House and Senate Move Tax Reform Forward

| 11/21/2017

On Nov. 16, the U.S. House of Representatives passed its version of tax reform. On the same day, the Senate Finance Committee simultaneously completed its work in debating and amending a “conceptual chairman’s mark.” The Senate is in recess for Thanksgiving, and Majority Leader Mitch McConnell could bring a bill to the Senate floor as early as the week of Nov. 27.

Full floor consideration in the Senate will start only once the leadership is convinced it has the 51 votes needed to pass the legislation. The votes are not yet guaranteed, and several senators have voiced concerns regarding both specific policy provisions and the speed at which the process is moving. Additionally, this process is a balancing act, and any changes in one area will have to be offset in another. The process could take several weeks to negotiate, which would delay a final vote until late December or early January.

Following is a summary of the key provisions of the House and Senate bills.

  House Senate
Corporate Tax Rates Reduces corporate tax rate from 35 percent to 20 percent in 2018. Reduces corporate tax rate from 35 percent to 20 percent in 2019.
Alternative Minimum Tax (AMT) Repeals corporate and personal AMT in 2018. Same as House bill.
Net Operating Losses (NOLs) Unlimited carryforward of NOLs. NOLs would be able to offset only 90 percent of taxable income. Carrybacks allowed only for small businesses and farmers. NOLs would grow by an interest factor. Unlimited carryforward of NOLs. NOLs would be able to offset only 90 percent of taxable income through 2022 and then 80 percent thereafter. Carrybacks allowed only for farmers.
Depreciation and Amortization 100 percent expensing for new and used equipment. No immediate expensing for buildings. Real estate industry ineligible for 100 percent expensing. Same as House bill but applies to new equipment only.
Interest Expense Limits interest expense to 30 percent of adjusted taxable income (taxable income before interest expense, NOLs, depreciation, and amortization). Five-year carryforward of disallowed amounts. Interest expense limitation does not apply to real estate businesses.  Same as House bill, but no addback for depreciation and amortization and unlimited carryforward of disallowed amounts. Applies to real estate businesses unless they make an election to use the alternative depreciation system (ADS) depreciation in lieu of the modified accelerated cost recovery system (MACRS) and 100 percent expensing.
Credits Repeals most credits. Retains research and experimentation credit, low-income housing credit, and some alternative energy credits. Same as House bill except:
  • Does not retain alternative energy credits.
  • Retains and modifies the historic rehabilitation tax credit.
Deductions Eliminates any deduction for:
  • Entertainment and recreational expenses, including amounts paid for an entertainment facility
  • Social club membership dues
  • De minimis fringe benefits provided to employees that are primarily personal in nature
  • Qualified parking and transportation fringe benefits
  • On-premises athletic facilities
  • The 80 percent deduction for contributions made for university athletic seating rights
Also repeals Section 199.
Same as House bill but also repeals deduction for meals provided at the convenience of the employer.
Public Company Compensation Deductions Effectively limits all public company compensation to $1 million per covered employee by eliminating exceptions for performance- and commission-based amounts. No significant differences from House bill.
Like-Kind Exchanges Repealed except for investments held in real estate. No significant differences from House bill.
Pass-Through Entity Provisions Passive investors taxed at 25 percent. Active investors have 30 percent of income taxed at 25 percent and the remainder at ordinary income rates. Service businesses generally ineligible for favorable rates. Capital-intensive businesses can get a higher percentage of income at the 25 percent rate. Provides a 17.4 percent deduction on taxable income from pass-through entities. Service businesses not eligible for the deduction.

  House Senate
Individual Tax Rates Four brackets with the 39.6 percent bracket retained at $1 million taxable income. Benefit of lowest bracket phases out at $1.2 million, which creates a 25.6 percent “bubble rate.” Seven brackets with a top rate of 38.5 percent at $1 million taxable income.
Itemized Deductions Retained Eliminates most itemized deductions, but retains the following:
  • Charitable contributions
  • Home mortgage interest, but only on one house; eliminates home equity interest deduction, and caps interest expense at a $500,000 mortgage balance
  • State income tax deduction limited to $10,000 of property tax; no deduction for state and local income tax
  • Investment interest expense and investment expenses
Same as House bill except:
  • Keeps home mortgage limit at $1 million
  • Eliminates all state and local tax deductions
Itemized Deductions Eliminated Eliminates the following:
  • Casualty losses, but preserves casualty losses for federally declared disaster areas
  • Tax preparation expenses
  • Alimony (not taxable to recipient)
  • Moving expenses
  • Medical expenses
  • Unreimbursed employee expenses, including certain education expenses
Same as House bill except:
  • Retains deductions for medical expenses
  • Retains deductions for unreimbursed employee expenses
Standard Deduction/Personal Exemptions/Dependent Exemptions Raises standard deduction to $24,400. Eliminates personal and dependent exemptions. Same as House bill, but standard deduction would be $24,000.
Child Tax Credit Child tax credit of $1,600 with phaseout beginning at $230,000 income level. Child tax credit of $2,000 with phaseout beginning at $500,000 income level.
Estate Tax Doubles estate tax exemption from $5 million to $10 million. Eliminates estate tax in 2024. Same as House bill but does not eliminate estate tax.

  House Senate
International Tax Adopts modified territorial system with benefits available only for corporations with foreign subsidiaries. Same as House bill.
Deemed Repatriation of Foreign Profits Deemed repatriation of foreign profits at Dec. 31, 2017; 14 percent rate on foreign profits held in cash and 7 percent on the remainder. Tax payable over eight years. Same as House bill, but deemed repatriation at 10 percent rate on foreign profits held in cash and 5 percent on the remainder.

Once the Senate passes a bill, the two chambers of Congress will have to reconcile the differences that exist. Many experts expect that because the legislative process is much slower and more difficult in the Senate, the House might just concur with the Senate product.

Contact us

Peter Judge
Howard Wagner - social
Howard Wagner
Partner, National Tax Services