larger businesses.
- Section 1031 like-kind exchanges would only be permitted for real property.
- The domestic production activities deduction would be repealed.
- No deduction would be allowed for entertainment and recreation activities or facilities, even when directly related to the taxpayer’s business.
Eliminated Credits
- Work opportunity tax credit for hiring employees belonging to certain target groups
- Credit for expenses to rehabilitate old and historic buildings
- Employer-provided child care credit
- Credit for expenses related to providing access to disabled individuals
Increased Availability of Simplified Accounting Methods for Small Businesses
Several changes would be made to the rules permitting smaller taxpayers to use simpler accounting methods for inventory, long-term contracts, or their overall method of accounting. These changes would apply to taxpayers with average annual gross receipts of less than $25 million.
Broad Changes for Businesses with International Operations
The bill includes significant changes for multinational businesses by moving to a territorial tax regime from the current worldwide tax system. These changes include the following:
- One-hundred percent exemption for dividends from foreign subsidiaries in which the US parent owns at least a 10% interest
- A deemed repatriation tax for undistributed foreign earnings and profits of 12% for cash and other liquid assets or 5% for other assets
- New anti-base erosion rules that would impose a minimum tax
Individuals
Fewer Tax Brackets and AMT Repealed
Under the proposed bill, there’d be four brackets of 12%, 25%, 35%, and 39.6% instead of the current seven brackets. The threshold at which the 39.6% bracket would apply to married couples filing jointly would be increased to $1 million annual income or $500,000 for other filers. The 35% bracket would apply earlier at $260,000 for married couples filing jointly—down from $416,700 currently.
Standard Deduction Increased with Personal Exemptions Eliminated
Perhaps the most significant change for many individual taxpayers is in this area. For 2017, the standard deduction is $6,350 for single taxpayers and married couples filing separately and $12,700 for married couples filing jointly. In addition, taxpayers may claim a personal exemption for each taxpayer and dependent, such as a dependent child, included on the tax return. For 2017, the personal exemption is $4,050 per person.
Under the proposed plan, the standard deduction amounts would increase to $12,000 for single taxpayers or $24,000 for married couples filing jointly, but the deduction for personal exemptions would be repealed.
Several Changes Limit or Repeal Many Personal Tax Breaks
Many itemized deductions would be repealed or changed.
Eliminated Provisions
- Deductions for state and local income or sales taxes
- Personal casualty losses
- Medical expenses
- Alimony payments
- Moving expenses
- Student loan interest
- Tax preparation expenses
Limitations on Deductions
- Property tax deduction would be limited to $10,000.
- Charitable contribution deduction would be retained, though subject to some changes.
Mortgage Interest Deduction
The mortgage interest deduction would be retained, but the acquisition debt limit for mortgage interest deduction would be reduced. Currently, an itemized deduction for mortgage interest can be claimed for a principal residence and one other residence on up to $1 million of acquisition debt and up to $100,000 in home-equity debt.
Under the proposed bill, the $1 million limitation would be reduced to $500,000 for homes purchased after November 2, 2017, and interest could be deducted only on a principal residence. Home-equity debt incurred after the effective date wouldn’t be deductible.
Repeal of Nonrefundable Credits
The adoption tax credit and the credit for plug-in electric vehicles would also be repealed, as would the credit for taxpayers age 65 and older or those who are retired and disabled.
Principal Residence Gain Exclusion
Rules for principal residence gain exclusion would be tightened. To claim the principal residence exclusion of up to $250,000 for singles and $500,000 for joint filers, a taxpayer would generally have to own and use the home for five out of the previous eight years. Currently, the property must be owned and used for only two out of the previous five years.
Increased Child Tax Credit and a New Family Credit
Currently, parents can claim a tax credit of $1,000 for each qualifying child under the age of 17. The credit begins to phase out once adjusted gross income is over $75,000 for singles or $110,000 for joint filers.
Under the bill, the child tax credit would be increased to $1,600. An additional credit of $300 would be allowed for non-child dependents who aren’t qualifying children for tax years before 2023. There are a number of rules and qualifications for these proposed credits, including phaseout amounts.
Estate Tax Eventually Repealed
Under the proposal, the estate tax exemption would increase from $5.49 million in 2017 to $10 million in 2018 (indexed for inflation) and the estate tax, along with the generation-skipping transfer tax, would be completely phased out in six years. The gift tax would remain.
What’s Next
These are only some of the proposed changes in the Tax Cuts and Jobs Act. The bill is likely to undergo many revisions as it progresses through Congress.
Even though President Donald Trump and Republican lawmakers would like to pass tax reform sooner rather than later, a bill would have to be voted on by the full House and the Senate—which is working on its own tax plan—before that could happen.