Last week, the House Ways and Means Committee released its comprehensive tax bill, the “Tax Cuts and Jobs Act”. The bill incorporates many of the provisions that were introduced in the Republican Tax Framework released in September (See Whitley Penn Tax Alert: Republican Leaders and Trump Administration Release Tax Reform Framework – September 27, 2017). Note that since this is just the first step in the tax legislative process, many provisions in the bill may be changed or eliminated while other provisions may be added. With that in mind, some of the key provisions in the House bill are:
The corporation tax rate would be reduced to a flat 20%.
The tax rate for business income attributable to pass-through entities would be reduced to 25%. However, pass-through income from certain professional services activities would be not be eligible for this favorable rate and would be taxed at the normal graduated ordinary income tax rates.
The House bill would allow for 100% immediate expensing of qualified property acquired and placed in service in the five-year period beginning after September 27, 2017. The bill would also temporarily increase the Internal Revenue Code (IRC) Section 179 expense limitation to $5,000,000. The phase-out amount for the IRC Section 179 deduction would increase to $20,000,000. The increased IRC Section 179 limitations would apply for a five-year period.
The $5,000,000 gross receipts limitation for the use of the overall cash method of accounting by corporations would be increased to $25,000,000. Similarly, businesses qualifying for the use of the cash method under these rules would not be subject to the IRC Section 263A Uniform Capitalization Rules (UCR).
The utilization of Net Operating Losses (NOLs) would be limited to 90% of taxable income. Under current law, NOLs can be carried back 2 years and carried forward 20 years. The House bill would make the carryforward period indefinite, but would eliminate the carryback period.
The deduction for business interest expense would be subject to a limitation equal to the sum of total business interest income plus 30% of adjusted taxable income. Taxpayers with gross receipts of $25,000,000 or less would be exempt from the limitation.
The Research and Development tax credit would be retained under the House bill. However, other business credits and preferences would be eliminated including the Work Opportunity tax credit, the IRC Section 199 domestic production activities deduction, and the availability of like-kind exchange treatment for non-real property. In addition, deductions for entertainment and certain fringe benefits would be significantly limited or eliminated.
Individual taxpayers would be subject to four tax rates:
Rate Joint Return Individual Return
12% $0 to $90,000 $0 to $45,000
25% $90,000 to $260,000 $45,000 to $200,000
35% $260,000 to $1,000,000 $200,000 to $500,000
39.6% Over $1,000,000 Over $500,000
High-income taxpayers ($1 million or $1.2 million of taxable income for single and joint filers, respectively) would be subject to a phase-out of the 12% bracket.
The maximum tax rate for qualified dividends and capital gains would remain at 20%. Lower capital gain and qualified dividend rates would apply for taxpayers with taxable income below certain designated threshold amounts (including $470,000 for joint filers, $425,800 for single filers, and $12,700 for trusts and estates).
The standard deduction would be doubled to $12,200 and $24,400 for single and joint filers, respectively. However, the House bill would eliminate many currently available deductions including the deductions for moving expenses, alimony, personal casualty losses, and medical expenses. The personal exemption also would be eliminated.
The home mortgage interest deduction would be retained, but the applicable acquisition debt limitation would decrease from $1,100,000 to $500,000.
The House bill would eliminate the deductions for state and local income and state and local sales taxes. The deduction for state and local property taxes would be retained but limited to $10,000.
The deduction for charitable contributions would be retained but subject to various changes including an increase in the AGI limitation for cash contributions from 50% to 60%. In addition, contributions made to secure college athletic event seating would not be deductible.
The child tax credit would be increased from $1,000 to $1,600 with the first $1,000 being refundable. A new nonrefundable “Family Credit” of $300 would be allowed for each taxpayer and dependent that is not a qualifying child for purposes of the child tax credit.
The current education credits would be retained and combined into one credit while other credits including the adoption tax credit, elderly and disabled credit, and the plug-in vehicle credit would be eliminated.
The House bill would repeal the Alternative Minimum Tax (AMT). Taxpayers with AMT credit carryforwards would be allowed to claim a refund of up to 50% of the carryforward in the 2019, 2020, and 2021 tax years. Any remaining credit carryforwards would be refundable in the 2022 tax year.
Estate and Gift Tax
The estate and generation-skipping transfer taxes would be repealed after 2023. However, the allowable step-up in basis to fair market value for inherited property would be retained. In the interim, the current statutory estate tax lifetime exclusion of $5 million would be doubled to $10 million (indexed for inflation) and the top estate tax rate would be decreased to 35%.
The statutory lifetime gift tax exclusion also would be increased to $10 million and the annual exclusion amount would be $14,000 (indexed for inflation).
The House bill would allow a 100% exemption for the foreign source portion of dividends received by a U.S. corporation from a foreign corporation in which it owns a 10% or more interest. This “dividend-exemption system” effectively would replace the current foreign tax credit regime.
In addition, the House bill includes a mandatory repatriation provision for offshore earnings that have not yet been subject to U.S. tax. A portion of the deferred earnings and profits (E&P) of foreign subsidiaries would be taxed at reduced rates of 12% for E&P attributable to cash and cash equivalents and 5% for E&P attributable to illiquid assets. For purposes of this provision, the E&P measurement date would be either November 2, 2017, or December 31, 2017 (on whichever date E&P is higher). The U.S. corporation would be able to elect to pay this tax liability over a period of up to 8 years.
The House bill also would make changes to the Subpart F rules that require certain types of income earned by a foreign subsidiary to be treated as deemed dividends to its U.S. owner.
As previously discussed, various provisions contained in this bill will likely change throughout the legislative process. Whitley Penn LLP will continue to monitor the progress of the tax legislation and will issue additional alerts as significant developments occur. In the interim, please feel free to contact your Whitley Penn tax advisor if you have any questions or need any further information.