House and Senate Bills Outline Tax Reform for Businesses

The House Ways and Means Committee revealed a new tax bill, the Tax Cuts and Jobs Act. Running at almost 430 pages, the bill seeks to make sweeping changes to the current tax code. The Senate Finance Committee has also released a summary of their own proposal.  Actual legislation from the Senate has still not yet been released, but the summary gives an overview of where it may be headed.  While the below summary is not exhaustive, we have highlighted some important points within the two bills for businesses. We will continue updating this blog as the House and the Senate begin reconciling the differences between the two plans.

Revised 12/6/17

Business Tax Rates

  • House: Corporate tax rate from 35% to 20%. Senate: Corporate rate also to 20%, but with a delay until 2019
  • House: Maximum pass-through tax rate on business income set at maximum of 25%, depending on whether a business is active or passive, but not for specified service businesses. Senate: Allowed a 23% deduction on domestic qualifying business income not to exceed 50% of wage income (for certain higher-income taxpayers), but not for specified service businesses with taxable incomes over $500,000

Increased Expensing and Section 179

  • House and Senate: Immediately expense 100% of qualifying property placed in service after September 27, 2017 and through January 1, 2023. This, in effect, repeals the bonus depreciation phase-down that is in the current law
  • House and Senate: Qualified property would not include property used by Public Utility Company or property used in a real property trade or business
  • House: Repeal of “original use” requirement for newly acquired property to qualify. Additional depreciation would be allowed if it was “first use” of the taxpayer. Senate: The “original use” requirement would remain
  • House: Section 179 expensing increased to $5,000,000 and phase-out amount increased to $20 million, both indexed for inflation. Senate: Section 179 expensing increased to $1,000,000 and phase-out amount increased to $2,500,000
  • House: Section 179 qualifying property would be expanded to include energy efficient heating and air-conditioning property. Senate: Section 179 qualifying property would also include improvements to non-residential property such as roofs, heating, ventilation, fire alarm/security systems, and air-conditioning property
  • Senate: Increased depreciation limits for listed property under section 280F. For listed property such as certain vehicles not taking bonus depreciation, the maximum deduction per year is increased to $10,000 in year 1, $16,000 in year 2, $9,600 in year 3, and $5,760 in year 4 and on. Computers are removed from the definition of listed property
  • Senate: Certain farming equipment would be allowed a recovery period of 5 years, instead of 7. The 150% declining balance method would no longer be required for this equipment and farmers could use the 200% declining balance method

Depreciation of Residential and Nonresidential Real Property

Senate

  • Recovery period would be decreased to 25 years
  •  Definitions for qualified leasehold improvement, qualified restaurant, and qualified retail improvement property would be eliminated. The replacement would be a single definition for qualified improvement property
  • All qualified improvement property would be allowed a recovery period of 10 years. The depreciation method would be straight line

Accounting Methods and Recognition of Income

  • House: Cash method of accounting would be allowed for corporations and partnerships with a corporate partner as long as gross receipts are $25 million or less, indexed for inflation. The requirement that this must be satisfied for all prior years would be repealed. Senate: The threshold of average gross receipts would instead be $15 million or less, indexed for inflation. The exceptions to the accrual method would remain for personal service corporations, partnerships without C Corp partners, and other pass-through entities
  • House: Businesses with average gross receipts of $25 million or less would be allowed the cash method of accounting even with inventories and could use the method for inventory accounting reflected on their books. In addition, they would be exempt under current UNICAP rules. Senate: The threshold of average gross receipts would instead be $15 million or less
  • House: The $10 million average gross receipts exception for the percentage of completion method for accounting for long-term contracts would be increased to $25 million. Senate: The threshold of average gross receipts would instead be $15 million or less
  • Senate: A taxpayer would have to recognize income no later than the taxable year in which such income is taken into account as income on an Applicable Financial Statement. This would possibly modify the current constructive receipt rules for certain companies

Limitation on Net Interest Expense

  • House and Senate: All businesses would be subject to a disallowance of net interest expense in excess of 30% of adjusted taxable income as defined in legislation (EBITDA vs EBIT)
  • House: The carryforward of disallowed net interest expense would be 5 years. Senate: The carryforward of disallowed net interest expense would be indefinite
  • House: An exemption to these rules would be allowed for businesses with average gross receipts under $25 million. Public Utility Companies and Real Property Trades or Businesses would also be exempted. Senate: An exemption would be allowed for business with average gross receipts under $15 million. The exception for real property trades/businesses and public utility companies would also apply

Net Operating Loss Deductions

  • House: NOL carryover or carryback would be allowed only to the extent of 90% of taxpayer’s taxable income. Senate: Proposal would also allow only to the extent of 90% of taxable income, but would be decreased to 80% after December 31, 2023
  • House: All carrybacks would be repealed except for a special 1 year carryback for certain qualifying businesses. Senate: All carryback repealed except a 2 carryback for farms and other special circumstances
  • House and Senate: NOLs generated effectively after the provision would be allowed to be carried forward indefinitely and increased by an interest factor to preserve the value of the NOL

Like-Kind Exchanges

  • House and Senate: Like-kind exchanges would only be allowed for real property
  • House and Senate: Like-kind exchanges of personal property would be allowed a transition period if effective before December 31, 2017

Contributions of Capital

  • House: Contributions of property with a Fair Market Value in excess of the Fair Market Value of stock received in exchange to a corporation or partnership would no longer be tax free. This would apply to both corporations and even pass-through entities such as a partnership

Alternative Minimum Tax

  • House: AMT would be eliminated
  • Senate: Keep corporate and individual AMT

Meals and Entertainment Expenses

  • House and Senate: No deduction would be allowed for entertainment expenses including, but not limited to, such items as amusement or recreation, facilities, or membership dues
  • House and Senate: Qualifying business meals and beverages would be only allowed deduction with the 50% limit remaining in place and this limitation would be expanded to employee meals
  • House and Senate: No deduction would be allowed for transportation fringe benefits, employee gym amenities, or other personal employee fringe benefits unless such benefits are also picked up in employee’s income

Miscellaneous Business Credits Repealed/Modified

  • House: Credit for Clinical testing Expenses for Certain Drugs would be eliminated. Senate: Credit rate reduced from 50% to 27.5%
  • House: Employer-provided Child Care Credit would be eliminated
  • House: The Rehabilitation Credit would be eliminated. Senate: Repeals the 10% credit for pre-1936 buildings. Decreases the credit for other qualifying expenditures from 20% to 10%
  • House: The Work Opportunity Credit would be eliminated
  • House and Senate: Deduction for unused business credit would be eliminated
  • House: New Markets Tax Credit would be eliminated. However, unused credits from the past would be allowed for up to 7 years of their original allocation
  • House: Credit for Expenditures to Provide Access to Disabled Individuals would be eliminated. Senate: Not addressed in the summary
  • House: Oil recovery credit would be eliminated
  • House: Credit for producing oil and gas from marginal wells would be eliminated

Credit for Portion of Employer Social Security Taxes Paid with Respect to Employee Tips

  • House: Modification would allow only tips above the current minimum wage rather than tips above $5.15 an hour
  • House: All restaurants claiming the credit would be required to report to the IRS tip allocations amount tipped employees
  • Senate: The tip credit is not addressed in the Senate summary

Bonds

  • House: Interest on newly issued Private Activity Bonds (PAB) would no longer be tax exempt
  • House and Senate: Interest on newly issued Advance Funding Bonds (AFB) would no longer be tax exempt
  • House: Tax credit bonds would no longer be issued. However, existing tax credit bonds would continue receiving tax credits
  • House and Senate: Interest on bonds issued to finance professional stadiums would no longer be tax exempt

Executive Compensation

  • House and Senate: The exceptions to the $1 million deduction limitation for compensation to covered employees would be eliminated. These exceptions under the current law are commissions, performance-based comp (including stock options), payments to the tax-qualified retirement plan, and amounts excludable from the executive’s gross income.  Covered Employees would include the CEO, the CFO and the three highest-paid employees

Other Corporate Tax Changes of Note

  • House and Senate: The 70% dividends received deduction is reduced to 50% for ownership below 20%. The 80% dividends received deduction to 65% for ownership over 20%, but below 80%. The 100% dividends received deduction for affiliated groups of ownership over 80% would remain the same
  • House and Senate: Deduction for lobbying expenses with respects legislation of local governing bodies would be eliminated
  • House and Senate: The Domestic Production Activities Deduction (DPAD) would be eliminated
  • House: Gain or loss from the disposition of a self-created patent would be ordinary rather than capital. Election to treat as a capital asset musical compositions and copyrights in musical works would no longer be available (A recently introduced house amendment would reinstate the capital gain treatment for self-created patents such as musical compositions)
  • House: Technical termination rules of partnerships would be eliminated. There would no longer be a requirement for a short year return to be filed if ownership changed by more than 50% in a tax year.
  • House: Various energy credits such as the credit for electricity produced from certain renewable resources, the energy investment credit, credit for production from advanced nuclear facilities, and residential energy efficient property credit would not be eliminated. However, some changes and phase-outs would be implemented.  Contact an Anders advisor should you need any more information regarding these energy credits
  • House and Senate: Specific tax law changes to the Insurance Industry, which includes but is not limited to Net Operating Losses and the computation of reserves. Contact an Anders advisor should you need any further information on the provisions as specific to this particular industry
  • Senate: Cost basis of stock sold would have to always be calculated on a first-in-first-out basis, except in limited circumstances where average cost basis would be allowed
  • Senate: Various proposals to specific industries such as beverages and spirits. Contact an Anders advisor should you want any additional information pertaining to this

What isn’t changing?

  • There currently does not appear to be any elimination or modification to the Research and Development credit. This credit is not expected to change, but we will closely follow should any further developments occur.

While legislation is still pending, we will keep you updated on the latest developments. Contact an Anders advisor with questions on how the proposed changes could affect you or your business. Read the proposed tax reform changes for individuals.