THE TAX CUTS & JOBS ACT: HOUSE BILL vs. SENATE BILL

On Thursday, November 16, the US House of Representatives passed the Republican crafted tax reform bill by a 227 – 205 vote.   That same day, the Senate Finance Committee approved its version of the Tax Cuts and Jobs Act, sending the bill to the full Senate for debate and a vote. The Senate is expected to take up the bill after it returns from its Thanksgiving recess.

It must be noted that, despite all of the noise being made in Washington about the differences between the two bills, there are similarities.  Both bills eliminate personal exemptions, double the standard deduction, repeal the AMT and eliminate most of the above-the-line deductions including student loan interest, moving expenses and out of pocket expenses for teachers. Additionally, both bills change the residency requirement needed for excluding gain of the sale of a primary residence from “two of the last five years” to “five of the last eight years”.   It would be fair to assume that if a bill does make it to President Trump’s desk, that these agreed upon changes have a strong likelihood of still being in the bill.

The two bills do have major differences though, which Republicans hope to reconcile once a bill passes through the Senate.   Below are some of the major differences between the House bill and the Senate bill:

Individual Taxes

 

Tax Rates and Brackets:

House Bill: The House bill has four brackets, and individual rates from 12 percent to 39.6 percent, and a “bubble” tax bracket of 45.6 percent for income between $1 million and $1.2 million for individual filers, and between about $1.2 million and $1.64 million for joint filers.

Rate Single Married, filing jointly
12% Up to $45K Up to $90K
25% $45K–$200K $90K–$260K
35% $200K–$500K $260K–$1M
39.6% More than $500K More than $1M

 

Senate Bill: The Senate bill has seven tax brackets, from 10 percent to 38.5 percent, and no bubble tax bracket.

Rate Single Married, filing jointly
10% Up to $9,525 Up to $19,050
12% $9,525–$38.7K $19,050–$77.4K
22% $38.7K–$70K $77.4K–$140K
24% $70K–$160K $140K–$320K
32% $160K–$200K $320K–$400K
35% $200K–$500K $400K–$1M
38.5% More than $500K More than $1M

 

State and Local Taxes and Mortgage Interest:

House Bill: Eliminates the deduction for state and local taxes, but retains a deduction for local property taxes up to $10,000. The bill limits the mortgage interest deduction to the first $500,000 in mortgage value.

Senate Bill: Eliminates the deduction for state, local, and real estate taxes, but keeps the mortgage interest deduction for home purchases. The bill eliminates the deduction for home equity loans.

Medical expense deduction:

House Bill:  Eliminates the medical expense deduction entirely.

Senate Bill:  No change

Student loan interest deduction:

House Bill:  Eliminates the student loan interest deduction

Senate Bill:  No change

Child Tax Credit:

House Bill:  Increases the credit to $1,600 and adds a $300 credit for each parent and non-child dependent

Senate Bill:  Increases the credit to $2,000 and adds a $500 credit for non-minor child dependents

Obamacare Taxes:

House Bill:  No change

Senate Bill:  Repeals the individual mandate

Education Credits:

House Bill: Consolidates all existing credits and deductions into one credit, The American Opportunity Tax Credit, and extended it to five years

Senate Bill:  Makes no significant changes

Alimony Income/Deduction:

House Bill:  Repeals it

Senate Bill:  No change

Expiration of changes to Individual taxes:

House Bill: Makes all individual tax changes permanent

Senate Bill:  In order to comply with reconciliation rules, the Senate bill would have all individual tax changes expire after 2025.

Corporate Taxes

 

Corporate Rate Delay. The House bill cuts the corporate tax rate to 20 percent effective in tax years after Dec. 31, 2017. The Senate bill also cuts the corporate tax rate to 20 percent, but delays the effective date until 2019.

Treatment of Pass-Through Income:

House Bill: Allows all passive income to be taxed at 25 percent, and, except for certain service businesses, allows businesses organized as pass-through entities to elect to have 30 percent of its income taxed at 25 percent as income from capital. Alternatively, pass-through entities and service entities with significant capital investments can elect to calculate the percentage of income earned on capital investments, and that percentage of their income would be subject to the 25 percent rate.

Senate Bill: Rather than adopting a lower tax rate on pass-through income, the Senate bill allows pass-through entities to deduct 17.4 percent of their pass-through income in determining taxable income. This deduction is limited to 50 percent of the wages paid to the owner by the business. Pass-through entities are still subject to ordinary income tax rates. The deduction is not available to specified service businesses including law, accounting and other businesses whose income is above $150,000 and whose principal assets are the reputation and skill of employees.

Expensing and Depreciation:

House Bill: Allows immediate expensing of qualified property, generally property not related to real estate business and that is depreciable over 20 years or less. The bill increases the limits under section 179, which allows small businesses to expense certain property (generally not subject to the immediate expensing rule above), from $500,000 to $5 million, and phases out the benefit where companies purchase more than $20 million of qualifying property.

Senate Bill: The Senate bill also provides for immediate expensing of qualified property. However, the Senate bill raises the expensing cap under section 179 to only $1 million and begins phasing out the benefit when purchases reach $2.5 million. The Senate bill also shortens the depreciation period of real property to 25 years.

NOL Carryback/Carryforward Provisions:

House Bill: Carrybacks of net operating losses incurred in 2018 and beyond would not be permitted. Also, the carryforward of any 2018 or later NOL would only be allowed to be used against 90% of a corporation’s taxable income.

Senate Bill:  Starting in 2023, NOL deduction carryforwards would be limited to 80% of taxable income.

Employer Credit for Paid Family and Medical Leave:

House Bill: Not mentioned

Senate Bill: For 2018 and 2019 only, would allow eligible employers a general business credit of 12.5% of the wages paid for family and medical leave (with certain adjustments)

Deemed Repatriation:

House Bill: Imposes taxes on previously untaxed income held outside the United States at 14 percent on liquid assets 7 percent on illiquid assets.

Senate Bill: Imposes similar taxes but at 10 percent on liquid assets and 5 percent on illiquid assets.

Other Provisions

 

Estate Tax:

House Bill: Doubles the estate tax deduction to $11 million immediately, and eliminates the estate tax in six years.

Senate Bill: Doubles the estate tax deduction to $11 million but does not eliminate the estate tax.

 Cash Accounting:

House Bill: Allows corporations and partnerships with a corporate partner to use the cash method of accounting if their average gross receipts have not exceeded $25 million in prior years.

Senate Bill: Limits the use of cash accounting to businesses whose average gross receipts have not exceeded $15 million in prior years.

BKC Insights

 

Congress is moving quickly to advance tax reform legislation, although it is unclear when or if an agreed bill will be passed by both houses of Congress.  There are many steps that need to happen between now and when any version of tax reform becomes law. Taxpayers should continue to monitor the progress in both the House and the Senate to ensure they understand how the proposed rules would impact their position.

BKC will continue to monitor the tax reform process and release timely updates as more information becomes available.

If you have any questions, please contact us.

Learn more about our Tax Planning & Compliance Services.

Read more Tax Tidbits here.

Leave a Reply

Your email address will not be published. Required fields are marked *