The Senate modified the Tax Cuts and Jobs Act with a vote of 51-49 on December. The article has been updated to reflect these changes.
A copy of the full House bill, as well as a section by section summary of all the changes, can be found on the Ways and Means Committee’s website and a full copy of the Senate bill can be found on the Senate Finance Committee website.
• Individual Tax Rates, Standard Deduction, & Personal Exemptions
The House version would reduce the brackets to 4: 12%, 25%, 35% and 39.6% while the Senate Bill would remain at 7 but with different thresholds. The standard deduction would also double to $12,000 for individuals and $24,000 for married couples. The personal exemptions would be repealed.
• Alternative Minimum Tax Repealed
The AMT would be repealed and would allow a taxpayer to claim a refund of any remaining credit carryforwards (if applicable) through 2022. However, the Senate bill has retained the AMT with an increase in the exemption amount.
• Estate and Generation-Skipping Transfer Taxes
The House proposal would achieve the Republican goal of full repeal of the estate tax beginning in 2024 (and will increase the current exclusion from $5M to 10M through 2023), while the Senate bill will only double the current exclusion amount from $5M to $10M per person.
• Changes Related to Itemized Deductions
The House and Senate bills made several changes to Itemized Deductions:
- Both bills eliminate the overall limitation on itemized deduction.
- State and local income tax and sales tax deductions would be repealed.
- Tax preparation fees deduction would be repealed.
- The property tax deduction will be allowed up to $10,000
- The House bill will limit the interest expense on home mortgages to new debt up to $500K, while the Senate version maintains the current $1M acquisition debt limit.
- The House bill repeals the deduction for personal casualty losses while the Senate bill will continue to allow this but only for losses occurring in a federally declared disaster area.
- The House bill repeals the Medical expense deductions while the Senate version reduces the limitation back down to 7.5%.
- • Alimony Payments
The House bill repeals the deduction for Alimony payments while the Senate version will make no changes to current law.
• Maximum Rate for Business Income of Individuals
Under the House bill, a portion of business income for pass-through entities and sole proprietorships will be taxed at a maximum rate of 25% (there is a formula to determine how much income gets the preferential 25% tax rate but the safe harbor option provides that 30% of the business income will qualify). Based on complaints from various small business groups that 25% was not low enough to provide benefit to small businesses, the House added an amendment which calls for a 9% rate on business income of $75k or less. The Senate bill took a different direction and calls for a 23% exclusion of business income from the standard ordinary income tax rates. In addition, these provisions do not apply in most cases to certain service related business.
Krost Highlight – One area of opportunity is found in the Senate version which allows a 25% rate on passive activities. This may lead to an increase focus on PIG’s (Passive Income Generators).
• Changes to Depreciation
The House and Senate bills include many provision for increased depreciation deductions. The House version provides for an increase in Section 179 deduction from $500K to $5M and an increase from 50% to 100% Bonus depreciation. In addition, used equipment would now be eligible for Bonus. The Senate version increases the 179 deduction to $1M but does not include the used equipment provision for Bonus depreciation. The Senate version also includes shorten depreciable lives to 25 years and 10 years for real estate rentals and qualified improvements, respectively.
• Corporate Tax Rate Reduction
The big winner in both bills comes from the reduction in the corporate tax rate to 20%.
Krost Highlight -This should lead to an increased use of C Corporations over pass-through entities going forward.
• Cash Method of Accounting
Both bills include provisions intended to simplify the tax law. The increased Gross Receipts threshold to use the Cash Method of Accounting goes from $5M to 25M, and 15M for the House and Senate bills, respectively.
• Interest Expense Limitation
Both bills include provisions to limit the amount of interest expense a business can deduct. The limitation is 30% of adjusted taxable income. Excess interest carries over to the next year.
• Domestic Production Activity Deduction
Both bills repeal the 9% deduction provided by IRC Section 199 known as the Domestic Production Activity Deduction.
The IC-Disc provisions meant to encourage export sales are effectively eliminated for corporate purposes by the rate reduction to 20%. The Senate bill, however, removed the repeal of IC-Disc.