Tax Policy Update

December 20, 2017

Pardon Our Dust

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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!


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

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
  • Private activity bonds – no change to current law
  • Advance refunding bonds – repealed
  • Tax credit bonds – repealed
  • No change to current law
New Markets Tax Credit
  • No change to current law
Low Income Housing Tax Credit
  • No change to current law
Wind & Solar PTC
  • No change to current law
Investment Tax Credit
  • No change to current law
Nuclear Production Tax Credit
  • No change to current law
30D Plug-in Electric Vehicle Credit
  • No change to current law


Compensation & Employee Benefits

Limitation on Excessive Employee Remuneration

  • Eliminate “performance-based” compensation deduction
  • Add CFO to covered employees
  • 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

  • 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


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



(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