Last week, we sent out an overview of the tax reform bill released by the House Ways and Means Committee – the “Tax Cuts and Jobs Act.” On November 9th, the Joint Committee on Taxation released the Description of the Chairman’s Mark of the Tax Cuts and Jobs Act, revealing the Senate’s version of proposed tax reform. On November 16th, the House passed the “Tax Cuts and Jobs Act” and the Senate Finance Committee passed its version, currently referred to as the “Chairman’s Mark.” Both the House and the Senate are proposing significant changes to the current tax Code, but there are important differences between the two approaches. The “Chairman’s Mark” is scheduled to be debated in the Senate the week of November 27th.

This alert highlights some of the differences between the House and Senate proposals. Buchanan’s tax team and Government Relations specialists are committed to closely monitoring the legislative process and providing you with information regarding the most recent developments. When and if Congress passes a tax reform bill, we will be poised to help you understand what has changed and the impact of those changes on your business and wealth and succession planning.

  House Bill
(passed in the House
on 11/16/2017)
Senate Finance
Committee Bill
(as of 11/16/2017)
Corporate Tax Rates & AMT

Eliminates graduated rate structure and instead taxes corporate taxable income at 20% effective for taxable years beginning after 12/31/2017

Personal service corporations taxed at 25%

Corporate AMT repealed for taxable years beginning after 12/31/2017

Same as House Bill except that 20% rate is effective for taxable years beginning after 12/31/2018; thus, the Senate version delays the rate reduction for corporations by one year

No special rate for personal service corporations

Corporate AMT repealed for taxable years beginning after 12/31/2017 (same as House Bill)

Net Operating Losses

Limits the NOL deduction to 90% of taxable income effective for taxable years beginning after December 31, 2017

Indefinite carryforward; carryback repealed except for one-year carryback for certain small businesses and farms with casualty and disaster losses

Limits the NOL deduction to 80% of taxable income effective for taxable years beginning after December 31, 2022; present law will continue to apply to NOLs of property and casualty insurance companies;

Indefinite carryforward; carryback repealed except for two-year carryback for certain losses incurred by farms

Cost Recovery / Full Expensing

100% expensing for qualified property placed in service after 9/27/2017 and before 1/1/2023;

Excludes property used by a regulated public utility, or in a real property trade or business, and floor plan financing indebtedness;

Eliminates the requirement that original use begin with the taxpayer; property is eligible for full expensing as long as it is taxpayer’s first use

100% expensing for qualified property placed in service after 9/27/2017 and before 1/1/2023 (similar to House Bill);

Excludes property used by a regulated public utility but does not exclude property used in a real property trade or business or floor plan financing indebtedness

Does not extend to used property; retains requirement that original use begin with the taxpayer

Section 179 Expensing

Section 179 small business expensing limitations would be increased to $5,000,000 and the phase-out amount would be increased to $20,000,000 (indexed for inflation), effective for taxable years beginning after 2017 and before 2023. 

The definition of qualifying property would be expanded to permanently include qualified energy efficient heating and air conditioning, effective for property acquired and placed in service after 11/2/2017.

Section 179 small business expensing limitations would be increased to $1,000,000, and the phase-out threshold would be increased to $2,500,000 (indexed for inflation), effective for property placed in service in taxable years beginning after 2017 (with no end date)

Expands the definition of qualifying property further than the House Bill; would include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging as well as several types of improvements to nonresidential real property placed in service after the date the property was first placed in service

Recovery Period for Real Property

No comparable provisions

Shortens the recovery period for depreciation of nonresidential real property to 25 years and residential rental property to 30 years

Eliminates the separate definitions of qualified leasehold improvements, qualified restaurant and qualified retail improvement property and provides a general 10-year recovery period for all qualified improvement property and 20-year ADS recovery period for that property

Cash Method of Accounting

$5,000,000 average gross receipts threshold for corporations and partnerships with corporate partners would be increased to $25,000,000 (indexed for inflation) and businesses would not have to meet this requirement for all prior taxable years

Businesses with average gross receipts of $25,000,000 or less would be able to use the cash method even if the business has inventories

Businesses with average gross receipts of $25,000,000 or less would be fully exempt from the uniform capitalization rules

$10,000,000 average gross receipts exception to requirement for use of percentage-of-completion accounting method for long-term contracts would be increased to $25,000,000

$5,000,000 average gross receipts threshold for corporations and partnerships with corporate partners would be increased to $15,000,000 (indexed for inflation) and businesses would have to meet the gross receipts test for the three prior taxable-year period

Businesses with average gross receipts of $15,000,000 or less would be able to use the cash method even if the business has inventories (similar to House Bill)

Businesses with average gross receipts of $15,000,000 or less would be fully exempt from the uniform capitalization rules

$10,000,000 average gross receipts exception to requirement for use of percentage-of-completion accounting method for long-term contracts would be increased to $15,000,000

Interest Expense Deduction

The deduction for net interest expenses in excess of 30% of adjusted taxable income would be eliminated;

Adjusted taxable income would be defined as a business’s taxable income computed without regard to business interest expense, business interest income, NOLS, depreciation, amortization or depletion (similar to EBITDA)

This limitation would not be applicable to real property trades or businesses or certain regulated public utilities (but those businesses are not eligible for full expensing)

Businesses with average gross receipts of $25,000,000 or less would be exempt from this interest limitation

Disallowed interest could be carried forward 5 years

Similar to the House Bill, the deduction for net interest expenses in excess of 30% of adjusted taxable income would be eliminated

The Senate would define “adjusted taxable income” similarly to EBIT  

Businesses with average gross receipts of $15,000,000 or less would be exempt from this interest limitation

This limitation would not be applicable to certain regulated public utilities. At taxpayer’s election, the limitation would also not apply to a real property trade or business – however if the taxpayer makes this election, the taxpayer is required to use ADS to depreciate any of its nonresidential real property, residential real property, and qualified improvement property (e.g., full expensing of qualified improvement property would be disallowed)

Disallowed interest could be carried forward indefinitely

Pass-Through Taxation

25% rate applicable to pass-through net income treated as qualified business income; all net income derived from a passive business activity would be treated as qualified business income, which essentially means that passive investments will generate income taxed at 25%. Pass-through owners or shareholders who receive income allocations from active business activities may elect to: (1) treat 30% as qualified business income and 70% as wage income, or (2) determine the ratio of qualified business income to wage income based on capital investment

The new 25% rate on qualified business income would generally not apply to services businesses including legal, accounting, consulting, engineering, financial services, or performing arts

9% tax rate, phased in over 5 years, for the first $75,000 of net business income for joint returns and $37,500 in net business income for individuals in lieu of the 12% rate. Phased out at $225,000 of taxable income

The Senate approach to the taxation of pass-through income is significantly different from the House approach:
  • Senate Bill establishes a new 17.4% deduction for “qualified business income” from a pass-through or sole proprietorship
  • However, the deduction is generally limited to 50% of the taxpayer’s allocable share or pro rata share of “W-2 wages” paid by the partnership, S corporation or sole proprietorship; thus, if the partnership, S corporation or sole proprietorship does not pay W-2 wages, the owner/taxpayer’s deduction would be zero
  • The W-2 wage limit would not apply in the case of a taxpayer with taxable income not exceeding $500,000 (for married individuals filing jointly) or $250,000 (for other individuals), but the application of this wage limit would be phased in for individuals with taxable income exceeding those amounts
  • The deduction applies to specified service businesses only to those taxpayers whose taxable income does not exceed $500,000 for married individuals filing jointly or $250,000 for other individuals. The benefit of the deduction for service businesses is phased out over the next $100,000 of taxable income for married individuals filing jointly or $50,000 for other individuals
  • his provision would expire after December 31, 2025
Like-Kind Exchanges

The rule allowing deferral of gain on like-kind exchanges would be modified to allow for like-kind exchanges only with respect to real property.

There would be a transition rule that allows like-kind exchanges of personal property to be completed if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before 12/31/2017

Same as House Bill

Carried Interests

The bill would impose a 3-year holding period requirement for qualification as long-term capital gain with respect to certain partnership interests received in connection with the performance of services

Same as House Bill

Partnerships – Technical Termination

The technical termination rule would be repealed

No comparable provision

Partnerships – Basis Limitation on Partner Losses

No comparable provision

Modifies the basis limitation on partner losses; that limitation will apply to a partner’s distributive share of charitable contributions and foreign taxes; in the case of a charitable contribution of appreciated property by a partnership, the basis limitation does not apply to the extent of the partner’s distributive share of the excess of FMV over basis

Partnerships – Substantial Built-in Loss

No comparable provision

Modifies the substantial built-in loss rules for purposes of the basis adjustment upon a transfer of a partnership interest; in addition to the present-law definition, a substantial built-in loss would also exist if the transferee would be allocated a net loss in excess of $250,000 upon a hypothetical disposition by the partnership of all partnership’s assets in a fully taxable transaction for cash equal to the assets’ fair market value, immediately after the transfer of the partnership interest – in other words, substantial built-in loss would be tested at both the partnership and the partner level

Partnerships – Source of Gain or Loss on Sale of Interest

No comparable provision

Gain or loss from the sale or exchange of a partnership interest would be considered effectively connected with a U.S. trade or business to the extent that the transferor would have had effectively connected gain or loss had the partnership sold all of its assets at FMV as of the date of the sale or exchange;

The transferee of a partnership interest would be required to withhold 10% of the amount realized on the sale or exchange of a partnership interest unless the transferor certifies that the transferor is not a nonresident alien individual or foreign corporation. If the transferee fails to withhold the correct amount, the partnership would be required to deduct and withhold from distributions to the transferee partner an amount equal to the amount the transferee failed to withhold

Business Credits The following credits would be repealed (among others):
  • 50% credit for clinical testing expenses for certain drugs for rare diseases or conditions (“orphan drug” credit);
  • Employer-provided child care credit;
  • Rehabilitation tax credit;
  • Work opportunity credit;
  • Deduction for unused business credits;
  • New markets tax credit; and
  • Credit for expenditures to provide access to disabled individuals.

Modifies but does not repeal the 50% credit for clinical testing expenses for certain drugs for rare diseases and conditions; deduction reduced from 50% to 27.5%

Employer-provided child care credit would not be repealed;

The 10% credit for pre-1936 buildings would be repealed; the 20% credit for qualified rehabilitation expenditures with be retained and claimed ratably over a five-year period beginning in the taxable year in which a qualified rehabilitated structure is placed in service

The work opportunity credit would not be repealed

The deduction for unused business credits would be repealed (same as House Bill)

The new markets tax credit would not be repealed

The credit for expenditures to provide access to disabled would not be repealed

Energy Credits

30% investment tax credit – for solar, fiber optic solar, fuel cell, and small wind energy producers – eliminated for facilities constructed after 2021

10% investment tax credit for solar energy and geothermal energy producers eliminated for facilities constructed after 2027

Inflation adjustment for the production tax credit repealed for electricity produced at qualifying facilities, reverting back to the base rate of 1.5 cents/kW. This reduction would be effective for all electricity and coal produced at facilities, the construction of which begins after 11/2/2017

No comparable provisions

Local Lobbying Expenses

Deductions for lobbying expenses with respect to legislation before local government bodies (including Indian tribal governments) would be disallowed

Same as House Bill

Domestic Production Activities

Repeals the domestic production activities deduction effective for taxable years beginning after 12/31/2017

Repeals the domestic production activities deduction effective for taxable years beginning after 12/31/2018

International Tax Regime

Modified territorial tax system

100% foreign dividend exemption

Substantially the same as House Bill

Repatriation “Toll Tax” Previously untaxed foreign E&P earnings:
  • 14% cash and cash-equivalents
  • 7% non-cash assets
  • Payable ratably over 8 years
  • Proportional reduction in foreign tax credits attributable to previously untaxed foreign earnings
Previously untaxed foreign E&P earnings:
  • 10% cash and cash-equivalents
  • 5% non-cash assets
  • Payable over 8 years on a back-loaded basis
  • Same as House Bill
Subpart F

There would be a new category of inclusion for 10% U.S. shareholders (both corporate and individual) equal to 50% of their CFCs’ “foreign high return amount” – non-subpart F, non-effectively connected net income which is net income to the extent such net income exceeded a return (equal to the short term AFR for the year + 7 percentage points) on the CFC’s assets used in producing such income (measured by the adjusted bases of those assets)

  • Foreign high returns would be allowed 80% foreign tax credits, which could not be carried forward or backward to that tax year. Certain exceptions for active financing and extraction activities would apply

CFC “look-through” rule for related corporations would be made permanent beginning after 2019. Stock attribution rules for determining “CFC” status would be revised such that a U.S. corporation would be treated as constructively owning stock held by its foreign shareholder and a requirement that a corporation must be controlled for an uninterrupted period of 30-days before it can be subject to U.S. tax on the CFC’s Subpart F income would be eliminated.

U.S. shareholders of CFCs will be subject to 10% (12.5% after 2025) tax on global intangible low-taxed income (GILTI), which is equal to (a) the shareholder's pro rata share of certain foreign profits of the CFC over (b) a deemed return of 10% of the shareholder’s pro rata share of the CFC's total basis in tangible property used to produce such profits

  • An 80% foreign tax credit is permitted so that, in effect, the minimum tax will not apply to taxpayers if, on an aggregate basis, their effective foreign tax rate is 12.5% (15.6% after 2025) or higher

Same as House Bill