Senate Committee on Finance Issues Version of Tax Cuts and Jobs Act

Last week, the Senate Finance Committee issued its version of the recently released House Tax Cuts and Jobs Act. The Senate version, released on Friday, November 10, differs from the House version in several ways, such as the following:

• The Senate bill proposes a seven-rate bracket structure – 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5% – which is four more than described in the House version.

• The Senate bill eliminates the clawback of the 12% benefit in the House bill for those with incomes over $1.2 million for joint filers and $1 million for other filers, at a rate of 6% of such excess.
• The Senate approach will repeal the SALT income and property tax deductions.
• The medical deduction is preserved.
• Benefits for adoption expenses are retained.
• The $1 million debt limit for mortgage interest deduction is maintained (not reduced to $500,000 as noted in the House version).
• The child tax credit is increased from $1,000 to $1,650 (instead of $1,600 in the House bill) and phases out at higher income levels to enable more parents to become eligible for the credit.
• The reduction in corporation tax rates is delayed until 2019.
• The estate tax exemption is doubled (though not eliminated). The House version also doubles the tax exemption, but eliminates the estate tax and Generation Skipping Transfer Tax (GST) in 2024.
• The accounting simplification rules permitting use of cash method, exception to Percentage of Completion, exclusion from maintaining inventories, and exception from the business interest deduction limit (under the small business exception) uses average gross receipts of $15 million (versus $25 million in the House bill).

The Senate summary does not include details on many business tax provisions. It does reference a “simple and easy-to-administer deduction” for pass-through businesses of all sizes, allowing more small businesses to grow, invest, hire new workers, and increase wages while also preventing abuse of the reformed system. The approach to taxation of pass-through entities and sole proprietorships is different than the House version. The Senate uses a 17.4% deduction on domestic qualified business income. This deduction generally does not apply to certain service businesses – unless the taxpayer’s taxable income is not greater than $150,000 for joint filers or $75,000 for others. For taxpayers with taxable income lower than these thresholds, the full 17.4% deduction will apply to even service businesses. Otherwise there is a phase-out over a $50,000 range for joint filers and $25,000 for others. Additionally, for partnerships and S Corporation flow-through income, the deduction is limited to 50% of W-2 wages.

More on the House Bill

As some details of the Senate plan were being leaked, the House Ways and Means Committee issued a new set of changes in an amendment, including:

• Creating a new 9% tax rate to small businesses on the business’s first $75,000 of income for joint filers (the 9% bracket threshold). The rate reduction is phased in at 11% for 2018-2019; 10% for 2020-2021, and 9% thereafter. However, this lower bracket amount is phased-out beginning at $150,000 for joint returns. This 9% rate does not apply to estates and trusts.
• The deemed repatriation rates are increased to 14% on liquid assets and 7% on illiquid assets (versus 12% and 5%, respectively, as noted in the House version).

At this point, there are bound to be other modifications from both the House and Senate before any version is referred to the President for signature. The Tax professionals at Marcum LLP will continue to keep you posted on changes.