This week, the House Ways and Means Committee approved revised version on 11/9, aiming to bring to a floor vote this week. On November 11th, the Senate Finance Committee released their tax reform plan, and the senate will begin markup this week.
There are significant differences between the two bills. This article aims to point out the major changes and significant differences that will affect our clients in the future, as well as suggests ways to plan for the new Tax Cuts and Jobs Act Bill.
Business Provisions
| House Version | Senate Version |
| C Corp Tax Rate – 20% in 2018 | C Corp Tax Rate 20% in 2019 |
| Dividend Received Deduction
80% becomes 65% 70% becomes 50% |
Dividend Received Deduction
same as House Version effective 2019 |
| Pass-through Businesses & Sole Prop
70% of income attributable to labor Taxed at “normal” rate 30% of income taxed at 25% Personal Service business –100% taxed at “normal” rate |
Pass-through Businesses & Sole Prop
17.4% deduction of income Personal Service business – no deduction |
| Bonus Depreciation
100% expense of qualified property acquired & placed in service after 9/27/2017 and before 1/1/2023 Replaces original use requirement with taxpayer’s first use requirement |
Bonus Depreciation
100% expense of qualified property acquired & placed in service after 9/27/2017 and before 1/1/2023 |
| Section 179
Expense limit $5 million Phase out limit: $20 million |
Section 179
Expense limit $1 million Phase out limit $2.5 million Indexed for inflation Expands definition of qualified real property to include roofs, HVAC, fire and alarm protection systems, and security systems |
| Non-residential real property depreciable life: 25 years
10 year recovery period for qualified improvement property |
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| Cash Basis of Accounting
C Corps, Partnerships with C Corp partner: Cash basis allowed if average gross receipts for 3 prior periods is less than $25 million. Indexed to inflation |
Cash Basis of Accounting
C Corps, Partnerships with C Corp partner: Cash basis allowed if average gross receipts for 3 prior periods is less than $15 million. Indexed to inflation |
| Inventory
If gross receipts are less than $25 million Treat inventories as materials and supplies OR Conforms to financial accounting statements or its books and records |
Inventory
If gross receipts are less than $15 million Treat inventories as materials and supplies OR Conforms to financial accounting treatment |
| Section 263A
Small Biz exception average gross receipts under $25 million |
Section 263A
Small Biz exception average gross receipts under $15 million |
| Construction
Small construction contract average gross receipts under $25 million |
Construction
Small construction contract average gross receipts under $15 million |
| Business Interest Expense
Limited to 30% adjusted taxable income Determined at the entity level Excess carried over 5 years Doesn’t apply if gross receipts < $25 million |
Business Interest Expense
Limited to 30% adjusted taxable income Determined at the entity level Excess carried over indefinitely Doesn’t apply if gross receipts < $15 million |
| Net Operating Losses
No Carryback (1 yr small biz & farm exception) Carryover can only deduct up to 90% of taxable income NOL’s generated after 2017 can be increased by an interest factor to preserve its value |
Net Operating Losses
No Carryback (2 yr farming exception) Carryover can only deduct up to 90% of taxable income NOL’s generated after 2017 are indefinite and can be increased by an interest factor to preserve its value |
| Like exchanges
Allowed only with respect to real property |
Like exchanges
Allowed only with respect to real property |
| DPAD- repealed | DPAD- repealed |
| Small life insurance company deduction is repealed | |
| Sale of Partnership Interest
Character of gain or loss attributable to hypothetical sale of all of partnerships assets allocated to interests in the partnership in the same manner as non-separately stated income Buyer required to withhold 10% of sales price unless seller certifies seller is not a nonresident alien or foreign corporation |
Individual Provisions
| House Version | Senate Version |
| Tax Brackets:
Brackets indexed for chained CPI 12% bracket phases out for high income taxpayers
|
Tax Brackets:
Adjusted for chained CPI “Kiddie tax” – Earned income taxed according to single tax bracket, BUT unearned income taxed according to trust & estate tax brackets.
|
| Standard Deduction
$24,000 – MFJ $12,000 – Single |
Standard Deduction
$24,000 – MFJ $12,000 – Single $18,000 – Head of Household |
| Personal Exemptions – Repealed | Personal Exemptions – Repealed |
| Child Credit Expanded
$1,600 per qualifying child Age limit under 17 $300 credit for other qualifying dependents (including both the spouses on a joint return). Phase out: $230,000 MFJ, $115,000 Singles |
Child Credit Expanded
$1,650 per qualifying child Age limit under 18 $500 credit for other qualifying dependents. Phase out: $1 million MFJ, $500,000 all others
|
| Itemized Deductions
Overall Limit – repealed Medical Deductions – repealed Mortgage Interest – new debt after 11/2/17 – limited $1million limited becomes $500,000
Taxes Income and sales tax deduction eliminated. Property taxes capped at $10,000
Charity 50% limit changed to 60% Charitable miles adjusted for inflation
Miscellaneous Deductions Repealed: Tax prep fees Unreimbursed employee business exp.
Exclusion of gain on sale of personal residence 2 out of 5 years becomes 5 out of 8 Able to use once every 5 years Phased out dollar for dollar when AGI exceeds $500,000 ($250,000 singles)
Moving Expenses – Repealed
Exclusion of qualified moving expense reimbursement – repealed
Deduction for Alimony – Repealed Not included in recipient income
|
Itemized Deductions
Overall Limit – repealed Mortgage Interest – home equity debt interest deduction repealed. Taxes – Repealed
Charity 50% limit changed to 60%
Miscellaneous Deductions Repealed: Tax prep fees Unreimbursed employee business exp. All other subject to 2% floor
Exclusion of gain on sale of personal residence 2 out of 5 years becomes 5 out of 8 Able to use once every 5 years
Moving Expenses – repealed
Exclusion of qualified moving expense reimbursement – repealed
|
| Education Provisions
Enhanced American Opportunity Credit. American Opportunity Credit, Hope Scholarship Credit, and Lifetime Learning Credit – consolidated into 1 credit. 100% credit for first $2,000 25% credit for next $2,000 Covered expenses = tuition, fees, course materials Available for a 5th post-secondary year at 50% the rate of the first 4.
Education Savings Accounts New contributions to Coverdell savings accounts prohibited Tax free rollovers from Coverdell to 529 529 plan qualified expenses expanded: Elementary & high school expenses up to $10,000 per year Expenses associated with apprenticeship programs
Repeal of other provisions Student Loan Interest Above the line deduction for tuition Exclusion of interest from Savings Bonds Qualified tuition reductions |
Education Provisions
None.
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| AMT – Repealed
AMT credit may offset regular tax for any year. AMT credit refundable before 2022 equal to 50 percent of the remaining credit over the credit allowable for regular tax. Balance of AMT credit refunded in 2022 |
AMT – Repealed
AMT credit may offset regular tax for any year. AMT credit refundable before 2022 equal to 50 percent of the remaining credit over the credit allowable for regular tax. Balance of AMT credit refunded in 2022
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| Estate Taxes
Exclusion doubled to $10 million (indexed for inflation) Repealed in 2023 Stepped up basis remains Gift tax rate lowered to 35% |
Estate Taxes
Doubles estate and gift exemption amount. Indexed for inflation.
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If you are curious of how this new tax plan will affect your business or personal tax situation, contact our tax team. We are here to help you plan for the plan.
Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.
