TAX REFORM UPDATE
Early last Saturday morning, the U.S. Senate passed its tax reform legislation entitled the “Tax Cut and Jobs Act”. While passing any tax bill in the Senate was a major step, the tax legislation still faces numerous challenges before becoming law. First, a conference committee, made of members appointed by Congress, must reconcile the two bills together to form a final version. This final version then goes to the floor of the House and the Senate for a final vote. If the House and the Senate both pass the bill, then the bill finally goes to the President’s desk for a final signature.
A formal conference committee should be convened in the next few days, but back-office negotiations have already begun. Reconciling these bills is no easy task, as the bills differ on some major points. Here are a few of those differences:
- Alternative Minimum Tax (AMT) – The House fully repealed the alternative minimum tax, while the Senate, in a last second change before the vote, merely raised the individual exemptions. Tax practitioners nationwide are hopeful that the House wins this argument.
- Rates & Brackets – The Senate bill maintains the current 7 bracket system with rates ranging from 10% to 38.5%. The House bill simplifies to only four tax brackets ranging from 12% to 39.6%.
- ACA Individual Mandate – The current ACA Individual Mandate requires individuals to obtain health insurance or pay a tax penalty. The Senate’s bill effectively repeals this mandate by reducing the tax penalty to $0, while the House bill does not modify these penalties.
- Sunset Provision – The House bill makes most changes permanent. The Senate’s bill “sunsets” in the year 2026. This means that all changes will be unwound in 2026, unless Congress takes action to extend the changes.
- Estate Tax – While both bills raise the estate and gift tax exemption levels, only the House bill would repeal the estate tax.
- C Corporation Tax Rate Effective Date – Both bills agree that the corporate tax rate should be 20%, but they disagree on when that change would occur. The House bill lowers the rate beginning in the 2018 tax year, while the Senate delays this until the 2019 tax year.
- Corporate Alternative Minimum Tax (AMT)– Similar to the Individual Alternative Minimum Tax (AMT), the House fully repealed the corporate AMT, while the Senate bill maintains the corporate AMT.
- Section 179 Expensing – Both bills raise the expensing cap and phase out levels, but at different levels. The House bill raises the deduction limit to $5 million and the phase-out to $20 million of purchases, while the Senate bill only raises the deduction to $1 million and begins the phase out at $2.5 Million in purchases.
- Pass–Through Provision – The House and the Senate both approached tax cuts to pass-through entities (S corporation and Partnerships) differently. The House bill provides a flat rate of 25% on the portion of the pass-through income constituting “business income”, but provides complex rules on determining “business income”. The Senate bill, on the other hand, taxes all of the pass-through income at the individuals normal rate, but provides a 23% deduction on “qualified business income”. Either way, pass-through business will see some sort of tax cut that will be overly complex.
There are numerous other provisions that the House and the Senate disagree on and a few where there agree. If you wish to wade into the minute details, please see the attached.
Otherwise, please let us know if you have any questions. When a final bill is released by the conference committee, we will do our best to update you on the changes.