November 27, 2017 | Volume 15, Issue 2 | 800.756.2772
Senate Releases its Version of the Tax Cuts and Jobs Act
On November 9, 2017, the Senate Finance Committee released its markup of the Tax Cuts and Jobs Act (the Act). Subsequently, on November 14, 2017, additional changes were issued by the committee. Senate leadership expects their legislation will leave committee this week and to the full Senate for a vote, assuming Senate leadership can assuage the concerns of some Senators. While the proposed Senate law as outlined below has some similarities to the Act, there are substantial differences that will have to be worked out in conference committee.
A summary of Senate proposed tax law changes affecting individual taxpayers and families follows:
- The individual income tax rate structure under the Senate proposal would continue with the current seven brackets with rates as follows: 10%, 12%, 22%, 24%, 32%, 35% and 38.5%, effective for the 2018 tax year.
- The 12% bracket would be in effect for single taxpayers at $9,525 and married filing jointly at $19,050.
- The 22% bracket would be in effect at $38,700 for single taxpayers and $77,400 for married filing jointly.
- The 24% bracket would be in effect for single taxpayers at $70,000 and $140,000 for married filing jointly.
- The 32% bracket would be in effect for single taxpayers at $160,000 and $320,000 for married filing jointly.
- The 35% bracket would be in effect for single taxpayers at $200,000 and $400,000 for married filing jointly.
- The 38.5% bracket would be in effect for single taxpayers $500,000 and $1,000,000 for married filing jointly.
- The current standard deduction would approximately double to $12,000 for single individuals and $24,000 for married filing jointly. Current elderly and blind additional standard deduction would be kept under the Senate proposal.
- Under current law, taxpayers, spouses, and dependents are allowed a personal exemption of $4,050 each. Under the proposed Senate law, personal exemptions would be eliminated.
- Under the Senate proposal the following itemized deductions would be repealed:
- state and local taxes, including property taxes,
- personal casualty and theft losses, except for personal casualty loss incurred in a Presidentially-declared disaster, and
- home equity indebtedness. The Senate proposal does not change current home mortgage interest expense rules.
- Individual taxpayers are allowed a “miscellaneous itemized deduction” for certain expenses to the extent they exceed two percent of adjusted gross income. Miscellaneous itemized deductions include expenses related to the production/collection of income and unreimbursed employee costs. The Senate proposal repeals all miscellaneous itemized deductions.
- The charitable contribution AGI limit would increase from 50% to 60% for cash contributions to public charities.
- Individual taxpayers may exclude a portion of the gain on the sale of their principal residence if they owned and used their residence two out of the last five years. The Senate proposal extends the holding and use period to five out of eight years.
- The Senate proposal would repeal the deduction for moving expenses.
- The Senate proposal would increase the child tax credit from $1,000 to $2,000, with the first $1,000 of credit refundable.
- As with the House proposal, the Senate proposal would repeal the individual alternative minimum tax or AMT.
- Under the Affordable Care Act individuals must be covered by a health plan that provides minimum essential coverage or be subject to a tax (known as the individual mandate). Under the Senate proposal the individual mandate would be repealed.
- The Senate proposal increases the estate and gift per person tax exemption to $10,000,000, effective for tax years beginning after December 31, 2017.
A summary of Senate proposed tax law changes effecting business taxpayer and individual taxpayers reporting business income follows:
- The Senate proposal eliminates the graduated corporate tax rate structure and instead provides for a flat 20% corporate income tax rate. The proposal also eliminates the special 35% rate that applies to personal service corporations.
- As with the House proposal the Senate proposal removes the corporate alternative minimum tax or AMT.
- The Senate proposal provides for an individual tax deduction of 17.4% of domestic qualified business income from a partnership, S-corporation, or sole proprietorship (pass-through entity). The 17.4% deduction is limited to 50% of the taxpayer’s allocable or pro rata share of W-2 wages from the pass-through entity. The wage limitation would not apply to taxpayers whose taxable income does not exceed $500,000 for married filing jointly or $250,000 for other taxpayers. Individual owners of certain service sector pass-through entities are allowed the deduction to the extent their taxable income does not exceed $500,000 for married filing jointly or $250,000 for other taxpayers.
- Increases bonus depreciation from 50% to 100% for qualified property acquired placed in service from September 28, 2017 until December 31, 2022.
- Expensing limitations under Section 179 would be extended to $1,000,000 and would phase-out at $2,500,000 of income. Additionally, the Senate proposal would expand property eligible for Section 179 to include roofs and buildings systems of nonresidential real property.
- Business interest expense would be deductible to the extent of net business interest income plus 30% of a taxpayer’s “adjusted taxable income” for the taxable year. Adjusted taxable income means trade or business taxable income before:
- non-trade or business income,
- the 17.4% deduction for pass-through income, and
- net operating loss deduction. The rule does not apply to real property trades or business and taxpayers whose annual gross receipts in the past three years do not exceed $15M. Any interest deduction limited under these rules can be carried forward indefinitely.
- Excess business losses incurred by taxpayers other than a C-corporation would be limited. Excess business loss for a taxable year is the taxpayer’s excess of aggregate trade or business deductions, over the aggregate trade or business gross income or gain plus a threshold amount. The threshold amount would be $500,000 for married individuals filing jointly and $250,000 for all other individual taxpayers. Excess business losses are carried forward as part of the taxpayer’s net operating loss.
- For taxable years beginning after December 31, 2023 a taxpayer’s net operating loss (NOL) would be limited to 80% of taxable income. NOL carrybacks would be eliminated, and carryforward of NOL’s would be indefinite.
- Under current law residential and non-residential real property are depreciated over 27.5 and 39 years, respectively. Under the Senate proposal the depreciable recovery period for both residential and non-residential real property would be shortened to 25 years.
- Unlike the House proposal to remove most business credits the Senate proposal lowers the rehabilitation credit from 20% to 10%, and limits the orphan drug credit under Section 45C.
- Elimination of Section 199 manufacturing deduction and deduction for entertainment expenses.