Senate Passes Tax Bill

While the fat lady still isn’t singing, she seems to be warming up. In the wee hours of Saturday morning, the Senate passed a bill to overhaul the tax code in a bid to get a signature piece of legislation to President Donald Trump before the new year. Prior to landing on the President’s desk, however, the Senate and House bills must be reconciled.

The bill would cost about $1.45 trillion over a decade, according to estimates from the Congressional Budget Office. The Joint Committee on Taxation estimate a previous version of the bill would add about $1 trillion to the deficit over 10 years. Measures included revenue raising provisions to offset some of these costs. A brief and not all-encompassing synopsis follows. Look for more in the coming days.

Businesses

The Senate legislation calls for a 20% corporate rate and an increase in the deduction for pass-throughs to 23% (from 17.4%). The increase will result in an approximate 29.6% tax on business income for top earning pass-through owners.

Other changes for businesses include more generous expensing rules. The Senate version makes it possible for businesses to immediately and fully expense new equipment for five years, phasing the provision out by 20% points each year thereafter.

Also, as expected, the bill moves the U.S. to a territorial system and includes provisions to prevent corporations with foreign profits from gaming the system. It would require companies to pay a one-time low tax rate on their existing overseas profits -- 14.5% on cash assets and 7.5% on non-cash assets (e.g., equipment abroad in which profits were invested).

Included in both the House and Senate versions was a change in the deduction for net interest expense. The Senate version limits the deduction to 30% of adjusted taxable income with an indefinite carryover, while the House version limited it to 30% of EBITDA with a five-year carryover.

Both the House and Senate versions of the bill would allow for immediate expensing (Section 179) of the purchase of certain equipment at higher than the current allowable $500,000 level. The Senate version caps it at $1 million while the House bill boosted the cap to $5 million with both versions subject to phaseout.

Other changes to the Senate bill include:

  • A provision specifying that master limited partnership unit holders can claim the 23% pass-through deduction;
  • A provision for cash distributions for an S corporation converting to a C corporation;

Individuals

While the House bill proposed only four tax rates, the Senate bill would keep seven and reduce the top marginal rate to 38.5%. Under the Senate bill, the standard deduction would increase to $12,000 for individuals, $18,000 for heads of household (HOH), and $24,000 for married couples filing jointly – almost doubling each deduction from current tax law. However, the extra deduction currently available of $4,050 of personal exemption for yourself, your spouse and each of your dependents is folded into the standard deduction and is no longer available. 

Mortgage Interest Deduction: Under the Senate bill, the deduction would remain in place for mortgages up to $1,000,000 but the deduction for equity debt (refinancing not related to home improvement) would be eliminated.

State and Local Tax and Property Tax Deductions: Both proposals eliminate the state and local income tax or sales tax deduction for individual taxpayers. The property tax deduction stays in place but at a reduced cap of $10,000.

The Senate version also includes an amendment that would allow funds from Section 529 savings accounts to be used for public, private and religious elementary and secondary schools, as well as for home school students. There is also an amendment that would remove a provision from the bill excluding universities that don’t exempt federal funding from the excise tax on their endowments. The underlying tax bill would exempt endowments worth more than $500,000 per student, an increase from a $250,000 per student threshold in earlier versions.

What’s Next

The House and Senate will now begin to work out any remaining differences between their two bills, including how to approach pass-through taxation and whether the plan should include an alternative minimum tax. The final product will have to pass both chambers before President Trump can sign the bill.

The bill will likely go to conference so that certain provisions between the House and Senate version can be reconciled.

Please contact Tax Practice Leader, Debbie Torrance, if you have any questions. 

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