|The following is a very high-level summary of the description of the Tax Cut and Jobs Act released by the Senate Finance Committee on November 9th (including subsequent amendments). Although draft bills will go through changes and compromises (the House voted on and approved their own version of tax reform legislation with some similarities and differences) we wanted to give you a snapshot of the Senate bill. The Senate Finance Committee voted on and approved their tax reform plan (as summarized below) on November 16, 2017. Please stay tuned for additional updates as more information is available. The current version of the House Bill and the Senate plan are subject to a number of changes and we are monitoring them very closely. Please call or email us if you have any questions or would like to discuss in greater detail.
Corporate Tax Rate
- After 2018, permanent 20% flat corporate rate.
- After 2018, 80% dividends received deduction to 65% and 70% dividends received deduction to 50%.
Alternative Minimum Tax (“AMT”)
- After 2017, Corporate AMT tax would be repealed.
- For 2017 through 2020, AMT credit would be refunded in an amount equal to 50% (100% starting in 2021) of the excess of minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability.
Cash Method of Accounting
- $5m average gross receipts threshold would be increased to $15m.
Accounting for Inventories
- Taxpayers that meet $15m gross receipts test would not be required to account for inventories.
- Instead taxpayers may choose to account for inventories by (i) treating inventories as non-incidental materials and supplies or (ii) conforming to the taxpayer’s financial accounting treatment.
- $10m average gross receipts threshold would be increased to $15m.
- For contracts entered into after 2017, $10m average gross receipts exception to the requirement to use percentage-of-completion would be increased to $15m.
Other Accounting Methods
- After 2017, taxpayer would be required to recognize income no later than the taxable year in which such income is included in applicable financial statements; exception for long-term contract income.
- Codify the current deferral method of accounting for advance payments provided under Rev. Proc. 2004-34.
- For property placed in service after September 27, 2017 and before January 1, 2023, the first-year additional depreciation percentage would increase to 100%.
- The election to accelerate AMT credits in lieu of bonus depreciation would be repealed.
- Starting in 2018, the expense amount would be permanently increased to $1m and the phase-out threshold increased to $2.5m.
Luxury Automobile Depreciation (section 280F)
- For autos placed in service after December 31, 2017, the depreciation limitations would be increased to $10,000 in Year 1, $16,000 in Year 2, $9,600 in Year 3 and $5,760 going forward.
Nonresidential Real and Residential Rental Property Depreciation
- The recovery period would be reduced to 25 years.
Interest Expense Deduction
- Deduction limited to 30% of adjusted taxable income. Interest not allowed as a deduction would be carried forward indefinitely.
Small Business Exception from Limitation on Deduction of Business Interest
- After 2017, businesses with $15m gross receipts or less are exempt from interest limitation.
- NOL deduction would be limited to 90% of taxable income.
- NOLs may be carried forward indefinitely instead of 20 years.
- After 2023, NOL deduction would be limited to 80% of taxable income (could be repealed after 2015 if revenue targets are met).
Like-Kind Exchanges of Real Property
- For exchanges after 2017, the nonrecognition of gain in like-kind exchanges would be limited to real property that is not held primarily for sale.
Deductions Attributable to Domestic Production Activities
- After 2018, deduction is repealed.
- After 2017, no deduction for entertainment, amusement, recreation and membership dues for clubs.
- Deduction of 50% of food and beverage expenses for business purposes would generally be retained.
- Credit would be preserved.
Amortization of R&D Expenditures
- After 2025, R&D expenditures, including software expenditures, would have to be capitalized and amortized ratably over a 5-year period (15 years for R&D outside the US). Upon disposal, any remaining basis would continue to be amortized.
Employer Credit for Paid Family and Medical Leave
- For 2018, employers would be eligible to claim a credit of 12.5% of the wages paid to employee while on leave if payment rate is 50% of wages normally paid to the employee. Credit would increase if payment rate exceeds 50% up to a 25% credit.
Pass-Through Tax Treatment
- Allow 17.4% deduction from domestic qualified business income from a partnership, S Corporation or sole proprietorship. 17.4% deduction not allowed for certain businesses performing personal services. Income receiving 17.4% rate would not include reasonable compensation paid by S-Corp or guaranteed payment to a partner and would be limited to 50% of the W-2 wages.
Limitation on Losses for Taxpayers Other than Corporations
- Would limit business losses to $500,000 for married filing jointly and $250,000 for married filing separately. The limitation applied at the partner or S corporation shareholder level.
Individual Income Tax and Estate and Gift Tax (most of these rate provisions would sunset in 2025)
- Would create seven brackets: 10%; 12%; 22%; 24%; 32%; 35%; 38.5%
- Adjust capital gain rate thresholds (keep preferential rates of zero; 15% and 20%)
Standard Deduction and Personal Exemption
- Increase standard deduction to $24,000 for joint return; $18,000 for unmarried individual with at least one child; $12,000 for single filers
- Eliminate personal exemptions
Alternative Minimum Tax
- Eliminate limitation on itemized deductions
- Repeal all miscellaneous (2%) itemized deductions
- Would retain $1,000,000 debt limit but eliminate home equity loan deduction
- Eliminate state and local taxes paid by individuals unless paid in carrying on a trade or business
- Increase the income limitation of cash contributions to charity from 50% to 60%.
- Repeal the personal casualty loss deduction for most property losses
- Eliminate the deduction for tax preparation services and moving expenses
Principal Residence Sale Exclusion
- Would retain $500,000 ($250,000 for singles) principal residence sale exclusion but only if utilized home for 5 of the previous 8 years
Moving Expense Reimbursements
- Would tax moving expense reimbursements
- Repeal of ACA mandate the forces individuals to purchase health insurance
Child Tax Credit
- Double the child tax credit to $2,000
- Repeal the original proposal that would tax stock options when they vest
Simplified Filing for Older Individuals
- Simplified form for persons who are age 65 or older (similar to 1040EZ but without income limitations)
- An unborn child would be able to qualify as a designated beneficiary
Estate, Gift and GST Taxes
- Would increase estate and gift tax unified credit and GST exemption to $10 million per person (with inflation adjustments) but would not repeal these taxes
New Participation Exemption
- A US corporation (not including S-corps or REITs) will now receive a 100-percent dividend received deduction (DRD) for the foreign source portion of dividends received from a specified 10-percent owned foreign corporation.
- Foreign tax credits will not be permitted for any foreign tax paid (or accrued) with respect to dividends for which the 100-percent DRD is allowed.
- Three-year holding period to be eligible for the DRD.
One-Time Tax on Deemed Repatriation of Untaxed Foreign Earnings
- The Senate plan imposes a one-time US tax on US shareholders of specified 10-percent owned foreign corporations with untaxed foreign earnings.
- Foreign earnings held in the form of cash (or cash equivalents) and non-liquid assets would be taxed 10 percent and 5 percent, respectively.
- Undistributed foreign earnings would be determined as of 11/9/17 (or other applicable measurement date as appropriate).
- Foreign tax credits would be partially available to offset the US tax liability resulting from the deemed repatriation, but only for the portions of earnings that are subject to US tax.
- Taxpayer may elect to pay the tax imposed on the deem repatriation over an 8-year period.
New Tax on Foreign Intangible Income
- The Senate plan provides that US corporations will be subject to current taxation in the US on certain “global intangible low-taxed income” (“GILTI”) of their foreign subsidiaries with foreign tax credits available with respect to such income (but, the foreign tax credit will be reduced by 20 percent and subject to other limitations).
- Current taxation in the US would apply to the amount by which the foreign corporation’s active foreign source income exceeds a 10 percent return on the adjusted tax basis of its active foreign tangible assets.
- Additionally, US corporations would be entitled to partial deductions for such low-taxed income and certain foreign-derived intangible income from a trade or business in the US.
Additional Limitation on Interest Deductions
- The Senate plan includes an additional interest limitation that denies a deduction for certain interest expense of US shareholder that is a member of a worldwide affiliated group with excess domestic indebtedness.
Base Erosion and Anti-Abuse Tax on Certain Inbound Base Erosion Payments
- The Senate plan also provides that the US will tax certain base erosion payments paid by a US company to a foreign related person.
- A company that is subject to tax will pay tax in an amount equal to the excess of tax computed at a 10-percent rate (a 12.5 percent rate after 2025) on an expanded definition of taxable income over the regular tax liability reduced by certain credits.
- The tax would not apply to companies with “base erosion tax benefits” less than four percent of total deductions of the taxpayer.
Other International Tax Provisions
- Repeal of the foreign tax credit under Section 902. Foreign tax credits would only be available under Section 960 to the extent foreign taxes are imposed on subpart F income that is included in a US shareholder’s gross income.
- A reduction of a US corporation shareholder’s tax basis in stock of specified 10-percent owned foreign corporation by an amount equal to the DRD is required for purposes of determining any loss recognized on a future sale of the foreign corporation.
- Section 863(b) is modified so that income from sale of inventory is sourced entirely to the place of production rather than by reference to the location of production and sales.
- Repeal of current taxation of previously excluded subpart F income qualified income under Section 955.
- Repeal of foreign base company oil related income under Section 954.
- Inflation adjustment of de minimis exception threshold for foreign base company income under Section 954(b)(3).
- Section 954(c)(6) (CFC look-through rule) will be permanent.
- Broaden the stock attribution rules for determining CFC status by treating a US corporation as constructively owning foreign corporation stock held by the foreign shareholder of the US corporation.
- Elimination of the requirement that a foreign corporation must be controlled for 30-days before subpart F inclusions apply under Section 951(a)(1).
- Modification of the passive foreign investment company rules as applied to certain income derived by a qualifying insurance corporation.
- The denial of deductions for certain amounts paid or accrued in connection with hybrid transactions or with hybrid entities.
- Addition of separate foreign tax credit basket for foreign branch income.
- Termination of special rules for domestic international sales corporations (the IC-DISC export tax incentive).
- Revised definitions of intangible property under Sections 367(d) and 482 to impose limitations on income shifting though intangible property transfers.
- Basis adjustments rules for transfers of intangible property from CFC’s to US shareholders.
- The Senate plan would also treat gain or loss from the sale or exchange of a partnership interest as income that is effectively connected with a U.S. trade or business (ECI) to the extent that the transferor would have had ECI if the partnership sold all of its assets at fair market value on the date of the sale.
- Modification of source rules involving possessions.
- Impose income tax on currently exempt passenger cruise ship income for cruises in U.S. territorial waters.
- Revision of foreign corporation passenger aircraft income.