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Everything That’s In The Senate Tax Reform Bill

By Ryan Ellis

Business Tax Reform

Corporate income tax rate

Lowered from 35 percent today, the highest rate in the developed world when states are included, to 20 percent starting in 2019.

Pass-through business tax rate

Under current law, “pass through” or “flow through” business income from partnerships, LLCs, Subchapter-S corporations, and sole proprietoriships is taxed as ordinary personal income. Under this plan, a deduction equal to 17.4 percent of such income is allowed against taxable income.

This results in a top rate on business income of 31.8 percent, down substantially from 39.6 percent today. White collar service businesses are ineligible, with a middle class exception. The deduction is limited to half of W-2 wages of the taxpayer. Expires after 2025.

Business fixed investment

Small business “Section 179” expensing increased to $1 million and expanded to more items.

  • 50 percent “bonus depreciation” is increased to 100 percent full business expensing for investments purchased from September 27, 2017 to December

  • 31, 2022 (thus, a five year window). After that, regular depreciation rules apply.

  • Real property (buildings) has its depreciable life reduced to 25 years, down from 39 years today (27.5 years in the case of residential real estate).

  • Leasehold improvements, restaurants, and retail properties go from being deductible under Section 179 to a 10 year straight line, mid-month recovery

  • The maximum allowed depreciation deduction for autos is increased, and computer equipment is removed from listed property.

  • Most farm property’s depreciable life is reduced from 7 to 5 years, and the 150% dB method can instead elect the 200% dB method.

Business interest

Under current law, the deduction for business interest is unlimited. Under the Senate plan, like the House plan, net interest is limited to 30 percent of modified taxable income, a so-called “thin cap” rule.

Worldwide to Territorial System

Under current law, all income from whatever sources derived is taxable on a worldwide basis. Under tax reform, business income earned overseas is generally excluded from U.S. income tax (i.e., “territoriality”).

Prior deferred foreign earnings are “catch up” taxed under “deemed repatriation” at a rate of 10 percent for cash and 5 percent for other holdings.

There appears to be a 12.5 percent global minimum tax and a 10 percent “base erosion” tax. More will come out on this in future days.

Net Operating Losses

Two year carryback repealed except for farm losses. Losses limited to 80% of taxable income in future years. 20 year limit on NOL carryforwards repealed.

Like kind exchanges

Tax free rollovers of gains from sale of business property are limited to real estate only.

Limit on 50 percent meals and entertainment deduction

Taxpayers are currently allowed a deduction for 50 percent of business meals and entertainment connected to business activity. Employers can reimburse the full amount, but can only deduct 50 percent of such reimbursed expenses.

Under the proposal, the deduction is limited to meals only, and no meals on site.

Other business tax reforms

Employers can continue to reimburse for commuting as a fringe benefit, but not for any other personal transportation

  • $1 million “CEO deductible pay cap” expanded to non-profits and expanded to include stock options

  • Businesses under $15 million in gross receipts eligible for cash method of accounting

  • Businesses under $15 million in gross receipts not required to keep an inventory accounting

  • Section 199 domestic production activities deduction is repealed

  • College and university super-large endowments ($250,000 per student or more) have a 1.4 percent excise tax

  • Non-profits (like colleges) who lease their sports stadium’s names must pay tax on that income

  • NFL league office can never again become a non-profit entity

Personal Tax Reforms

Lower Personal Tax Brackets Across the Board

Current Law Senate Proposal

10% 10%

15% 12%

25% 22%

28% 24%

33% 32%

35% 35%

39.6% 38.5%

The top bracket would kick in at $1,000,000 for married couples and $500,000 for all other filing statuses. That’s higher than today, and more than double today’s level for married couples. All other bracket thresholds would be similar, but not identical, to current law. The marriage penalty is eliminated in every tax bracket. These bracket levels revert to current law after 2025.

The brackets would be indexed to Chained-CPI starting in 2019, a lower inflation rate than is currently used.

Standard deduction

Current Law Senate Proposal

Single $6350 $12000

Married $12700 $24000

Head of Household $9350 $18000

The $4050 personal and dependent exemptions are repealed, essentially rolled into the larger standard deduction and child tax credits, respectively. After 2025, the current law standard deduction returns and the personal and dependent exemptions return.

Child tax credit

Is increased from $1000 today to $2000. Age eligibility increased to children through age 17.

In addition, $500 per non-minor child dependent.

The credit begins to phase out at $500,000 of AGI for a married couple, half that for others. This is FAR higher than today, where the phaseout begins at $110,000 AGI for married couples and less than that for others.

All these changes expire after 2025.

State and local tax deduction (SALT)

Taxpayers will no longer be able to deduct state or local income or sales taxes, state or local real property taxes, or state or local personal property taxes. This deduction returns after 2025.

Mortgage interest deduction

Rules basically unchanged ($1 million acquisition indebtedness cap is the same), but interest from home equity loan interest will no longer be deductible in years through 2025.

Sale of home gain exclusion

Under current law, a taxpayer may exclude up to $250,000 ($500,000 if married) of gain on the sale of a main home that has been lived in and owned for at least 2 of the 5 years prior to sale. That is changed to 5 out of the 8 years prior to sale. Current rules return after 2025.

Death tax

40 percent death tax retained. Exemption doubled to $11 million per person, or $22 million for surviving spouses who properly structure. Current exemption returns after 2025.

Alternative minimum tax

Both the personal AMT and the corporate AMT are repealed. The AMT is a parallel tax system that forces taxpayers to run the numbers in both the regular and AMT methods, and pay the higher amount. The AMT returns after 2025.

Retirement savings

  • Once a Roth conversion is made on an IRA, it cannot be recharacterized back later.

  • No more double dipping in 457 plans and 401(k)/403(b) plans

Other deduction changes

  • Casualty losses only deductible in presidentially-declared disaster areas (fully deductible after 2025)

  • Tax prep fees no longer deductible except for businesses (through 2025)

  • Unreimbursed employee business expenses and other 2% of AGI “haircut” items no longer deductible (through 2025)

  • Charitable contributions now allowed up to 60 percent of AGI without rollover (currently 50 percent) through 2025

  • No charitable deduction for college sports tickets through 2025

  • “Pease” itemized deduction phaseout repealed through 2025

  • Moving expenses no longer deductible/reimbursed by an employer except Armed Forces through 2025

  • Bicycle commuting expense benefit repealed

  • Gambling losses are actually expanded to include associated costs with gambling, not just the wager itself (!) through 2025

Learn more here.

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