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November 10, 2017

Tax Cuts and Jobs Act Update: Senate Finance Committee Releases Draft

On Thursday night the Senate Finance Committee released their own version of the Tax Cuts and Jobs Act.  The text of the draft can be found here and is scheduled for committee markup on Monday.  Meanwhile the House Ways and Means Committee approved their revised bill and plan to bring it to a vote next week.  The two bills are similar, but differ significantly in some areas, as discussed below.  Members of the two chambers of Congress have begun negotiations on these differences and hope to have a bill passed by Thanksgiving.  

Income tax brackets:  The Senate bill would keep seven tax brackets, but changing the rate structure with new tax rates of 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%, while the House bill proposes four brackets of 12%, 25%, 35% and 39.6%. 

Personal exemption and standard deduction:  Both bills would nearly double the standard deduction and eliminate personal exemptions. 

State & local tax deduction:  The Senate bill would eliminate the deduction for state & local income and property tax.  The House bill would eliminate the state & local income tax deduction, but keeping the property tax deduction with a maximum deduction of $10,000. 

Mortgage interest deduction:  The Senate bill would keep the deduction and limitations regarding mortgage interest the same as present law, while the House bill would lower the debt limit to $500,000 for newly purchased homes.

Child tax credit:  Both bills propose an increase in the child tax credit, with the Senate’s proposal slightly higher, but the House bill introduces a family tax credit.

Corporate tax rate:  The Senate bill proposes a 20% flat tax rate (eliminating the special tax rate for personal service corporations) beginning in 2019, while the House bill’s 20% rate (25% for personal service corporations) would begin in 2018. 

Pass-through tax rate:  Rather than adjusting the tax rate for pass-through income, the Senate bill proposes a special 17.4% deduction for certain “domestic qualified business income from a partnership, S corporation, or sole proprietorship” for individual owners.  The House bill proposes a 25% tax on the non-wage portion of pass-through business income.

Carried interest:  The Senate bill does not address the carried interest rule while the House revised their bill to include a 3-year holding period requirement to qualify for the carried interest benefits.

Business interest deduction:  Both bills would limit interest deductions for businesses with exceptions for small businesses.

Capital expenditures:  Both bills include a similar proposal to generally allow a 100% deduction for qualified capital expenditures placed in service during the period after September 27, 2017 and before January 1, 2023.  

Estate tax:  The Senate bill keeps the estate tax in place, but doubles the exemption, while the House bill would phase out the estate tax by 2024. 

International:  The Senate bill proposes a 12% tax on the deemed repatriation of cash and 5% on non-cash assets.  It would introduce a 10% tax on foreign earnings.  The House bill calls for a 100% foreign dividend deduction, a 14% tax on cash and 7% tax on other assets.