We recently launched this new site and are still in the process of updating some of our archived content. Some details of this article may be incomplete, links may be broken, and other elements may not display properly yet. We appreciate your patience and understanding.
VOTE OF THE WEEK: H.R. 1
O Come, All Ye Faithful. Early this morning, the Senate approved, 51-48, the conference report for the Tax Cuts and Jobs Act (H.R.1). The legislation is headed back to the House for another vote around noon today — the House has to vote again because the Senate took out three provisions that violated the Byrd Rule. According to the Senate Budget Committee, the violations include:
A provision that would allow 529 savings accounts to be used for homeschooling expenses
A criteria that would exempt private universities with less than 500 tuition-paying students from having to pay the endowment excise tax
The short title, “Tax Cuts and Jobs Act” (yes, the Democrats were that petty)
The House is expected to approve H.R. 1 and send it to the president this afternoon.
The Tax Policy Update team has put together a quick, high-level summary of the conference report in the “Legislative Landscape” section below.
Programming Note: The Tax Policy Update team is taking off for the holidays next week. We will be back in January!
LEGISLATIVE LANDSCAPE
Miracle on Pennsylvania Avenue. Congress will need a small miracle to avoid a government shutdown this week. The previous continuing resolution (“CR”) expires Dec. 22. House Republicans have put together another stopgap measure to keep most of the government running through Jan. 19, 2018 — defense spending would be extended through the end of FY 2018 with an increased budget. The stopgap also includes a five-year extension of Children’s Health Insurance Program (“CHIP”).
The House proposal is a non-starter for Senate Democrats, who have long demanded for an increase to non-defense spending as well. The House CR will not clear the Senate without at least some Democratic support.
Even if House Republicans press forward and pass their CR, the Senate will likely take out the beefed up defense budget and extend funding for all government programs through Jan. 19. The Senate is also considering adding the following riders: (1) PAYGO waiver, (2) Alexander-Murray/Collins-Nelson bill, (3) FISA renewal, and (4) disaster relief supplemental.
Have You Heard the Good(ish) News? Below is the Tax Policy Update team’s summary of the bill.
Tax Cuts and Jobs Act (H.R. 1) Conference Report Highlights
BUSINESS TAXATION
Corporate Tax Rate
Permanent 21% (effective Jan. 1, 2018)
Business Expensing
Full and immediate expensing for 5 years – property placed in service on or after Sept. 27, 2017 and before Jan. 1, 2023
Phases down 100% immediate expensing after 5 years. Phase down schedule is as follows: 80%, 60%, 40%, and 20%
Repeal election to accelerate AMT credits in lieu of bonus depreciation to conform with the corporate AMT repeal
Exception for certain regulated utilities, including certain electric cooperatives
Expands qualifying property to include certain property from film, television, and live theatrical productions
Net Interest Expense Deduction
Limited to 30% of EBITDA for 5 years. After 5 years, limited to 30% of EBIT
Allow pass-through entities to pass through excess net interest expense to owners
Carried forward indefinitely
Applicable to all taxpayers except small businesses (>$15m), regulated utilities, certain auto dealers, and certain real estate businesses. Farming businesses can elect out of limitation but must depreciate certain property over a lengthier schedule.
Net Operating Loss
Permitted to offset 80% of taxable income
Carryforward indefinitely
No carryback except for farming trade or business (two years)
Rules applicable to NOLs beginning in 2018
Domestic Production Activities Deduction
Repealed for all taxpayers, effective Jan. 1, 2018
Corporate AMT
Repealed, effective Jan. 1, 2018
Carried Interest
3-year holding requirement for partnership interest transferred in connection with services
Provide that once covered by Sec. 162(m), always subject to $1 million deduction cap, even in final year of employment
Transition Rule: Modification does not apply to remuneration under a written binding contract in effect on Nov. 2, 2017 and that has not been materially modified or renewed.
Fringe Benefit Rules
No deductions allowed for entertainment, recreational or membership dues
No deduction allowed for qualified transportation fringe benefits
Limits imposed on food and beverage benefits – no deduction for meals provided for convenience of employer (effective in 2026)
Sec. 127 Tuition Assistance
No change to current law
Qualified Moving Expenses
Suspend the exclusion for qualified moving expenses until Jan. 1, 2026
Dependent Care Assistance
No change to current law
Adoption Assistance
No change to current law
Employee Achievement Awards
No deduction allowed for employee achievement awards in the form of cash and cash equivalents, among others
FIFO Method of Accounting
No change to current law
Insurance
Changes in Net Operating Loss treatment for life insurance companies to conform to the general NOL carryover rules, carried back for two tax years, carried forward for up to 20 years
Changes in capitalization rules for life insurance policy acquisition expenses:
Extends the amortization period for specified policy acquisition expenses from a 120-month period to a 180-month period
Retains the special 60-month amortization of the first $5 million of expenses
The percentage for annuity contracts is 2.09; the percentage for group life insurance contracts is 2.45 and the percentage for all other specified insurance contracts is 9.20
Special transition rule for acquisition expenses required to be capitalized in tax years beginning before Jan. 1, 2018
Accounting Methods
Certain Special Rules for Taxable Year of Inclusion
Require a taxpayer to recognize income no later than the taxable year in which such income is taken into account as income on an applicable financial statement
Codify current deferral method of accounting for advance payments of goods, services, and other specified items provided by the IRS
Direct taxpayers to apply revenue recognition rules under Sec. 451 before applying the OID rules under Sec. 1272
INTERNATIONAL TAXATION
Dividends Received Deduction
Applies to foreign-source portion of dividends from a foreign corporation to a U.S. corporation
U.S. corporation must own at least 10% voting stock in the foreign corporation
Interest Expense Deduction
No change to current law – no limitation on deduction of interest by domestic corporations which are members of an international group
Global Intangible Low-Tax Income (GILTI)
U.S. shareholder of a CFC includes “global intangible low-tax income” (GILTI) in taxable income, similar to Subpart F income.
GILTI is excess of shareholder’s net CFC “test income” over their “net deemed tangible income return.”
Partial foreign tax credit permitted for 80% of foreign income taxes
Deemed Repatriation
15.5% for cash or cash-equivalent
8% for non-cash
Subpart F
Elimination of inclusion of foreign base company oil related income
Modification of Stock Attribution Rules for CFCs
Provides for downward attribution from a foreign person to a related U.S. person.
U.S. Virgin Islands
Sourcing rule provision not included
INDIVIDUAL TAXATION (Provisions to sunset after Dec. 31, 2025)
Individual Tax Rates
Maintain 7-bracket structure
37%, 35%, 32%, 24%, 22%, 12%, 10%
Standard Deduction
Increase standard deduction to $12,000 for individuals and $24,000 for couples
