On the evening of Dec. 15, congressional leaders unveiled the final conference committee report for Tax Cuts and Jobs Act.
As with any major piece of legislation, there are positive and negative aspects. However, the final agreement contains many of AED’s recommendations to the conference committee, including a lower rate for most pass-throughs (including trusts and estates), the ability for construction equipment dealers to take advantage of full expensing of new and used equipment and business interest initially capped at 30 percent of earnings before interest, tax, depreciation and amortization (EBITDA), as opposed to significantly more restrictive proposals.
Additionally, the final agreement is a significant benefit to your customers and manufacturers, which should spur growth in the broader construction sector. The House and Senate are poised to approve the bill and send it to the president’s desk by the end of the week.
AED strongly encourages you to have your CPA/tax attorney review the final agreement to determine its effect on your company. Be sure to join AED in Las Vegas, Jan. 15-19, for the 2018 Summit & CONDEX where there will be educational sessions on the new tax law and its impact on AED members.
Highlights of the Tax Cuts and Jobs Act final conference agreement include:
Rates. For pass-through entities, there will be a 20 percent deduction for business income. This deduction is subject to a limit based on the greater of 50 percent of W-2 wages paid in your business or the sum of 25 percent of W-2 wages plus 2.5 percent of the basis of your depreciable property (expires after 2025). There is no limitation on trusts and estates receiving the 20 percent deduction. A permanent corporate rate of 21 percent is effective January 1, 2018.
Dealer floor plan. “Construction machinery and equipment” was omitted from the dealer floor plan provision in the final agreement, ensuring construction equipment dealers can take advantage of the conference report’s full expensing provision (the House-passed proposal would have carved out construction dealers from utilizing full expensing in exchange for higher business interest).
Expensing. Full expensing for new and used property acquired between September 28, 2017 and December 31, 2022. Thereafter, the bonus depreciation percentage decreases by 20 points per year, phasing out entirely by 2027. Section 179 expensing levels were also increased to $1 million with a $2.5 million phaseout.
Interest deductibility. The final bill caps business interest at 30 percent of EBITDA through 2021 before moving to a 30 percent of EBIT formula thereafter. Disallowed business interest is allowed to be carried forward indefinitely.
Estate tax. Doubles the estate tax exemption levels to about $11 million per individual/$22 million per couple through 2025.
AMT. Corporate AMT is repealed
LKE. Repeals LKE for personal property. The provision doesn’t apply to an exchange if (A) the property disposed of by the taxpayer in the exchange is disposed of on or before December 31, 2017, or (B) the property received by the taxpayer in the exchange is received on or before December 31, 2017
The final conference report doesn’t touch LIFO and also continues to permit the tax exempt status of private activity bonds, an important tool for infrastructure investment.
For questions about this or other legislative issues, please contact AED’s Vice President of Government Affairs Daniel B. Fisher.
From the beginning of the tax reform process, AED has worked hard in Washington representing the interests of our membership. We have done this with input from our Public Policy Council (PPC), Board of Directors and individual members who have responded to our alerts. I think we can all agree this has been a very quick and at times confusing process, so thank you to all that have helped us with your feedback.
This week, AED delivered a comprehensive letter to conference committee members detailing our concerns with the House and Senate-passed Tax Cuts & Jobs Act and our recommendations for ensuring the best possible outcome for AED members.
Thank you to everyone for your engagement in the process.
Brian P. McGuire
President and CEO
On early Saturday morning, the U.S. Senate approved its version of the Tax Cuts & Jobs Act. The legislation differs from the House bill in many ways. Yesterday evening, the Senate released its final bill, as amended: https://www.finance.senate.gov/imo/media/doc/12.2.17%20HR%201.PDF.
Outlined below are some of the key areas for AED members and comparisons between the House and Senate provisions:
Pass-Through Rate. The Senate bill allows for pass-throughs to deduct 23 percent of their income, although the provision sunsets after 2025. The House legislation lowers the pass-through rate to 25 percent, but excludes certain business income from the lower rate. Net income derived from a passive business activity would be treated entirely as business income and fully eligible for the 25 percent maximum rate. Owners or shareholders receiving net income derived from an active business activity (including any wages received) would determine their business income by reference to their “capital percentage” of the net income from such activities. Under the provision, owners or shareholders generally may elect to apply a capital percentage of 30 percent to the net business income derived from active business activities to determine their business income eligible for the 25 percent rate. That determination would leave the remaining 70 percent subject to ordinary individual income tax rates. Alternatively, owners or shareholders may elect to apply a formula based on the facts and circumstances of their business to determine a capital percentage of greater than 30 percent. That formula would measure the capital percentage based on a rate of return (the Federal short-term rate plus seven percent) multiplied by the capital investments of the business. Once made, the election of the alternative formula would be binding for a five-year period.
Corporate Tax Rates. Both the House and Senate legislation permanently reduce the C-Corp rate to 20 percent, but the Senate reduction starts in 2019.
Business Interest. The House bill caps net interest deduction at 30 percent of earnings before interest, taxes, depreciation and amortization (EBITDA). The Senate bill limits it to 30 percent of earnings before interest and taxes (EBIT). Companies with less than $25 million in gross receipts (House) and less than $15 million in gross receipts (Senate) are exempted from business interest limitations. Under the House bill, excess interest expense can be carried forward for five years. The Senate bill allows excess interest expense to be carried forward indefinitely.
Full Expensing. The Senate legislation allows for full and immediate expensing of new equipment purchases until 2022; at that point, bonus has a gradual phase-out (80 percent, 60 percent, 40 percent, 20 percent from 2023-2026). The House legislation allows for full expensing of new and used equipment purchases for five years.
Sec. 179 Expensing. The Senate raises the Sec. 179 small business expensing cap to $1 million with a phaseout starting at $2.5 million. The House increases Section 179 expensing to $5 million, with the phaseout beginning at $20 million.
Estate tax. The Senate maintains the federal estate tax, but doubles the current exemption to about $11 million per individual and $22 million per couple through 2025 before sunsetting. In the House bill, the basic exclusion amount is similarly doubled from about $11 million per individual/$22 million per couple, which is indexed for inflation. Furthermore, beginning after 2023, the estate and generation-skipping taxes are repealed while maintaining a beneficiary’s stepped-up basis in estate property. The gift tax is lowered to a top rate of 35 percent and retains a basic exclusion amount of $10 million and an annual exclusion of $14,000 (as of 2017), also indexed for inflation.
Like-Kind Exchanges. Both the House and the Senate repeal like-kind exchanges for personal property while maintaining it for real property. The provision doesn’t apply to an exchange if (A) the property disposed of by the taxpayer in the exchange is disposed of on or before December 31, 2017, or (B) the property received by the taxpayer in the exchange is received on or before December 31, 2017.
Dealer Floor Plan Indebtedness Carveout. The House included language that would have prevented construction equipment dealers from taking advantage of the legislation’s full expensing provision in exchange for an increased business interest deduction. AED’s Board instructed the association to work to strike “construction equipment dealers” from the list in the carveout. We were successful in keeping “construction equipment dealers” from being included in the Senate bill, thus allowing construction equipment dealers to have 100 percent expensing in the upper chamber’s legislation.
Alternative Minimum Tax. The Senate legislation retains the corporate alternative minimum tax (AMT) in its current form, and retains the individual AMT with higher exemption amounts (about 40 percent higher than current law). The House bill repeals both the individual and corporate AMTs.
Private activity bonds. The House bill includes the termination of private activity bonds (PABs), which are often used to fund infrastructure projects. The Senate doesn’t touch PABs.
Affordable Care Act Individual Mandate. The Senate bill repeals Obamacare’s individual mandate. The House doesn’t have a similar provision.
The action now proceeds to a conference committee, where House and Senate members will negotiate a conference report to present to each chamber for final passage. The process is moving full steam ahead, but reconciling differences between the chambers’ bills while ensuring it complies with the Senate’s arcane budget rules will be difficult.
AED will be weighing-in with House and Senate conferees on all of the issues mentioned above. The association remains concerned about the treatment of pass-throughs, the limitations on the business interest deduction, retaining the AMT, the elimination of like-kind exchanges for personal property, the temporary nature of many of the key provisions and the repeal of private activity bonds. We encourage everyone to consult with their CPA, CFO or tax expert to determine how this plan impacts your business operations and convey any concerns or comments to AED’s Vice President of Government Affairs Daniel Fisher.
To view the House-passed bill visit: https://www.congress.gov/115/bills/hr1/BILLS-115hr1eh.pdf
Earlier today, the House of Representatives passed the Tax Cuts & Jobs Act (H.R. 1). While a noteworthy milestone in the tax reform process, it’s only a first step. The Senate Finance Committee continues to work on its proposal, which differs from the House in significant areas. If the Senate does pass legislation, it will still have to be reconciled with the House before reaching the president’s desk.
Upon House passage, AED’s President and CEO Brian P. McGuire said, “As with any major piece of legislation, the Tax Cuts & Jobs Act has some good and some bad. As the process moves forward, AED will continue to work with lawmakers to ensure a final bill benefits the capital intensive, small-to-medium-sized companies that dominate the construction equipment industry. There’s a lot of work yet to be completed and AED will remain at the table to help Congress, not just get tax reform done, but to get it done right.”
AED remains concerned with how both the House and Senate proposals treat tax pass-through’s, limits business interest and expensing, eliminates like-kind exchanges for personal property and restricts the use of private activity bonds for infrastructure projects. The temporary nature of many provisions in both bills is also a major concern.
While the process is moving quickly by congressional standards, there’s still ample time to weigh-in and seek modifications. AED recommends you have your CPA or tax attorney review the legislative proposals to determine the impact it will have on your individual company. Please provide feedback to AED’s Vice President of Government Affairs Daniel B. Fisher, as AED is working to craft an industry response to the bills.
To view the House-passed Tax Cuts & Jobs Act, visit: https://www.gpo.gov/fdsys/pkg/BILLS-115hr1rh/pdf/BILLS-115hr1rh.pdf
To view the current Senate proposal, visit: https://www.finance.senate.gov/imo/media/doc/11.14.17%20Chairman’s%20Modified%20Mark.pdf
To view the letter AED delivered to Senate Finance Committee members regarding like-kind exchanges, visit: http://aednet.org/wp-content/uploads/2017/11/AED-SenateLKELetter.pdf
To view the letter AED delivered to House Ways & Means Committee members regarding like-kind exchanges, visit: http://aednet.org/wp-content/uploads/2017/11/AED-LKELetter2.pdf
To view AED’s letter regarding the importance of the business interest deduction, visit: http://aednet.org/wp-content/uploads/2017/09/AED-BusinessInterestTaxReformLetter.pdf
To view AED’s comments to the Senate Finance Committee regarding tax reform priorities, visit: http://aednet.org/wp-content/uploads/2017/07/AED-FinanceCommitteeTaxReformComments-20170717.pdf
Last week, House Republican leadership introduced comprehensive tax reform legislation, known as the “Tax Cuts & Jobs Act” (H.R. 1).
While H.R. 1 has provisions beneficial to AED members, there are also some troubling portions. AED is particularly concerned with Sec. 3303, which prevents the use of like-kind exchanges (LKE) for personal property starting in 2018. While the provision doesn’t apply to an exchange if (A) the property disposed of by the taxpayer in the exchange is disposed of on or before December 31 2017, or (B) the property received by the taxpayer in the exchange is received on or before December 31, 2017, eliminating personal property LKE from the tax code will create uncertainty and could detrimentally impact capital investments.
In a letter delivered on Nov. 7, AED’s President & CEO Brian P. McGuire wrote, “While we strongly support efforts to simplify and restore long-term certainty to the nation’s tax code, repealing LKE for personal property, particularly construction equipment, we don’t think is a positive step.”
H.R. 1 is expected to be considered by the full House next week. The tax reform process is just beginning, as the House must pass its bill, the Senate must introduce and approve its own legislation, and differences between the House and Senate must be worked out before ever reaching the president’s desk for signature.
Now is the time to weigh-in with your member of Congress to express your concerns related to preventing LKE for personal property in the Tax Cuts & Jobs Act. Visit https://www.house.gov/representatives/find/ to get contact information for your lawmaker. Call their office, ask to speak with the tax legislative assistant and discuss the importance of LKE for your business.
The AED alert regarding the tax legislation is available here.
For a section-by-section summary visit of H.R. 1 visit: https://waysandmeansforms.house.gov/uploadedfiles/tax_cuts_and_jobs_act_section_by_section_hr1.pdf
For the full bill text visit: https://waysandmeansforms.house.gov/uploadedfiles/bill_text.pdf
For a policy highlights document visit: https://waysandmeansforms.house.gov/uploadedfiles/policy_highlights.pdf
We encourage everyone to consult with their CPA, CFO or tax expert to determine whether this plan in its entirety is beneficial to your business operations. Please convey any concerns or comments about the Tax Cuts & Jobs Act, to AED’s Vice President of Government Affairs Daniel Fisher.
On Oct. 23-24, members of AED’s Board of Directors visited Washington, D.C. to advocate on the industry’s behalf. With comprehensive tax reform at the top of the congressional agenda, it was an opportune time to meet with Trump administration officials and leading lawmakers, including:
- David Kautter, Assistant Treasury Secretary for Tax Policy & Acting IRS Commissioner
- Mark Calabria, Chief Economist to Vice President Pence
- Rep. Pete Sessions (R-Texas), House Rules Committee Chairman
- Rep. Jim Himes (D-Conn.), New Democrat Coalition Chairman
- Rep. Steny Hoyer (D-Md.), House Democratic Whip
- Rep. Cheri Bustos (D-Ill.), House Democratic Policy & Communications Committee Co-Chair
- Sen. Lamar Alexander (R-Tenn.), Senate Health, Education, Labor & Pensions Committee Chairman
- Sen. Orrin Hatch (R-Utah), Senate Finance Committee Chairman
Discussions primarily focused on AED’s tax policy priorities, such as protecting the business interest deduction, like-kind exchanges and LIFO, ensuring corporate and pass-through reform proceeds simultaneously so both large and small businesses benefit from improvements to the code and reduced rates, repealing the estate tax and maintaining the long-term solvency of the Highway Trust Fund. Additionally, workforce development issues were at the top of the agenda.
Thank you to those who took the time to visit Washington to represent the construction equipment industry. The delegation, led by AED’s Chairman Wes Stowers (Stowers Machinery Corporation), included the following members of the association’s leadership:
- Diane Benck, AED Vice Chairman (West Side Tractor Sales Co.)
- Michael Brennan, AED Senior Vice President (Bramco, LLC)
- Paul Farrell, AED Board Member (Modern Group Ltd.)
- John Kimball, AED Vice President of Finance (Kimball Equipment Company)
- Whit Perryman, AED Immediate Past Chairman (Vermeer Texas-Louisiana)
- John Shearer, AED Board Member (4 Rivers Equipment, LLC)
- Denny Vander Molen, AED Foundation Chairman (Vermeer MidSouth, Inc.)
- Michael Vazquez, AED Board Member (MECO Miami, Inc.)
Be sure to register for the AED 2018 Summit & CONDEX, Jan. 15-19, in Las Vegas, where politics and policy will be at the forefront with keynote addresses by former presidential contender Carly Fiorina, Fox News host and political commentator Laura Ingraham and Congresswoman Cheri Bustos, a member of the House Democratic Policy & Communications Committee.
Congress can no longer shirk its constitutional responsibility to invest in our country’s crumbling infrastructure, Associated Equipment Distributors’ (AED) President and CEO Brian P. McGuire told a House panel this morning.
In a letter delivered to the House Transportation & Infrastructure Committee’s Subcommittee on Highways & Transit in conjunction with a hearing on building a 21st century infrastructure for America, McGuire informed lawmakers that the federal highway program is at a breaking point as the Highway Trust Fund races toward insolvency. He also highlighted the fact that many states have raised their fuel taxes in the past five years to make up for a substantial funding shortfall and Congress’s failure to act.
McGuire wrote, “Congress must take the hint from outside the Beltway and raise revenues to fund long-term infrastructure projects. The positive impact on the economy will be felt for decades to come and there is no better time to make bold decisions to position our country for long-term economic growth, job creation, competitiveness and security. It’s time for action.”
The hearing comes on the heels of participation from AED’s Chairman Wes Stowers of Stowers Machinery Co., at an exclusive White House briefing with senior administration officials on President Trump’s infrastructure plan. While no funding details were revealed, the administration’s framework centers around encouraging states and localities to raise revenue for infrastructure investment, providing targeted federal investment for rural areas and for “transformative projects”, and streamlining the permitting process to expedite project delivery. More details are expected from the Trump administration in the coming months.
Earlier today, the Trump administration, House and Senate Republican leadership, and the Chairmen of the House Committee on Ways & Means and the Senate Committee on Finance released a long-awaited “unified” framework that will serve as the basis for legislative efforts to reform the tax code. The document’s unveiling, which has been negotiated behind the scenes for several months, is expected to kick-off efforts to comprehensively reform the nation’s tax code for the first time in decades.
Highlights of the “Unified Framework for Fixing Our Broken Tax Code” include:
- Limiting the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25 percent;
- Reducing the corporate tax rate to 20 percent;
- Repealing the estate tax and the generation-skipping transfer tax;
- Allowing businesses to immediately write off (or “expense”) the cost of new investments in depreciable assets other than structures made after September 27, 2017, for at least five years; and
- Partially limiting the net interest expense deduction for C corporations while Congress will determine treatment of interest paid by non-corporate taxpayers.
The document is silent on many important issues for AED members, including 1031 exchanges (“like-kind exchanges”), the last in, first out (“LIFO”) accounting method and new revenues for the Highway Trust Fund (HTF) to invest in road and bridge projects.
Remember, the document is merely a framework and isn’t legislative text. Reforming the tax code will be a long and complicated effort. Stay tuned to AED for future updates.
If you have any comments on the framework, please reach out to AED’s Vice President of Government Affairs Daniel B. Fisher.
To view comments submitted by AED to the Senate Finance Committee outlining the association’s tax reform priorities, click here.
To view a letter sent to Congress regarding the importance of the business interest deduction, click here.
On Sept. 20, AED’s President & CEO Brian P. McGuire delivered a letter to Capitol Hill urging Congress to maintain the business interest deduction in comprehensive tax reform to ensure smaller-medium-sized companies can invest and compete. “Preventing companies from deducting business interest (or even restricting it to select companies based on size or revenue) will have a significant negative impact on capital intensive industries, such as construction equipment distributors,” McGuire wrote. To read the full letter, click here.
To the Editor:
The recent discovery that substantial sections of the main sewer line between Cloquet and Duluth are in poor condition and in need of repair forces residents, businesses and local officials to clean up the mess and endure significant expense as our leaders in Washington continue to forsake their responsibility to invest in the nation’s infrastructure in a long-term, sustainable manner (“Sewer main repair may hit $6 million,” Pine Journal Sept. 8).
A strong federal role in partnership with state and local entities is a necessary component to building and maintaining the United States’ infrastructure system. Every day there are numerous examples of structurally deficient bridges, dams and levees and inadequate roads, airports and pipes. Time is wasted in traffic or sitting on an overcrowded runway. Clean water is squandered and roads flooded as water mains break. Quality of life and safety are jeopardized.
Our infrastructure is the lifeblood of our economy. It impacts our quality of life, the competitiveness of our businesses, and the safety and security of our country. Minnesotans and the rest of the country deserve world-class infrastructure and further delay in Washington is unacceptable.
Brian P. McGuire
President & CEO Associated Equipment Distributors