- Republicans passed its tax reform bill, the Tax Cuts and Jobs Act, in an early morning Senate vote.
- To garner support, Republicans made significant amendments to the bill, including increasing deductions on business income for passthrough entities and adding back in the Alternative Minimum Tax on individuals and corporations to help pay for some of the changes.
- The House could take up the Senate bill and attempt to pass it with no modifications, or the two chambers can go to conference to reconcile their differences.
- As the 2017 tax year wraps up, businesses should make decisions on how to best navigate the uncertainty of future rules.
Early on Saturday, Dec. 2, 2017, the U.S. Senate voted to approve its version of legislation to overhaul the American tax code. The legislation, referred to as the Tax Cuts and Jobs Act, passed along party lines (51 to 49), with only one Republican senator voting with all Democrats against the measure. This vote comes just weeks after the House passed its version of tax reform legislation.
In a marathon session, Republicans made considerable amendments to the bill to garner support from various senators within the party. These included carve-out agreements that would satisfy individual lawmakers, but wouldn’t alienate the rest of the caucus and still stay within the guardrails of the budget rules.
The following are highlights of the changes to the Senate’s proposal, and how they compare to the House legislation:
Modifications to provisions
- One of the more significant deviations from the previous version of the Senate bill is an increase in deductions for qualified business income for pass-through entities (partnerships, LLCs, sole proprietorships, S Corporations) for the individual taxpayer – from 17.4 percent to 23 percent.
The House bill deviates from the Senate approach. The House proposal caps the tax rate on pass-through income at no more than 25 percent. Although, considerable limitations apply to when an individual can apply the reduced rate. These different approaches for pass-through entities will need to be reconciled.
- Another notable change is the property tax deduction, which was eliminated in the original proposal. It would allow a property tax deduction up to $10,000. This directly aligns with the House bill that contains the same cap.
- Specific criteria and very detailed definitions were fleshed out for the proposed tax credit for employers that provide paid family and medical leave. The credit was originally inserted in the mark-up of tax reform in the Senate Finance Committee. One clarification specifically carve-outs the amounts employers are required to contribute to a paid leave policy under state or local leave laws. Consequently, these required amounts would not count toward the credit. It should be noted that this tax credit provision is not in the House version.
- Minor corrections to individual tax tables. Keep in mind, these tables in the Senate bill deviate substantially from the House version. The two chambers must come to an agreement on the best approach to individual tax rates.
- Reduced threshold for deduction of qualified medical expenses to pre-Affordable Care Act levels. Currently, individuals are only allowed to deduct qualified medical expenses that exceed 10 percent of adjusted gross income. This provision would move that threshold back to 7.5 percent, but only for 2017 and 2018. The House version eliminates this deduction entirely.
- Although originally removed, the Alternative Minimum Tax was reinserted for both corporations and individuals, although the exemption amount for individuals was increased to offset some of the impact. The House version eliminated this provision entirely, which sets up future debate between the two chambers.
Reconciling Senate and House versions of tax reform
Given the deviations noted above, Congress must now reconcile the Senate and House versions of the legislation. There are two options: The House could take up the Senate bill and attempt to pass it with no modifications, or the two chambers can go to conference to reconcile their differences.
If they choose the latter, they must work through the thorny issues of the various constituencies in each chamber, and compromise with a piece of legislation that they believe could pass both chambers. The comingled legislation would have to go back to both the House and the Senate for an up or down vote.
All the while, legislators must keep a close eye on deviations that may run afoul with complex budget rules, including the CBO economic analysis of these changes. There is currently very little wiggle room for adding to the cost of the legislation. The CBO estimated the Senate bill will add over $1.47 trillion to the deficit in the next decade. The maximum the Senate can add to the deficit is $1.5 trillion over 10 years.
Given these budget considerations, adjustments may need to be made to the bill that previously were not considered in prior versions of either legislation. Nothing is off the table until the legislation is finalized.
In the meantime, what should businesses do?
There are no changes to the tax code until both chambers pass the same bill and President Trump signs it. Although it appears the tax overhaul legislation is moving rapidly through Congress, nothing is certain on the final product and whether the Republicans can marshal the votes while balancing competing demands. It’s important to stay current with the progress of this legislation and evaluate the impacts it may have on your business. As this year’s tax year wraps up, businesses will have to make decisions on how to best navigate the uncertainty of future rules.