House Republican leaders today formally introduced what they hope will be their signature legislative achievement in the 115th Congress: a sweeping tax reform bill that lowers individual and business tax rates, while also broadening the base by repealing or limiting many tax preferences.
The "Tax Cuts and Jobs Act" is slated for consideration in the Ways and Means Committee starting at noon on Monday, November 6. At or just before the start of the session, Chairman Kevin Brady (R-TX) will likely unveil a different version of the bill, reflecting additional input from lawmakers and outside interests, as well as technical corrections and clarifying edits to the bill language. Brady this week reaffirmed the goal of getting a reform bill signed into law this year.
Introduced as H.R. 1, the bill is 429 pages long and includes at least 120 separate provisions that would add to, modify or delete portions of the current tax code. The provisions are proposed to be effective for tax years beginning in 2018 and beyond.
Some of the major provisions affecting corporations include:
- Corporate Tax Rate - A permanent, lower tax rate of 20 percent for corporations.
- Passthroughs - A 25 percent tax rate for the net income distributed by a passthrough entity. "Each owner or shareholder would separately determine their proportion of business income," according to a bill summary provided by the House Ways and Means Committee. "Net income derived from a passive business activity would be treated entirely as business income and fully eligible for the 25-percent maximum rate. Owners or shareholders receiving net income derived from an active business activity (including any wages received) would determine their business income by reference to their 'capital percentage' of the net income from such activities."
- The provision also provides an election to "apply a capital percentage of 30 percent to the net business income derived from active business activities to determine their business income eligible for the 25-percent rate. That determination would leave the remaining 70 percent subject to ordinary individual income tax rates," the summary states.
- An alternate election would allow for a facts-and-circumstances formula to determine a capital percentage of greater than 30 percent. "That formula would measure the capital percentage based on a rate of return 9the Federal short term rate plus 7 percent) multiplied by the capital investments of the business," the summary explains. This alternate election would be binding for five years.
- Interest Deduction - For businesses with average gross receipts above $25 million, the deduction for net interest expense in excess of 30 percent of adjusted taxable income would be disallowed. Certain regulated public utilities and other specific entities would be exempt. Additional limits would apply for the deduction of interest by domestic corporations that are part of an international financial reporting group.
- Deemed Repatriation - A bifurcated rate would be imposed on the deemed repatriation of offshore assets: 12 percent for cash and cash equivalents, and 5 percent for non-liquid assets.
- Offshore Profits - Imposing an effective tax rate of 10 percent on certain excess offshore profits (described and defined as "foreign high returns" and typically driven by intellectual property and other intangible assets) generated by the subsidiaries of U.S. multinationals
- Imposing a 20 percent excise tax on payments by U.S. corporations to foreign affiliates unless the foreign affiliate elects to treat its profits from that transaction as taxable in the United States.
- Expensing - Immediate expensing for qualified property placed in service from September 27, 2017 through January 1, 2023.
For individuals, the bill would modify and condense the current number of tax brackets, creating marginal rates of 12 percent, 25 percent (starting at $90,000 for married couples), and 35 percent (starting at $260,000 for married couples). The bill would leave in place the 39.6 percent rate but raise the threshold, starting at $1 million for married couples).
The bill would increase the standard deduction from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples. The Child Tax Credit would increase from $1,000 to $1,600. A new $300 credit for each parent and non-child dependent would also be created.
The mortgage interest deduction for home purchases would be capped at $500,000 going forward. The estate tax exemption would be doubled up front, with a phase out of the estate tax entirely by 2024.
The bill would allow a deduction for state and local property taxes up to $10,000.
No changes to the contribution limits for 401(k) and similar employer-provided savings plans are included in the legislation.