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