“Tax Cuts and Jobs Act”

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The “Tax Cuts and Jobs Act” has passed both chambers of Congress and is expected to be signed by President Trump soon. Details of the final agreement among House and Senate Republicans include rate cuts for “C” corporations, individuals and pass-through businesses.

Here’s a summary of the major provisions of the final bill and how the new plan differs from bills that passed both chambers earlier. You may find on our website the Conference Committee summary of the compromise bill and the official bill text.

Corporate Tax Rate

Joint Agreement: Cut the corporate rate to a flat 21 percent from 35 percent, beginning in 2018.
House: Cut to 20 percent in 2018.
Senate: Cut to 20 percent in 2019.

Top Individual Tax Rate

Joint Agreement: Cut the top rate to 37 percent for the highest earners, down from 39.6 percent.
House: Leave top rate at 39.6 percent.
Senate: Cut top rate to 38.5 percent.

Pass-Through Entity Deduction

Joint Agreement: Provide a 20 percent deduction against pass-through business income, and extend that break to trusts as well as individuals/sole proprietors. A last-minute cap was added, however, which phases out the deduction for owners with more than $315,000 in taxable income (married filing jointly).
House: Tax such business income at a top rate of 25 percent, but service businesses like accounting and law firms wouldn’t be eligible. Provide a lower rate of 9 percent for some lesser-earning businesses.
Senate: Provide a 23 percent deduction, with limitations related to taxable income and amount of wages paid. A last-minute amendment allowed deduction for owners of professional service firms whose taxable income is less than $500,000 (MFJ) or $250,000 (single or MFS).

Corporate Alternative Minimum Tax

Joint Agreement: Repeal it.
House: Repeal it.
Senate: Maintain it.

Obamacare Individual Mandate

Joint Agreement: Repeal it.
House: No action.
Senate: Repeal it by zeroing out the tax penalty for individuals who don’t purchase health insurance.

Mortgage Interest Deduction

Joint Agreement: Cap it at loans of $750,000 – down from $1 million – for new purchases of homes.
House: Cap it at loans of $500,000.
Senate: No change.

Individual State and Local Tax Deductions

Joint Agreement: Limit combined deductions for state and local income, sales, and property taxes to $10,000 annually.
House: Repeal deduction except for property taxes, capped at $10,000.
Senate: Repeal deduction except for property taxes, capped at $10,000.

R&D Tax Credits, etc.

Preserves the R&D income tax credit as well as the low-income housing credit and retains the tax-preferred status of so-called private activity bonds, which are often used to encourage construction of low-income housing and infrastructure projects.

Rates on Offshore Earnings

Under current law, multinational companies may defer paying U.S. income taxes on their foreign earnings until they return, or “repatriate,” them to the U.S. The deferral provision and reduced tax rates in other countries have led companies to stockpile those earnings overseas.

The House voted last month to tax those companies’ stockpiled offshore earnings (estimated to be more than $3 trillion) at 15.5 percent for income held as cash and 8 percent for illiquid assets. The Senate’s bill this month set those rates at 14.5 and 7.5 percent, respectively.

As Republican leaders of the two chambers worked on compromise legislation, many of the changes – including a lower rate for the highest-earning individuals and restoring or enhancing some personal tax deductions and child tax credits – increased the bill’s revenue cost. As a result, the compromise bill included increased repatriation tax rates.

Short-Term Outlook

The bill is on its way to President Trump’s desk and is expected to be signed soon. Even with the bill becoming law, the tax reform debate is not over. Significant discussions are already taking place about subsequent legislation that will be needed in early 2018 to correct problems arising from the bill.

If you have any questions regarding the bill, please review the bill itself and, of course, feel free to contact one of us: pkavinoky@bradley.com, bely@bradley.com, dstewart@bradley.com, or rrobichaux@bradley.com.