House Introduces Proposal on Comprehensive Tax Reform
On November 2, 2017 the Chairman of the House Ways and Means Committee Kevin Brady (R-TX) released H.R. 1, The Tax Cuts and Jobs Act. The bill seeks to comprehensively reform the United States Tax Code for the first time in 30 years, by consolidating tax brackets, eliminating tax credits, and lowering rates for C-Corporations and pass-throughs. You may view H.R. 1 by clicking here.
On November 2, 2017 the Chairman of the House Ways and Means Committee Kevin Brady (R-TX) released H.R. 1, The Tax Cuts and Jobs Act. The bill seeks to comprehensively reform the United States Tax Code for the first time in 30 years, by consolidating tax brackets, eliminating tax credits, and lowering rates for C-Corporations and pass-throughs. You may view H.R. 1 by clicking here. Subject to the reconciliation rules included in the budget, a tax bill can only be passed with 50 votes under reconciliation if it reduces revenues by $1.5 trillion or less. The Joint Committee on Taxation (JCT) originally scored H.R. 1 as a $1.487 trillion reduction in revenue over the 10 year budget window, which means that it complies with the reconciliation rules. This summary focuses on the House bill as it was introduced, TRALA fully expects changes to the bill, but many of the agreed upon parameters should remain in place.
Some of the highlights of the bill are:
- Consolidates the current 7 tax brackets for individuals into 4
- Lowers the rate for C-Corporations to 20% and pass-throughs to 25%
- Allows for 100% immediate expensing for qualified property purchased after January 1, 2018 and before January 1, 2023
- Repeals the Alternative Minimum Tax (AMT)
- Doubles the threshold for the Estate Tax from $5 million to $10 million and sets it on a glide path to full repeal beginning in 2023
- Retains the Mortgage Interest Deduction for existing mortgages, and limits the deduction to $500 thousand on new mortgages
- Allows for the deduction of net-interest if the amount of net interest does not exceed 30% of adjusted taxable income.
On the individual income side, the Brady plan consolidates the current seven tax brackets into 4, doubles the standard deduction to $12,000 for individual filers, $24,000 for joint filers, increases the child care tax credit from $600 to $1,600 per child, caps the mortgage interest deduction to $500,000 for new purchases and limits the state and local deduction up to $10,000 for property taxes.
Tax Brackets for Single Filers
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To see how income levels are broken down as a share of taxes please click here.
The Brady plan lowers the tax rate paid by C-Corporations down from 35% to 20%, and creates a rate of 25% for companies filing as pass-throughs. Additionally, the Brady plan includes "safeguards" to exclude "professional service" income from claiming the 25% rate. This would exclude companies which rely on the reputation or skill of its employees as its main asset. Companies relying on "professional service" are doctors, lawyers, engineers, architects, performing arts, sports, consulting and similar trades. These businesses or individuals would be forced to pay their income at the individual rates based on income. Additionally, the bill includes a 70/30 split on wages and profits from a non-professional service pass-through. The Brady bill would limit a business owner or shareholder who receives a salary from the business to cap 30% of their salary and profits from a business at the 25% rate, the rest of the income and profits would be paid at the individual rates.
The Brady proposal allows for the immediate expensing of tangible personal property which is put in to service after September 27, 2017 and before January 1, 2023. The language excludes the immediate expensing of real property. Real property is defined as non-residential real property, residential rental property, and any railroad grading, tunnel, or bore. Additionally, the inclusion of immediate 100 percent expensing, makes Section 1031 Like-Kind Exchange (LKE) obsolete for qualified property. LKEs are still available for real property.
The Brady bill chose not to touch the Highway Trust Fund (HTF), despite earlier reports of efforts to use repatriation to cover shortfalls in the HTF. The House chose to focus on lowering rates and widening the base. Since the House is not touching the HTF, it chose not to eliminate the Federal Excise Tax (FET). TRALA and a group of trucking stakeholders have been meeting for months with members of the House and Senate to educate them on the negative impacts of the FET, which is a 12% tax on the sale of medium and heavy duty trucks. Despite interest in repealing the tax, Congress will have to use a potential infrastructure bill as a way to fix the HTF and repeal the FET.
The Brady proposal limits interest deductibility to deducting net interest if it is less than 30% of their adjusted taxable income and business interest income. Adjusted taxable income means taxable income net of (1) non-business income or deductions, (2) business interest expenses or business interest income, (3) Net Operating Loss, and (4) depreciation, amortization, or depletion expenses. The provision allows the IRS to provide other adjustments to arrive at "adjusted taxable income." For a corporation that is engaged in the business of leasing or renting trucks, the bill would limit the corporation's deduction for interest paid to the sum of its business interest income plus 30 percent of its adjusted taxable income. This limitation does not affect small businesses which have less than $25 million in gross receipts over a three year period. These small businesses would be able to fully expense all interest. There is also no grandfathering for existing interest. For pass-through businesses, interest must be separated from investment interest as only business interest may be deducted. Additionally, the interest income would be determined at the tax filer level, for a pass-through business that would be at the partnership level. Furthermore, any interest that was disallowed may be carried forward for 5-years.
Congress chose not to include specific rules for income generated from leases or rentals, but they did address many of TRALA's concerns by limiting net interest to 30% of adjusted taxable income. For a more in depth analysis of the interest deductibility portion of the bill, you may click here.
The House Ways and Means Committee is currently marking up H.R. 1 this week. There are several potential changes to this bill, including attaching a repeal of the Individual Mandate to buy health insurance. Though Chairman Brady had resisted calls to attach the Individual Mandate repeal, it could be used as a way of generating necessary revenue in order to keep the JCT score under $1.5 trillion. If the bill passes out of the Ways and Means Committee, as expected, it should be brought to the floor of the House in the next few weeks , where it could be passed and sent to the Senate.
In the Senate, Finance Committee Chairman Orrin Hatch (R-UT) was expected to release his bill on Thursday November 9, but that has now been delayed. Senate Finance is expected to begin marking up their own bill the week of November 13, 2017. As the Senate bill has to meet the reconciliation rules in order to pass by a simple majority of 50 votes plus the Vice President, it is most likely that the Senate bill will be similar in form to the House bill, but it will certainly have differences with the House bill. Depending upon how quickly the Senate moves on their bill, it is possible that the House and Senate could each pass their bills by late November, or early December and then go directly to a Conference Committee, where they could produce a final bill in early December.
If you have any questions on tax reform, please contact Andrew Stasiowski at email@example.com or at (703)299-9120.