Posted on Nov 15, 2017

This week, the House Ways and Means Committee approved revised version on 11/9, aiming to bring to a floor vote this week.  On November 11th, the Senate Finance Committee released their tax reform plan, and the senate will begin markup this week.

There are significant differences between the two bills. This article aims to point out the major changes and significant differences that will affect our clients in the future, as well as suggests ways to plan for the new Tax Cuts and Jobs Act Bill.

Business Provisions

House Version Senate Version
C Corp Tax Rate – 20% in 2018 C Corp Tax Rate 20% in 2019
Dividend Received Deduction

80% becomes 65%

70% becomes 50%

Dividend Received Deduction

same as House Version effective 2019

Pass-through Businesses & Sole Prop

70% of income attributable to labor

Taxed at “normal” rate

30% of income taxed at 25%

Personal Service business –100% taxed at “normal” rate

Pass-through Businesses & Sole Prop

17.4% deduction of income

Personal Service business – no deduction

Bonus Depreciation

100% expense of qualified property acquired & placed in service after 9/27/2017 and before 1/1/2023

Replaces original use requirement with taxpayer’s first use requirement

Bonus Depreciation

100% expense of qualified property acquired & placed in service after 9/27/2017 and before 1/1/2023

Section 179

Expense limit $5 million

Phase out limit: $20 million

Section 179

Expense limit $1 million

Phase out limit $2.5 million

Indexed for inflation

Expands definition of qualified real property to include roofs, HVAC, fire and alarm protection systems, and security systems

Non-residential real property depreciable life: 25 years

10 year recovery period for qualified improvement property

Cash Basis of Accounting

C Corps, Partnerships with C Corp partner: Cash basis allowed if average gross receipts for 3 prior periods is less than $25 million.

Indexed to inflation

Cash Basis of Accounting

C Corps, Partnerships with C Corp partner: Cash basis allowed if average gross receipts for 3 prior periods is less than $15 million.

Indexed to inflation

Inventory

If gross receipts are less than $25 million

Treat inventories as materials and supplies

OR

Conforms to financial accounting statements or its books and records

Inventory

If gross receipts are less than $15 million

Treat inventories as materials and supplies

OR

Conforms to financial accounting treatment

Section 263A

Small Biz exception average gross receipts under $25 million

Section 263A

Small Biz exception average gross receipts under $15 million

Construction

Small construction contract average gross receipts under $25 million

Construction

Small construction contract average gross receipts under $15 million

Business Interest Expense

Limited to 30% adjusted taxable income

Determined at the entity level

Excess carried over 5 years

Doesn’t apply if gross receipts < $25 million

Business Interest Expense

Limited to 30% adjusted taxable income

Determined at the entity level

Excess carried over indefinitely

Doesn’t apply if gross receipts < $15 million

Net Operating Losses

No Carryback (1 yr small biz & farm exception)

Carryover can only deduct up to 90% of taxable income

NOL’s generated after 2017 can be increased by an interest factor to preserve its value

Net Operating Losses

No Carryback (2 yr farming exception)

Carryover can only deduct up to 90% of taxable income

NOL’s generated after 2017 are indefinite and can be increased by an interest factor to preserve its value

Like exchanges

Allowed only with respect to real property

Like exchanges

Allowed only with respect to real property

DPAD- repealed DPAD- repealed
  Small life insurance company deduction is repealed
  Sale of Partnership Interest

Character of gain or loss attributable to hypothetical sale of all of partnerships assets allocated to interests in the partnership in the same manner as non-separately stated income

Buyer required to withhold 10% of sales price unless seller certifies seller is not a nonresident alien or foreign corporation

Individual Provisions

House Version Senate Version
Tax Brackets:

Brackets indexed for chained CPI

12% bracket phases out for high income taxpayers

 

Tax Brackets:

Adjusted for chained CPI

“Kiddie tax” – Earned income taxed according to single tax bracket, BUT unearned income taxed according to trust & estate tax brackets.

 

Standard Deduction

$24,000 – MFJ

$12,000 – Single

Standard Deduction

$24,000 – MFJ

$12,000 – Single

$18,000 – Head of Household

Personal Exemptions – Repealed Personal Exemptions – Repealed
Child Credit Expanded

$1,600 per qualifying child

Age limit under 17

$300 credit for other qualifying dependents (including both the spouses on a joint return).

Phase out: $230,000 MFJ, $115,000 Singles

Child Credit Expanded

$1,650 per qualifying child

Age limit under 18

$500 credit for other qualifying dependents.

Phase out: $1 million MFJ, $500,000 all others

 

Itemized Deductions

Overall Limit – repealed

Medical Deductions – repealed

Mortgage Interest – new debt after 11/2/17 – limited $1million limited becomes $500,000

 

Taxes

Income and sales tax deduction eliminated.

Property taxes capped at $10,000

 

Charity

50% limit changed to 60%

Charitable miles adjusted for inflation

 

Miscellaneous Deductions Repealed:

Tax prep fees

Unreimbursed employee business exp.

 

 Exclusion of gain on sale of personal residence

2 out of 5 years becomes 5 out of 8

Able to use once every 5 years

Phased out dollar for dollar when AGI exceeds $500,000  ($250,000 singles)

 

Moving Expenses – Repealed

 

Exclusion of qualified moving expense reimbursement – repealed

 

Deduction for Alimony  – Repealed

Not included in recipient income

 

Itemized Deductions

Overall Limit – repealed

Mortgage Interest – home equity debt interest deduction repealed.

Taxes – Repealed

 

Charity

50% limit changed to 60%

 

Miscellaneous Deductions Repealed:

Tax prep fees

Unreimbursed employee business exp.

All other subject to 2% floor

 

Exclusion of gain on sale of personal residence

2 out of 5 years becomes 5 out of 8

Able to use once every 5 years

 

Moving Expenses – repealed

 

Exclusion of qualified moving expense reimbursement – repealed

 

Education Provisions

Enhanced American Opportunity Credit.

American Opportunity Credit, Hope Scholarship Credit, and Lifetime Learning Credit – consolidated into 1 credit.

100% credit for first $2,000

25% credit for next $2,000

Covered expenses = tuition, fees, course materials

Available for a 5th post-secondary year at 50% the rate of the first 4.

 

Education Savings Accounts

New contributions to Coverdell savings accounts prohibited

Tax free rollovers from Coverdell to 529

529 plan qualified expenses expanded:

Elementary & high school expenses up to $10,000 per year

Expenses associated with apprenticeship programs

 

Repeal of other provisions

Student Loan Interest

Above the line deduction for tuition

Exclusion of interest from Savings Bonds

Qualified tuition reductions

Education Provisions

None.

 

AMT  – Repealed

AMT credit may offset regular tax for any year.

AMT credit refundable before 2022 equal to 50 percent of the remaining credit over the credit allowable for regular tax.

Balance of AMT credit refunded in 2022

AMT  – Repealed

AMT credit may offset regular tax for any year.

AMT credit refundable before 2022 equal to 50 percent of the remaining credit over the credit allowable for regular tax.

Balance of AMT credit refunded in 2022

 

Estate Taxes

Exclusion doubled to $10 million (indexed for inflation)

Repealed in 2023

Stepped up basis remains

Gift tax rate lowered to 35%

Estate Taxes

Doubles estate and gift exemption amount.  Indexed for inflation.

 

If you are curious of how this new tax plan will affect your business or personal tax situation, contact our tax team. We are here to help you plan for the plan.

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.