House and Senate Tax Plans DifferNovember 16, 2017
On Nov. 9, Senate Finance Committee Chairman Orrin Hatch (R-Utah) released a Senate version of the Tax Cuts and Jobs Act (H.R. 1). The Senate tax reform proposals would lower business and individual tax rates, modernize U.S. international tax rules, and simplify the tax law, but differ in key aspects from the House Ways and Means Committee-approved tax reform bill. The House is scheduled to vote on their version of the bill on Nov. 16.
Most notably, the Senate Finance Committee proposal, like the House Ways and Means bill, would reduce the corporate tax rate to 20 percent; however the Finance proposal would delay implementation of the rate cut until 2019, while the Ways and Means provision would be effective beginning in 2018. The Finance bill provides significant relief from the estate tax but stops short of the full repeal included in the Ways and Means package. It proposes no changes to the current-law deduction for mortgage interest on home purchases which the Ways and Means bill would cap at interest paid on loan amounts of up to $500,000; but it would fully repeal the deduction for state and local taxes something House tax-writers would retain, although only for property taxes and even then subject to a cap.
Below are some of the key differences of significance to small businesses between the two versions:
Corporate Rate Reduction: The Finance Committee proposal would reduce the general corporate tax rate to 20 percent for taxable years beginning after Dec. 31, 2018. This would appear to delay implementation of the reduction by one year, as compared to the Ways and Means bill.
Pass-through Provisions: In a significant departure from the Ways and Means bill, the Finance Committee proposal does not provide the reduced 25 percent tax rate for pass-through business income from partnerships, LLCs, and S Corporations. However, it does provide a new deduction equal to 17.4 percent of domestic qualified business income from a partnership, S corporation, or sole proprietorship.
Unless a taxpayer’s income is below a threshold ($75,000 for single filers, $150,000 for joint filers), the deduction does not apply to “specified service businesses” (any trade or business activity involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees).
Cost Recovery: The Finance Committee proposal modifies bonus depreciation to allow for full expensing of qualified property placed into service after Sept. 27, 2017, but before Jan. 1, 2023 (with an additional year for longer production period property and certain aircrafts). The Finance Committee proposal’s temporary full expensing provision is substantially similar to that of the Ways and Means bill.
Section 179 Expensing: The Finance Committee proposal increases the section 179 expense election threshold to $1 million, which is significantly lower than the $5 million limit provided under the Ways and Means bill. The phase-out of this expense election begins at $2.5 million, which is also significantly lower than the $20 million provided in the Ways and Means bill. The Finance Committee proposal expands the definition of section 179 property to include certain property used in furnishing lodging, and roofs, heating, ventilation, air-conditioning property, fire protection and alarm systems, and security systems for nonresidential real property that are placed in service after December 31, 2017. In contrast, the Ways and Means bill only expanded section 179 property to include certain energy efficient heating and air-conditioning property.
Accounting Methods: The Finance Committee proposal expands the scope of eligible taxpayers who may use the cash method of accounting. The Finance Committee proposal allows taxpayers with annual average gross receipts of $15 million or less to use the cash method. In contrast, the Ways and Means bill increased the average gross receipts threshold to $25 million.
Net Operating Loss Deduction: As in the Ways and Means bill, the Finance Committee proposal would modify aspects of current law regarding net operating losses (NOLs). Under current law, NOLs generally have a carryback period of two years and a carryforward period of 20 years. As in the Ways and Means bill, the NOL carryback period would generally be eliminated and the carryforward period would become indefinite. Similarly, the amount of the NOL deduction allowed would be limited to 90 percent of taxable income computed without regard to the NOL deduction. In the Ways and Means bill, the amount of NOLs, or so-called indefinite NOLs, carried to a succeeding year would be increased by an annual interest factor. There is no mention of the increase in the Finance Committee proposal.
Alternative Minimum Tax: Similar to the Ways and Means bill, the Finance Committee proposal would repeal the alternative minimum tax (AMT) for individuals, estates, trusts, and corporations for tax years beginning after Dec. 31, 2017.
Estate and Gift Tax: The Finance Committee proposal, unlike the Ways and Means bill, would not repeal the estate and generation-skipping transfer taxes after Dec. 31, 2023, or for generation-skipping transfer occurring after Dec. 31, 2023; neither would it reduce the gift tax rate to 35 percent (from the current 40 percent) for transfer made after Dec. 31, 2023.
The Finance Committee began its mark-up of the tax reform proposal on Nov. 13. Senate Majority Leader Mitch McConnell (R-Ky.) has said he would keep the Senate in session into the week of November 20 – which is currently slotted for the Thanksgiving recess – to ensure that it receives a floor vote before the holiday, although he has not as yet made any official announcement about the upcoming floor schedule.
With a narrow party split of 14-12 on the Finance Committee, Chairman Hatch cannot lose a single Republican member’s vote to move the bill forward, and nearly the same is true for the full Senate, where Republicans hold only 52 seats.
The biggest challenge the Senate may face relates to the procedural limits of the Byrd Rule. Under the FY 2018 budget resolution and underlying law, the reform bill can increase the deficit by up to $1.5 trillion over the next decade, but it cannot increase projected deficits outside that 10-year budget window. Though a long-term score for the proposal hasn’t been released yet, it is likely to have a multi-trillion dollar revenue loss in the second decade. Thus, at some point in the process, Senate Republicans will need to add back into the bill a curative amendment to ensure Byrd Rule compliance. That is all but certain to mean some of the tax relief in the proposal will have to sunset and some additional revenue raisers will be added. Those changes may make the bill less appealing to those members who will need to vote for it and can be expected to complicate the path to passage.