Senate and House Tax Reform

The Senate Tax Reform Bill Passes Amid Mounting Scrutiny

On November 16, 2017, the House passed H.R.1, also known as the “Tax Cuts and Jobs Act.” On the same day, the Senate Finance Committee marked up its own version of the Act. After clearing the Senate Budget Committee, the full Senate has finally voted on its tax reform bill as approved by the Senate Finance Committee.

There are still several differences, however, between the House and Senate bills on tax reform. This means that the House and Senate versions of the Tax Cuts and Jobs Act will need to be reconciled before the President can sign a tax reform bill into law. As a result, lawmakers and lobbyists are expected to continue discussions through late December 2017.

Key differences in the bills are summarized below, in addition to their similarities which are likely to be enacted into law if they can be presented for signature during this administration. This means individuals and business leaders can start to prepare now for certain new and amended tax code provisions, in addition to the wealth management strategies that are beginning to emerge on the Republican path to comprehensive tax reform.

Corporate Tax Cuts

Corporate tax rates are proposed to be reduced from a maximum rate of 35% to a flat rate of 20% under both the House and Senate bills, but the Senate would delay implementation until 2019. The current administration is taking the position that corporate tax cuts will boost hiring and wages, but corporate leaders suggest the proceeds may benefit shareholders instead.

Both bills also eliminate most of the business deductions and credits but retain the R&D tax credit. Notably, they would permit the full and immediate expensing of the cost of business investments. The Senate bill, however, would make the provision allowing the full write-off of new capital investments a temporary rather than a permanent provision.

Pass-Through Business Income

Initially, individuals receiving income from certain pass-through businesses would be able to deduct 17.4 percent of that income from their individual income tax under the original Senate bill. This deduction would sunset after 2025. Senator Steve Daines (R-MT), however, has proposed an amendment to raise the amount of pass-through income business owners can deduct from 17.4 percent to 23 percent. This new deduction can drop the rate on pass-through entities to below 30 percent.

International Tax

The Senate bill would allow domestic corporations to receive a dividend from their foreign subsidiaries without incurring United States tax on the income. It also creates a new minimum tax for certain related party transactions in order to reduce the erosion of the United States corporate income tax base. In a further effort to reduce base erosion, it equalizes the tax treatment of specified high return income from foreign sales whether they are earned through a foreign corporation or a domestic corporation.

Individual Tax Cuts

The House bill proposes three tax brackets at reduced rates (12%, 25%, and 35%) instead of the current seven while the Senate bill would keep the seven tax brackets, at reduced rates (10%, 12%, 22%, 24%, 32%, 35%, and 38.5%). The latter’s rate cuts would sunset in 2026.

Estate Tax Repeal

The House bill proposes the repeal of the estate and generation-skipping tax after 2024 in addition to significantly increasing the exemption amount until that time. The Senate bill would only increase the exemption amount but not repeal the estate tax. Moreover, the Senate bill’s higher exemption would sunset in 2026.

Executive Compensation

The Senate bill would make substantial changes to the Internal Revenue Code with respect to executive compensation. For example, it would eliminate popular exceptions to Code Section 162(m) which generally imposes a $1 million deduction limitation on employee compensation. Written contracts in effect by November 2, 2017, however, would be exempt from this more broadly applicable deduction limitation.

New 83(i) Election for Illiquid Stock held in Private Companies

The Senate bill would allow eligible employees to make an election under Code Section 83(i) to defer the recognition of income on private company stock acquired through the exercise of stock options or the settlement of restricted stock units for up to five years after vesting. Income would be recognized once the stock was readily tradeable on an established securities market or at the end of the deferral period based on the stock’s value on the vesting date.

Repeal of the ACA’s Individual Mandate

The Senate bill would eliminate the penalty relating to the Affordable Care Act’s individual mandate, i.e., the requirement that individuals maintain minimum essential coverage. The House bill does not address the ACA’s individual mandate.

New Employer Credit for Family and Medical Leave

The Senate bill would establish an employer credit for a percentage of the amount of wages paid to certain employees for the time they are on family and medical leave. The maximum amount of leave for each tax year, however, could not exceed 12 weeks.

State and Local Tax Deductions

Initially, the Senate bill would no longer allow taxpayers living in high-tax states and cities to deduct their property taxes or their state and local income taxes. Senator Susan Collins (R-ME), however, proposed a SALT amendment to allow taxpayers to deduct up to $10,000 for state and local property taxes. This last minute amendment aligns the Senate bill with the SALT deduction limitation in the House bill.

Effective Date

The Senate bill would apply to taxable years beginning after December 31, 2017.

Read Related Bills before the Senate Finance Committee

BillTitleLatest Action
S.1444Empowering Employees through Stock Ownership Act06/27/2017 Read twice and referred to the Committee on Finance.
S.852Retirement Security Preservation Act of 201704/05/2017 Read twice and referred to the Committee on Finance.
S.405Stop Taxing Death and Disability Act02/16/2017 Read twice and referred to the Committee on Finance.
S.264The Free Speech Fairness Act02/01/2017 Read twice and referred to the Committee on Finance.
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Allison Kroeker

Allison Kroeker joined the firm after receiving her LL.M. in Taxation. Her areas of focus within the tax practice include business structure planning, corporate transactions, deferred compensation, and income tax compliance. She also writes many of Royse Law Firm’s articles on tax procedure and policy.
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