On November 2, 2017, House Republicans unveiled a major overhaul of the Internal Revenue Code. The proposed “Tax Cuts and Jobs Act” would have an impact on virtually every individual and business on a level not seen in over 30 years. The plan calls for lowering the individual and corporate tax rates, repealing countless tax credits and deductions, eliminating the alternative minimum tax, abolishing the federal estate tax after 2023, enhancing the child tax credit, boosting business expenses and more.
The White House has signaled support for the House GOP bill. Possible roadblocks to ultimately getting the bill to the President’s desk before year end include unified opposition from House Democrats, as well as intense lobbying efforts to preserve tax breaks that are slated for elimination. There is also uncertainty over how the Senate will proceed. The Senate Finance Committee (SFC) is reportedly developing its own tax reform bill, which may or may not mirror the House bill.
The following are several highlights of the many changes proposed in the 400-page bill:
Tax Rates – Only four tax rates: 12, 25, 35, and 39.6 (starting at income of $1,000,000) after 2017.
Standard Deduction – Nearly doubling the standard deduction to $24,400 for married filing jointly and $12,000 for single filers.
Deductions and Credits – Eliminating countless individual tax deductions. The state and local income tax deduction, teachers’ classroom expense deduction, and a limited charitable deduction are just some of the many individual tax preferences slated for elimination. The bill would keep the home mortgage interest deduction and state and local property taxes as well, but each would receive some modified.
Family Incentives – Allowing a temporary credit of $300 for non-child dependents. In addition, the refundable portion of the child tax credit would remain at $1,000. The bill would also retain the earned income tax credit.
Federal Estate Tax – Doubling of the federal estate tax exemption ($5.49 million in 2017) and then eliminating the estate tax after six years.
Alternative Minimum Tax – Abolishing the AMT after 2017. As a parallel tax structure, the AMT has existed for the stated purpose of ensuring that taxpayers with substantial income do not avoid tax liability.
Corporate Taxes – Establishing a 20% corporate tax rate beginning in 2018. The maximum corporate tax rate currently tops out at 35%.
Business Tax Benefits – Changing many business incentives, including allowing 100% immediate expensing of qualified property for a five-year period.
Pass-Through Businesses – Establishing a 25% tax rate for pass-through income after 2017, aimed at smaller businesses. Small business owners could see their top tax rate reduced from 39.6% to 25%. There are many provisions in the proposed bill for preventing pass-through business owners, particularly those in the professional services industries like accountants, doctors, and lawyers, from strategically reducing (or eliminating) their wages and converting everything to pass-through income. Generally, 70% of pass-through income would be attributed to labor and the percentage would increase to 100% for certain service providers.
Repatriation – Taxing a portion of deferred overseas-held earnings and profits (E&P) of subsidiaries at a reduced rate of 12% (5% for illiquid holdings). Foreign tax credits carryforwards would be fully available and foreign tax credits triggered by the deemed repatriation would be partially available to offset the U.S. tax.
These are just a few of the many proposed changes put forward by the House GOP. There is still a long road for this bill to travel before it arrives on the President’s desk. However, it would be prudent to begin discussing these changes now with your tax advisors to see how these changes may affect you and your business.
We are sure there will be many modifications before all is said and done and we will continue to monitor these developments closely. The Barnes Dennig Tax Team will keep you informed of any updates and changes as they occur, please reach out if you have any questions about the proposed changes above, and a member of the tax team will contact you.