On Nov. 2, House Ways and Means Committee Chairman Kevin Brady (R-Texas) released a 429-page tax reform bill, entitled: Tax Cuts and Jobs Act of 2017 (H.R. 1). According to the Chairman, the legislation aims to lower business and individual tax rates, modernize U.S. international tax rules, and simplify the tax law, with significant impacts on numerous sectors of the economy.
On Nov. 6, the Ways and Means Committee is scheduled to begin consideration of the bill. Chairman Brady has announced that he may propose modifications to his bill in advance of the committee ‘markup’ sessions, at which time additional amendments offered by committee members could be considered. Chairman Brady has also said that he intends for the committee to complete action on the bill by the end of that week.
Under the bill, the current 35 percent top corporate rate would be reduced to 20 percent, for tax years beginning after 2017. A 25 percent corporate rate would apply for certain personal service corporations in the fields of health, law, engineering, architecture, accounting, actuarial services, performing arts, or consulting in which services are substantially performed by employee-owners.
The bill would provide a new 25 percent tax rate for certain pass-through income of businesses operated as sole proprietorships, partnerships, limited liability companies, and S corporations. Under the proposal, a portion of net income distributed by a pass-through entity to an owner or shareholder may be treated as ‘business income’ subject to a maximum rate of 25 percent, instead of ordinary income tax rates. The remaining portion of net business income would be treated as ordinary income compensation. The proposal includes rules that limit the amount of net business income that may qualify for the 25 percent rate. In addition, the proposal would exclude certain personal services businesses—businesses including services in the fields of law, accounting, consulting, engineering, financial services, or performing arts—from qualifying.
H.R. 1 proposes to replace the current seven individual tax brackets with four brackets with rates set at 12 percent, 25 percent, 35 percent, and 39.6 percent, effective after 2017. Under the bill, the top individual marginal tax rate of 39.6 percent in 2018 would apply for taxable income above $500,000 for single filers ($1 million for joint filers). Under present law, the 39.6-percent individual income tax rate is set to apply in 2018 for single filers with taxable income above $426,700 ($480,050 for joint filers). The bill would repeal the individual alternative minimum tax (AMT) and the corporate AMT. The proposal includes rules for taxpayers claiming AMT carryforward credits beginning in 2019.
The bill does not include any changes to investment income tax rates. The bill leaves in effect the Affordable Care Act’s 3.8 percent net investment income tax and the 0.9 percent additional Medicare tax that apply to higher-income individuals.
The measure would allow businesses to immediately write off the cost of qualified property (not including structures) acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. Section 179 small business expensing limits would be increased to $5 million and the phase-out amount would be increased to $20 million, effective for tax years beginning after 2017 and before 2023. These amounts would be indexed for inflation and the definition of qualifying property would be expanded, effective for certain property acquired and placed in service after Nov. 2, 2017. The bill would cap net business interest expense deductions at 30 percent of a business’s adjusted taxable income, effective for tax years beginning after 2017.
The bill would retain the research and development tax credit and low income housing tax credit. The bill would repeal certain other credits, including the New Markets Tax Credit, the Work Opportunity Tax Credit, and the Section 199 domestic manufacturing deduction. Further, it would double the Estate Tax exemption from $5.6 million per person, effective for tax years after 2017. The estate tax and the generation-skipping transfer tax would be repealed beginning in 2024, while maintaining a beneficiary’s stepped-up basis in estate property.
H.R. 1 would limit the use of net operating losses (NOLs) to 90 percent of taxable income, make changes to current carry-back rules, and provide for an increase in carry forwards for an interest factor; these proposals would be generally effective for losses arising in tax years beginning after 2017. The bill would increase the $5 million gross receipts threshold for cash accounting for certain corporations and partnerships with a corporate partner to $25 million, effective for tax years beginning after 2017.
House Speaker Paul Ryan (R-Wis.) has announced that he expects the House will vote on a Ways and Means Committee-approved bill during the week of Nov. 13, in advance of a scheduled Thanksgiving week recess. Meanwhile, Senate Finance Committee Chairman Orrin Hatch (R-Utah) could propose a Senate version of tax reform legislation as early as the week of Nov. 6. Senate Republican leaders also hope to have both the Senate Finance Committee and the full Senate complete action on tax reform legislation before Thanksgiving. Once the House and Senate have approved tax reform bills, both chambers must reconcile differences between the two bills and then vote to pass a final bill. President Trump said that he hopes to sign a tax reform bill before Christmas.
You can read the full bill text here.
You can read the section-by-section here.
NSBA has compiled a variety of resources on our website designed to help inform you about all things related to tax reform, and provide you with quick, one-step ways to weigh in with your lawmakers.