The 2017 Tax Reform package continues to make its way through Congress. This legislation has the potential to be the most significant change to tax law in recent memory. However, further changes to the legislation are likely, as the House and Senate must come together to create a final version of the bill for the President to sign. We have included tables below to compare current tax law with the House plan and the Senate plan. This chart is current as of November 22nd.
Except for a mortgage interest deduction cap in the House bill, all new income tax provisions would not take effect until 2018. In light of these anticipated changes, taxpayers may wish to consider year end planning even more carefully than usual. Regardless of the changes, there are some steps that you can take before year-end to ensure that you do not miss out on any potential deductions:
- The deduction for state and local tax paid is likely to be eliminated for future years, so it may make sense to pay any state tax due prior to the end of the year.
- Donations to organizations that provide scholarships for student-athletes (Rams Club, Wolfpack Club) may be non-deductible going forward. Thus, it might makes sense to make a donation before the end of the year.
- With a potential decrease in tax rates for most taxpayers, deferring capital gains into future years may make more sense for 2017.
- Also associated with potential tax rate decreases, itemized deductions become less valuable in future years. Any items that could be paid before year-end should be considered to maximize current deductions. In addition to state taxes, discussed above, mortgage interest, property taxes, charitable contributions, medical expenses, and tuition payments are just a few expenses that could be paid early to ensure a 2017 deduction.
Please see the tables below for details on the proposed legislation. Keep in mind that this is not final and we encourage clients to reach out to your TJT firm contact if you have questions or concerns about the tax reform package.
| Individuals | |||
|---|---|---|---|
| Current Tax Law | House Plan | Senate Plan | |
| Ordinary Income Tax Rates | 7 brackets (10%, 15%, 25%, 28%, 33%, 35%, 39.6%) | 4 brackets (12%, 25%, 35%, 39.6%) | 7 brackets (12%, 22.5%, 25%, 32.5%, 35%, 38.5%) |
| Top Bracket starts at: | $418,400 (individuals), $470,700 (joint filers) | $500,000 (individuals) $1,000,000 (joint filers) | $500,000 (individuals) $1,000,000 (joint filers) |
| Standard Deduction | $6,350 (S); $9,350 (HOH); $12,700 (MFJ). | $12,200 (S); $18,300 (HOH) $24,400 (MFJ). | $12,000 (S); $18,000 (HOH) $24,000 (MFJ). |
| Capital Gains and Dividends | 20% top rate for capital gains and qualified dividends. Additional 3.8% ACA tax on certain passive investment income. | No proposed changes | Retains present maximum rates on net capital gain and qualified dividends, but breakpoints indexed using the “Chain” CPI for after 2017. |
| Alternative Minimum Tax | Two rates (26% and 28%) on alternative minimum taxable income. | Eliminates the individual AMT. | Same as House bill. |
| State and Local Tax Deduction | State and local property and income taxes fully deductible (but not for AMT purposes) | Deduction for state and local income taxes repealed. Deduction for state and local property taxes (other than incurred in a trade or business) limited to $10K. | Deduction for state and local income taxes repealed. Deduction for state, local and foreign property taxes only when paid or accrued in carrying on a trade or business. |
| Home Mortgage Interest and Home Equity Interest Deduction | Home mortgage interest attributable to acquisition indebtedness (up to $1M). Interest from home equity indebtedness up to $100K. | Retains the deduction for interest on acquisition indebtedness but lowered cap to $500K. Repeals the deduction for interest on home equity indebtedness. | No change to the deduction for interest on acquisition indebtedness. Same as House bill. |
| Charitable Contributions | Charitable contributions generally deductible (limited to certain percentages of AGI). Contributions to obtain college athletic seating rights (80% deductible). Generally, where a taxpayer receives or expects to receive substantial benefit for a payment to charity, the payment is not deductible as a charitable contribution. However, special rules apply where (1) the amount paid is for the benefit of an institution of higher education and (2) such amount would be allowable as a charitable deduction but for the fact that the taxpayer receives (directly or indirectly) the right to purchase tickets for seating at an athletic event. | Deductibility generally retained, in some cases eligible amounts increased, others decreased. Repealed. No charitable deduction shall be allowed for any a payment to an institution of higher education in exchange for the right to purchase tickets or seating at an athletic event. | Increases income-based percentage limit for cash contributions to public charities and other organizations from 50% to 60%. Same as House bill. |
| Medical Expense and Personal Casualty | Medical expenses and personal casualty losses are deductible (often limited to certain AGI thresholds). | Deductions repealed. | Medical expenses deductible. Restricts personal casualty losses to those incurred in a disaster declared by President (under §401). |
| Limitations on ltemized Deductions | Limitations apply for incomes above $261,500 (individuals), and $313,800 (joint filers) | Repeals the limit on itemized deductions. Repeals all miscellaneous itemized deductions subject to the 2% floor under present law. | Repeals the limit on itemized deductions. Same as House bill. |
| Family Tax Credits | Up to $1,000 credit (partially refundable) for qualifying children under the age of 17. | Replaces the personal exemption with an expanded childcare tax credit from $1,000 to $1,600 (increases phase-out threshold). New $300 nonrefundable personal credit expires after 5 years. Preserves the adoption credit. | Replaces the personal exemption with an expanded childcare tax credit from $1,000 to $1,650 and increases the phase-out threshold. Preserves the adoption credit. |
| Gain on Sale of Principal Residence | Taxpayer may exclude from gross income up to $250K ($500K for joint filers) of gain on the sale of a principal residence. Property generally must have been owned and used as principal residence for two out of the previous five years. Exclusion available once every two years. | Extends the time a taxpayer must own and use the property as a principal residence to at least 5 of the 8 years prior to the date of the sale or exchange. Taxpayer may use exclusion once every 5 years. | Same as house bill. |
| Retirement Accounts | Up to $18,000 pre-tax income can be contributed to 401(k) plan (for employees 50 and older; $6,000 catch-up contribution). Allows IRA contributions of one type (traditional or Roth) to be recharacterized as a contribution of the other type. | The minimum age for in-service distributions from a tax-qualified plan (such as a defined benefit pension plan, a money purchase pension plan or a profit-sharing plan) or from a governmental 457(b) plan would be reduced from age 62 to age 59½. Less restrictive rules regarding hardship distributions. Extension of plan loan offset rollover periods. Less restrictive nondiscrimination rules for frozen plans. Repeals rule allowing IRA contributions of one type (traditional or Roth) to be recharacterized as a contribution of the other type. | Matches 457(b) plan contribution limits to those of 401(k) and 403(b) plans. Extension of plan loan offset rollover periods. Same as house bill. |
| Stock Options and RSUs | Generally taxed on exercise of stock options or settlement of RSUs. | Taxation of certain private company stock options and RSUs may be deferred for up to 5 years after exercise/settlement. Section 83 continues to apply to compensatory stock options. Sec 83 generally doesn’t apply to RSUs other than new Sec 83(i), | Same as House bill. However, non-statutory stock options and RSUs taxed at vesting. Same as House bill. However, income tax withholding would be required at highest individual rate. However, election would not change timing of FICA/FUTA withholding. New W-2 reporting requirements w/ deferral election. |
| Estate Tax and Gift and Generation-Skipping Transfer (GST) Tax | $5M exemption amounts indexed for inflation ($5.49M for 2017). Estate tax exemption amount is reduced by gift tax exemption used during lifetime. Surviving spouse may be able to use deceased spouse’s unused gift/estate tax exemption, but not unused GST exemption. Maximum 40% rates. | Doubled. $10.98M exemption amounts indexed for inflation, effective for estates of decedents dying, and transfers made, after 12/31/2017, with other current rules remaining in effect. Estate and GST tax eventually to be repealed, effective for estates of decedents dying, and transfers made, after 12/31/2024, after which gift tax remains in effect with a $10M, inflation adjusted gift tax exemption and max. 35% rate. | Same as House bill. Note: Under proposed rules, the income tax basis of inherited property continues to be adjusted to date of death values which, in the case of appreciated property results in a “step-up” in income tax basis at death). |
| Businesses | |||
|---|---|---|---|
| Current Tax Law | House Plan | Senate Plan | |
| Pass-Through Rate | Income earned by pass-through businesses taxed at individual’s regular rates ordinary income and capital gains. | Passive owners of partnerships and S corps would be taxed at a 25% rate. The new rates for pass-throughs will not apply to professional services firms (e.g., accounting, law, health, financial services, and investing or trading in securities), which will continue to be taxed at highest marginal rates. Certain retired and other passive owners of professional services firms may be eligible for the new 25% rate. | An individual could deduct 17.4% of their share of any “domestic qualified business income” of a pass-through. The deduction would not apply to income from professional services, except in the case of individuals whose taxable income would not exceed $75K ($150K for joint filers). |
| Owners actively involved in the business would pay the 25% rate on only 30% of their share of the income from income, with the remaining 70% being taxed at highest marginal rates. Active owners of capital intensive businesses may be able to apply the 25% rate to a larger percentage of their income, using a ratio calculated based on a return of capital.
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Further, although unclear, it appears the amount of the deduction generally would be limited to 50% of the domestic wages paid to the taxpayer. W-2 wage limit is phased in for individuals with taxable income exceeding $500K (or $250K) amount over the next $100K (or $50K) of taxable income.
Qualified business income would not include investment related income, other than certain dividends from REITs. |
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| Qualified business income would not include investment related income, other than certain dividends from REITs. | |||
| Pass-Through Source of Gains | Gain/(Loss) on the sale of a partnership interest by a foreign person of an interest in a partnership engaged in a U.S. trade or business is foreign source (Grecian Magnesite Mining v. Comm’r, 149 T.C. No. 3 (July 13, 2017)). | Does not contain a comparable provision. | Gain/(Loss) from the sale of a partnership interest is treated as effectively connected with a U.S. trade or business to the extent that the transferor would have had effectively connected gain/(loss) had the partnership sold all of its assets. Transferee of a partnership interest is required to withhold 10% of the amount realized unless the transferor certifies it’s a U.S. person. |
| Pass-Through Carried Interest | “Carried interest” earned by the general partner of a private equity fund is taxed under pass-through principles, with a significant portion of such income being treated as LTCGs. | Requires an investment partnership to hold an investment for more than three years in order for carried interest allocations of gain from the sale or disposition of that investment to qualify for reduced rates applicable to LTCGs. | Imposes a three-year holding period requirement for qualification as LTCG with respect to certain partnership interests received in connection with the performance of services. |
| Technical Termination” of Partnerships | A technical termination occurs when 50% of the total interest in capital and profits is “sold or exchanged” within a 12-month period. A “sale or exchange” includes a sale from one partner to another. In such cases, a short-year return must be filed by the partnership. | The technical termination rule would be repealed. Accordingly, a partnership would be treated as continuing even if more than 50% of the total capital and profit interests of the partnership are sold or exchanged, and new elections would not be required or permitted. | Does not contain a comparable provision. |
| Corporate Tax Rate | Approximating 35% for most corporations with taxable income exceeding $100K. | 20% flat rate (25% for personal service corporations). | 20% for all corporations (eliminates special tax rate for personal service corporations). |
| Corporate AMT | 20% tax on alternative minimum taxable income. | Eliminates the corporate AMT. | Same as house bill.
|
| Income Recognition | Various rules apply to determine when income is recognized; reporting year generally based on accounting method. | Does not contain a comparable provision. | Corporate taxpayers would be required to recognize income no later than taxable year in which income is taken into account under GAAP on F/S (exception for certain long-term contract income). |
| Corporation method of accounting | Forced onto accrual method if
receipts > $5M (3yr avg. gross receipts test applies). |
May use cash method
if receipts < $25M (3yr avg. gross receipts test applies). |
May use cash method
If receipts < $15M (3yr avg. gross receipts test applies). |
| Method of accounting for businesses with inventory | In most cases, businesses cannot report purchases and sales of inventory items using the cash method and are forced onto accrual method (no threshold, Rev. Procs. 2001-10 and 2002-28) unless qualifying under a small business exception rule or other tests. | Businesses with inventory
may use cash method if receipts < $25M. |
Businesses with inventory
may use cash method if receipts < $15M. |
| Method of Accounting for Long-term Contracts | Forced switch from completed contract method to percentage of completion for accounting for long-term contracts. (Receipts > $10M) | Completed contract method available
if receipts < $25M. |
Completed contract method available
if receipts < $15M. |
| UNICAP
(Sec 263a) |
Requirement to apply Section 263A Unicap rules to inventory (no threshold for producers, $10M in receipts for resellers). | UNICAP rules may not apply
If receipts < $25M. |
UNICAP rules may not apply
If receipts < $15M. |
| Net Operating Loss Provisions | NOLs can be carried forward indefinitely, restricts deduction to 90% of current year taxable income. NOLs are not adjusted for inflation or a real return to capital rate. | NOLs can be carried forward indefinitely and are adjusted for inflation and a real return to capital rate, restricts deduction to 90% of current year taxable income. | NOLs can be carried forward indefinitely, restricts deduction to 80% of current year taxable income. NOLs are not adjusted for inflation or a real return to capital rate. Effective beginning after 12/31/2023. |
| Dividends Received Deduction | Corporate shareholders are entitled to a 70% deduction for dividends received from other corporations. This deduction is increased by 80% for dividends from corporations in which the taxpayer owns more than 20 percent of the stock (by vote and value) and to 100% for dividends from corporations in the same affiliated group as the shareholder.
|
Reduces the 80% dividends- received-deduction to 65% and the 70% dividends-received- deduction to 50%. | Same as house bill.
|
| Capital Investment Depreciation and Expensing | Annual depreciation and amortization based on life of asset. | Makes certain property available for immediate expensing and expands Sec 179. | Same as House bill. |
| Section 179 expense (limited to $500,000). Taxpayers (other than trusts and estates) can elect to claim Sec 179 for the cost of Sec 1245 property that is bought for use in a business. | Sec. 179 up from $500k to $5M beginning 2018, qualified property expanded. Phaseout begins at $20M. Effective beginning after 2017. | Sec. 179 up from $500k to $1mil beginning in 2018, qualified property expanded. Phaseout begins at $2.5M. Effective beginning after 2017. | |
| Sec 179 can apply to many items typically used in a business, such as machinery and equipment, but not for section 1250 property, such as land, buildings, or section 1250 land improvements. Section 1245 land improvements do qualify. | Section 179 property modified to include qualified energy efficient HVAC property (i.e., any 1250 property part of building’s HVAC and within scope of Standard 90.1–2007 or any successor standard). | Section 179 property expanded/modified to include improvements to nonresidential real property (roofs; HVAC property; fire protection and alarm systems; and security systems). Also includes qualified improvements currently defined as leasehold, retail, and restaurant. | |
| Bonus depreciation (Sec 168(k)) is an additional first-year depreciation allowance for new property (i.e., the original use of property begins with the taxpayer). Currently, the allowance (determined by year placed into service) are 50% through 2017, 40% in 2018, and 30% in 2019. Bonus depreciation applies to “qualified property,” consisting of MACRS property (20 years or less), certain computer software, and qualified improvement property. | Temporary 100% expensing for investment in assets currently eligible for bonus depreciation, with certain modifications (e.g., does not apply to assets of real property business or used property). This would apply to qualifying property placed into service after September 27, 2017 and before January 1, 2023. | Same as House bill. | |
| Under current law, the recovery period is 39 years for nonresidential real property and 27.5 years for residential rental property. Separate definitions currently exist for qualified leasehold improvement, qualified restaurant and qualified retail improvement property, which will typically have a 15-year recovery period and a 39-year recovery period under ADS (“alternative depreciation system”). | Does not contain a comparable provision for the recovery period of nonresidential real and residential rental property. | The recovery period for nonresidential real and residential rental property would be reduced to 25 years. The separate definitions for qualified leasehold improvement, qualified restaurant and qualified retail improvement property would be eliminated and would provide a general 10-year recovery period for qualified improvement property, and a 20-year “alternative depreciation system” (“ADS”) recovery period. | |
| Tax Treatment
of Interest Expense |
Interest expense generally is fully deductible. | The deduction for net business interest would be effectively capped business interest income plus 30% of “adjusted taxable income” (business EBITDA, before NOLs). Disallowed business interest carried forward for 5 years. | The deduction for net business interest would be effectively capped business interest income plus 30% of “adjusted taxable income” (business EBITDA, before NOLs, and the 17.4% pass-through deduction). Disallowed business interest carried forward indefinitely; applied at the entity level. |
| Certain real estate firms, public utilities, and small businesses (with $25M or less of avg. gross receipts) are exempt from this limitation. | Certain real estate firms, public utilities, and small businesses (with $15M or less of avg. gross receipts) are exempt from this limitation. | ||
| No relief appears to be provided for debt in place before legislation takes effect. | No relief appears to be provided for debt in place before legislation takes effect. | ||
| Corporate State and Local Tax Deduction | State and local income and property taxes fully deductible (but not for AMT purposes). | Retains deduction for corporations, but state and local income taxes paid by an individual owner of a pass-through business would not be deducible on the individual’s tax return. | Retains deduction only for corporations. |
| Like-Kind Exchange | Sec. 1031 can be used for
real and personal property. |
Keep Sec. 1031 for only real property. | Same as house bill.
|
| Meals and Entertainment expenses | Limited to 50% deduction. | Entertainment and travel expenses nondeductible. | Entertainment and travel expenses nondeductible. |
| Meals are still 50% deductible. | Disallows an employer’s deduction for expenses associated with meals provided for the convenience of employees on the employer’s premises or through an employer-operated facility. | ||
| Other Business Deductions and Credits | Various special deductions and credits, including for DPAD (section 199), credits for R&D, wind energy, historic property rehabilitation, low income housing credit. exist. |
Repeals DPAD (Section 199). Expands limitation on deduction for de minimis fringe benefits. Repeals historic rehabilitation credit. Repeals worker opportunity tax credit. Various other deductions and credits eliminated or modified. | Repeals DPAD (Section 199). Expands limitation on deduction for de minimis fringe benefits. Certain other deductions and credits eliminated or modified. |
| A taxpayer may carry unused business credits back one year and forward 20 years. However, a taxpayer generally may not deduct unused credits after dying or, in the case of a business taxpayer, ceasing to exist. | Retains R&D credit and Low Income Housing credit; Beginning in 2023, R&D expenses must be capitalized and amortized over 5 years (15 years for expenses attributable to foreign research). The deduction for unused business credits would be repealed (effective for tax years beginning after 2017). | Retains R&D credit and Low Income Housing credit. Modifies historic rehabilitation credit. | |
| An employer credit would be available for paid family/medical leave. The credit would equal 12.5% of wages paid to qualifying individuals on family/medical leave if the individual is receiving 50% of normal wages. The credit would increase (but not above 25%) for wages for which the rate of payment is over 50%. | |||
| Not-for-Profits | |||
|---|---|---|---|
| Current Tax Law | House Plan | Senate Plan | |
| Exempt Organizations | Private foundations pay rate of 2%, reduced to 1% if payout levels met. | Streamlines the excise tax on net investment income of private foundations to 1.4% from 2%. | Same as House bill.
|
| Tax on Large Endowments of Private Colleges and Universities | Investment income currently exempt from tax. | 1.4% tax on investment income if aggregate fair market value of investment assets is at least $250,000 per student. | Same as House bill. |
| Endowment assets of a private university that are formally held by organizations related to the university (and not merely those that are directly held by the university) are subject to the 1.4% excise tax on net investment income. | |||
| Political Campaign Statements by 501(c)(3) Organizations | Under so-called Johnson amendment, 501(c)(3) organizations are prohibited from participating or intervening in any political campaign. | Permit all organizations described in section 501(c)(3) to engage in a de minimis amount of political campaign activity in the ordinary course of their activities. Effective for tax years beginning after 12/31/2018 and is sunset for tax years beginning after 12/31/2023. | Does not contain a comparable provision. |
| Private Art Museums | Private operating foundations are exempt from 30% tax on undistributed earnings, which applies to non-operating foundations | Private art museum would not qualify for this exemption unless open to public at least 1,000 hours per year. | Does not contain a comparable provision. |
| Excess Tax-Exempt Organization Compensation | No limits on deductibility of compensation paid to employees of tax- exempt organizations (other than the limitation on private inurement). | Compensation in excess of $1M paid to any of five most highly-compensated employees of tax-exempt organization subject to a 20% excise tax payable by the organization. | Same as House bill. |
| Foreign | |||
|---|---|---|---|
| Current Tax Law | House Plan | Senate Plan | |
| Modified Territoriality | Corporations liable for tax on worldwide income, subject to foreign tax credits; deferral regime for certain “active” income; certain investments in U.S. property by CFCs triggers deemed dividend. | Modified “territorial” regime: U.S. corporate shareholders entitled to 100% deduction for dividends attributable to foreign earnings that are received from 10%-owned foreign corporations. | Same as House bill. |
| No tax credit for any foreign taxes (including withholding taxes) paid or accrued with respect to any dividend to which this 100% deduction applies. | Limitation on foreign tax credits similar to house proposal. | ||
| U.S. corporate shareholders of CFCs are not deemed to receive a dividend as a result of the CFCs investing earnings in U.S. property. | Same as House bill. | ||
| Subpart F | U.S. shareholders (generally limited to U.S. persons owning 10% or more of the voting stock of a foreign corporation) subject to current tax on certain “passive” income earned by CFCs. | Foreign base company oil related income no longer subject to Subpart F regime. | Same as House bill. |
| $1M de minimis safe harbor threshold adjusted for inflation. | Same as House bill. | ||
| Makes permanent the CFC “look through” rule that characterizes certain payments received from related CFCs based on the income profile of the payer CFC. | Same as House bill. Applies to U.S. shareholders owning 10% or more of the vote or value of stock to a foreign corporation. | ||
| Tax on Base Erosion Payments | N/A | 20% excise tax imposed on certain payments (other than interest) made by a U.S. corporation to a foreign corporation in same international financial reporting group that are deductible, includible in COGS, or could give rise to depreciation or amortization (not including amounts paid to acquire any security or commodity). Exemption from excise tax if the foreign corporation elects to treat the applicable payment received by the foreign corporation as effectively connected income (“ECI”) that is subject to U.S. tax (or if the applicable payment is otherwise treated as ECI) | 10% base erosion tax levied on corporations (other than RICs, REITs and S corporations) with annual gross receipts of at least $500 million with at least 4% of its deductions derived from payments to related foreign persons. Tax applies to “modified” taxable income (i.e., without regard to certain tax benefits, such as deductions for payments made to foreign related parties) over the taxpayer’s regular tax liability. New reporting obligations apply with respect to base erosion payments and related information. |
| Surrogate Foreign Corporations | Shareholders receiving qualified dividends from surrogate foreign corporations entitled to preferential rates for “qualified dividends”. | Does not contain a comparable provision. | Individual shareholders receiving qualified dividends from surrogate foreign corporations (other than certain inverted corporations treated as domestic corporations) not entitled to qualified dividend rates. |
| Deemed Repatriation | N/A | Deferred foreign profits to be taxed at a 14% rate for cash and cash equiv., 7% for reinvested foreign earnings over an 8-year period. | Currently deferred foreign profits to be taxed at a 10% rate for cash and cash equiv., 5% for reinvested foreign earnings over an 8-year period. |