TAX CUTS AND JOBS ACT COMPARISON OF KEY BUSINESS RELATED PROVISIONS OF THE HOUSE AND
SENATE BILLS DECEMBER 7, 2017
that key parts of the Senate's versions passed on such a narrow
margin, 51 to 49, we expect the bulk of the Senate provisions to be
retained in the conference committee negotiations with the House.
Unlike the simple majority needed to pass the forthcoming Conference
Committee legislation, any subsequent technical correction act is
not likely as it would require 60 votes in the Senate.
Estate, Gift, and Generation-Skipping Transfer Taxes House
• Permanently doubles the
basic exclusion amount for estate and gift tax purposes from $5
million to $10 million (indexed for inflation occurring after 2011)
for estates of decedents dying and gifts made after December 31,
• Repeals the estate and
generation-skipping transfer taxes for estates of decedents dying,
gifts made, and generation-skipping transfers made after December
• Reduces the gift tax rate
from 40 percent to 35 percent for gifts made after December 31,
• Doubles the basic exclusion
amount for estate and gift tax purposes from $5 million to $10
million (indexed for inflation occurring after 2011) for estates of
decedents dying and gifts made after December 31, 2017, and before
January 1, 2026.
2018 Business Income I. House 25% Reduction of Maximum Tax Rate on Business Income
1. House -
Provides for 70% of non-passive (active) business income to be
treated as wages (without changing current law payroll tax
treatment) subject to normal rates with the balance of Qualified
Business Income of 30% subject to the lower rate. By election
covering 5 years, the 70/30 ratio may be substituted with an
alternative Capital Percentage. That formula would annually measure
the capital percentage based on a rate of return (the Federal short
term rate plus 7 percent) multiplied by the capital investments of
enough, personal service businesses would not be allowed to use the
70/30 ratio, but could elect the facts and circumstances Capital
100% of net
passive income would be subject to the 25% rate but not investment
income (interest, dividends, capital gains, annuities etc...)
2. House -
Subject to a 5 year phase-in and an income phase-out, the first
$75,000 of an active owner’s net business taxable income would be
subject to a 9-percent rate in lieu of the ordinary 12-percent rate.
The benefit phases-out for taxable incomes between $150,000 and
3. House -
Repeals the Individual Alternative Minimum Tax (AMT). Commentary:
discussed below, for businesses that currently benefit from the 9%
Domestic Production Activities Deduction (DPAD), such as those in
construction and manufacturing, it is very possible that the House's
repeal of the DPAD will increase their effective income tax rates by
.9%. See comment regarding the Senate version below.
effective marginal income tax maximum rate would be 36.91% (30% of
qualified income x 25% ceiling rate plus 70% x 39.6% ordinary tax
turns taxation of passive activities on its head by applying the 25%
rate to 100% of passive activity income, but only 30% of such income
if the taxpayer materially participates (so-called 750 hour, 500
hour, more hours than anyone else and activity grouping election
rules.) Though we think the Senate version will survive the
Conference Committee, the passive activity rule might be easily
gamed by married individuals exchanging ownership and filing
separately. Further, in the case of sale gains and positive
operating income all of which would be subject to the lower 25%
income tax rate when the taxpayer(s) do not materially participate,
the US Tax Court placed such onerous evidentiary burdens in order to
prove hours of active participation, that in most situations it
would be almost impossible for the IRS to dispute a taxpayer's
assertions that they are passive owners and do not materially
proposed repeal of the individual AMT is basically offset by
repeal or limitations on the deductibility of many itemized
deductions. However, for taxpayers with business credit carryovers
such as Energy, Research and Experimentation credits, these
carryovers will no longer be limited.
II. Senate - Accomplishes Rate Reduction Via a New 23% Deduction
for Qualified Business Income.
personal service businesses
Definition of qualified business income is similar to House
Deduction is limited to the lesser of Qualified Business Income or
50% of W-2 wages of the business, but only for taxable incomes
starting at $250k/$500k single/married, as indexed for inflation.
Qualified Business Income excludes reasonable compensation and
guaranteed payments to the taxpayer(s).
avoid enhanced accuracy related penalties, formal disclosure of
reasonable compensation should be made with the tax return.
businesses without employees, formation of single member S
corporations (or partnerships with 1% minority owners) could be a
loophole if it is not closed by the Conference Committee. The
marginal business income tax rate would be 29.645% (100%-23% times
maximum ordinary tax rate of 38.5%)
House Bill, the 9% Domestic Production Activities Deduction (DPAD),
such as those in construction and manufacturing, is repealed for
2018 (except for C corporations in 2019.) In general, the DPAD
repeal represents a 3.564% increase in tax rate on the income
previously benefiting from the DPAD.
House, the Senate does not repeal the individual AMT, but rather
increases in the AMT exemption amount ($109,400/$70,300) and the
exemption amount phase-out thresholds ($208,400/$156,300). Commentary.
The individual AMT tax rate ranges from 26% to 28%.
$250k/$500k single/married limitation threshold means that the
smallest of businesses will benefit from the 23% deduction proposal,
regardless of amount of employee compensation, if any.
non-business provisions including the AMT revert back to present law
III. Flat C Corporation Rate Reduced to 20%
1. House is
effective for tax years beginning after 2017 and includes repeal of
the Corporate AMT. Personal Service Corporations would have a 25%
rate, down from 34%.
is effective for tax years beginning after 2018. The Flat
rate would not apply to Personal Service Corporations.
House and Senate include provisions limiting the benefit of the
dividends received deductions with the 2017/2018 effective date
passive) S corporation businesses converting to C corporation status
(in order to take advantage of building up working capital at such a
low rate) would retain their ability to distribute previously taxed
accumulated earnings (so-call accumulated adjustment account or
bill does not repeal the Alternative Minimum Tax applicable to C
corporations. In general, AMT applies to C corporations with average
gross receipts in excess of $7.5 million and, among other items,
treats the difference between financial statement income and taxable
income as an item of AMT adjustment.
Depreciation Under Section 168:
and Senate: Section 168(k) bonus depreciation would rise to 100% for
"new" qualified property placed in service after September 27,
2017 and, in general, before January 1, 2023.
- "Used" property acquired by purchase, but excluding those
businesses subject to interest expense limitation described below.
increase by a factor of 2x the listed vehicle depreciation
only [Section 13204]: Effective for property placed in service after
12/31/2017, shortens the 39 and 27.5 real estate recovery periods to
Depreciation under Section 179 - Expensing of Equipment
1. House -
Effective 2018-2022, current law limitations increased to $5 mil,
$20 mil aggregate, and expanded to also apply to certain efficient
heating and AC systems retroactive to 11/2/2017.
2. Senate -
Effective for tax years beginning after 2018, limitations increased
to $1 mil, $2.5 mil aggregate.
3. Senate -
Placed in service in taxable years beginning after December 31,
2017, by election, commercial real estate improvements to roofs,
HVAC, fire protections and security alarms.
Net Operating Loss (NOLs) Limitations
both House and Senate limit NOLs to 90% and bar carry backs,
particularly for losses caused by above depreciation liberalization.
Effective dates are tax years beginning after December 2017. Senate
proposal includes a phase-in limitation expanding the 90% to 80%.
Also see the Senate's $250k/$500k limitation on excess business
losses treated as NOL carryovers. Interest Expense Limitations [IRC Section 163(j)] Effective
tax years beginning after 12/31/2017
and Senate - Interest expense deduction for most businesses with
gross receipts in excess of the following thresholds are limited to
30% of adjusted taxable income.
a. House $25 mil. Disallowed interest carried
over 5 years on a FIFO basis.
b. Senate $15 mil. No restrictions on carry over
of disallowed interest.
c. Senate allows election to deduct 100% if
accompanied by ADS depreciation election.
House Only IRC Sec 48 and 25D:
investment tax credit (ITC) for certain Energy Investments
(including solar and wind) phased out starting in 2020. Similarly,
there is a retroactive extension for residences.
The 10% ITC
applicable to geothermal installations is eliminated in 2027. Repeal of 9% Domestic Production Activities Deduction [IRC
Section 199] (excludes Puerto Rico)
1. House -
Effective tax years beginning after 2017.
2. Senate -
Effective tax years beginning after 2017 for non-corporate taxpayers
and to C corporations after 2018.
Like-Kind Exchanges of Real Property [IRC Section 1031]
for 2018 exchanges, both House and Senate, in essence, repeal
like-kind-exchanges for everything but real estate.
Methods of Accounting
small business with average receipts of less than $25 million in the
House and $15 million in the Senate:
Method of Accounting - Both retain the non-corporate use of
cash basis method of accounting and expands the current $5 million
Materials and Supplies - Both proposals exempt small
businesses from Uniform Capitalization Rules with financial
for long-term contracts - Both proposals expand the exception
for small construction contracts from the requirement to use the
percentage of completion method.
Partnership Profits Interests
and House include a new provision extending the 1 year long term
capital gain holding period to 3 years for the sale of profits
interests. These interests are frequently issued to non-capital
contributing members of partnerships who instead provide services
and often are accompanied by Section 83(b) elections.
There is an
exclusion for interest held by corporations, but due to a 3 year
look back rule it is unclear whether holding such interest through
an S corporation would circumvent that outcome, if such interest
where transferred before enactment.
Repeal of Section 174 Expensing of Research and Experimentation
effective dates after 2022 and 2025 (House and Senate respectively),
the new tax proposals include mandatory 60 month amortization of
R&E expenses. Currently, that is not required for materially
Both House and Senate Proposals modify exclusion of gain from
sale of a principal residence by narrrowing the holding period
requirement that a taxpayer must live in the residence for 5 out of
the 8 prior taxable years with the exclusion applying only to 1
residence every 5 years. The House's version is even more
restrictive and includes a modified adjusted gross income test of
Both House and Senate Proposals contain significant changes to
taxation of foreign income and foreign persons including
look-through rules for related controlled foreign corporations
(CFCs). Both House and Senate include proposal for an excise tax
based on investment income of private colleges and universities.
There are also significant changes to UBIT rules.
Selective Important Miscellaneous House (only) Provisions
of deduction for alimony payments (and corresponding inclusion in
gross income) generally for decrees issued after 2017.
Limitation to so-called security guard housing - Limit income and
FICA tax exclusions to $50,000 (phased out based on compensation
level) for employer-provided housing.
$5,000 income and FICA tax exclusions for dependent care assistance
programs—exclusion ends December 31, 2022.
Disallows deduction for expenses associated with entertainment
activities, membership dues, de minimis fringes that are primarily
personal in nature, and facilities associated with any of these.
Repeals present-law exception for expenses associated with
recreational, social, or similar activities primarily for the
benefit of rank-and-file employees. Disallows deduction for expenses
associated with entertainment meals, including meals in connection
with recreational, social, or similar activities primarily for
benefit of rank-and-file employees.
Applicable to Corporations and Partnerships - Under the House
provision, the gross income of a corporation or partnership would
include contributions to its capital, to the extent the amount of
money and fair market value of property contributed to the entity
exceeds the fair market value of any ownership interest that is
issued in exchange for such money or property. The provision would
be effective for contributions made and transactions entered into
after the date of enactment. The provision is intended to remove a
Federal tax subsidy for State and local governments to offer
incentives and concessions to businesses that locate operations
within their jurisdiction (usually in lieu of locating operations in
a different State or locality). Commentary: Though
not the intent of the provision, this could preclude the owners from
contributing capital for the purpose of paying off entity level
liabilities due to themselves. This is significant for partners
holding promissory notes with tax basis below the face value of the
notes. Likewise, such entities may not be able to escape ordinary
income tax treatment on debt forgiveness income from the discharge
of such liabilities occurring either voluntarily or as a consequence
of having no assets to pay such indebtedness.
Self-created Patent, Invention, Model or Design. Whether or not
patented or secret formula or process, both the House and Senate
proposals bar capital asset treatment. Rather, gain or loss from the
disposition of self-created assets, similar to copyrights of
literary, musical or artistic compositions, would be ordinary in
character. However, the election to treat as capital asset with
respect to musical compositions would continue. The provision would
be effective for dispositions of such property after 2017.
Similarly, the special capital gain rule for sale or exchange of
patents would be repealed. Commentary: Holders of
such assets might consider an installment sale of such assets into
an S corporation on or before December 31, 2017.
of technical terminations of partnerships (Section 708).
of deduction for certain unused business credits. Commentary. In
many cases, the House's repeal of the individual AMT, if also
enacted, would likely result in those credits being allowed.
Modification of credit for portion of employer social security taxes
paid with respect to employee tips.
Modification of the energy investment tax credit and the extension
and phase-out of residential energy efficient property credit.
Termination of private activity bonds.
Selective Important Miscellaneous Senate (only) Provisions
Limitation on Deduction of Excess Business Losses of Non-Corporate
Taxpayers - Effective for years beginning after 2017 and before
January 1, 2016, the amount by which the aggregation of income and
deductions from all trades or businesses (after applying Passive
Activity Rules of Section 469) nets to a loss which exceeds 250k
single, 500k married (indexed for inflation), are disallowed and
carried over as a Net Operating Loss. Commentary:
This provision of the Senate proposal will result in the limitation
of net business losses from offsetting more than 250k/500k of
investment income (interest, dividends, net capital gains, certain
annuity income etc...).
Eliminates ACA individual shared responsibility payment for failure
to obtain required health coverage.
Disallows deduction for expenses associated with entertainment
activities, membership dues, and facilities associated with any of
these. Disallows deduction for expenses associated with
entertainment meals. Applies 50-percent deduction limitation to
expenses associated with providing meals for the convenience of the
employer on the employer’s business premises, or on or near the
employer’s business premises through certain employer-operated
eating facilities; further expands deduction disallowance to 100
percent after December 31, 2025.
Prohibition on cash, gift cards, and other non-tangible personal
property as deductible employee achievement awards.
Modification of the definition of the $250,000 substantial built-in
loss in the case of transfer of partnership interest.
average costing of specified securities determined without regard to
identification. Commentary: If you own batches of
securities with both high and low basis, you may consider selling
the high basis securities before December 31, 2017 and reinvesting
in another investment to avoid the averaging of low and high basis
in to a single average.
Section 13801 through 13808 contains significant benefits for craft
brewers and distillers.
Modification to source rules involving U.S. Virgin Islands.
If you have any questions, do not hesitate to
contact the professionals at Dana S. Beane & Company, P.C.