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Focus on Taxation: Tax Reform Update – Businesses and Individuals

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The House and Senate have both passed separate tax reform bills. These bills will now head into the reconciliation process for potential passage of a single bill that would be ready for the President’s signature by the end of the year.
December 4, 2017

The House and Senate have both passed separate tax reform bills. These bills will now head into the reconciliation process for potential passage of a single bill that would be ready for the President’s signature by the end of the year.

The following is a summary of the key changes proposed:


Business Tax Changes

  • Reduces the C corporation tax rate to 20%
    • House – Effective 2018
    • Senate – Effective 2019
  • Reduces taxes on certain pass through (S corporation, partnership) and sole proprietorship income (but not most service businesses)
    • House – 25% max rate on 30% of business income
    • Senate – 23% deduction on business income capped at 50% of wages
  • Repeals the corporate alternative minimum tax in House bill (no repeal in Senate bill)
  • Allows immediate expensing of the cost of qualified property placed in service after 9/27/17 and before 1/1/23
  • Increases section 179 expensing limit and phase-out
    • House - $5M expense, phase-out to $20M
    • Senate - $1M expense, phase-out to $2.5M
  • Repeals the domestic production activities deduction (Section 199)
  • Eliminates like-kind exchanges for personal property (still allowed for real property)
  • Limits net operating loss deductions of C corporations to 90% of taxable income (reduced to 80% after 2022 in Senate bill), eliminates net operating loss carrybacks, extends net operating loss carryforwards indefinitely
  • Limits interest deductions for certain large businesses to business interest income plus 30% of
    • House – earnings before interest, tax, depreciation and amortization
    • Senate - earnings before interest and tax
  • Transforms our existing taxation of international profits from a worldwide to a territorial system of taxation.
  • Exempts from tax 100% of dividends from certain foreign subsidiaries.
  • Treats certain foreign earnings that have accumulated overseas under the current worldwide system as repatriated and subjects to a tax of
    • House - 14% for cash, 7% for any excess accumulated foreign earnings
    • Senate – 14.5% for cash, 7.5% for any excess accumulated foreign earnings

 

Individual Tax Changes

House Version

  • Four Tax Brackets – 12%, 25%, 35% and 39.6%
  • Mortgage Interest Deduction – Mortgages Limit of $500,000 (no mortgage interest deduction for second homes)
  • Repeal of Medical Expense Deduction
  • Elimination of Alternative Minimum Tax
  • Tuition Waivers – Treated as Taxable Income for the Graduate Student
  • Increased Child Tax Credit to $1,600 per Child Under the Age of 17
  • Increase in Standard Deduction:
    • Single - $12,200
    • Head of Household - $18,300
    • Married Filing Jointly - $24,400
  • Estate, Generation-Skipping and Gift Taxes – Doubles Exemption on All Three Taxes, Repeal of Estate and Generation-Skipping Taxes in 2024

Senate Version

  • Seven Tax Brackets – 10%, 12%, 22%, 24%, 32%, 35%, 38.5%
  • Mortgage Interest Deduction – Mortgage Limitation remains $1,000,000 (no mortgage interest deduction for home equity indebtedness)
  • Medical Expense Deduction – Remains in Place, Subject to 7.5% Floor in 2017 and 2018
  • Alternative Minimum Tax – Increase in Exemption Levels and Phase-Out Thresholds for individuals
  • Tuition Waivers – Exemption From Income Remains In Place
  • Increased Child Tax Credit to $2,000 per Child Under the Age of 18
  • Increase in Standard Deduction:
    • Single - $12,000
    • Head of Household - $18,000
    • Married Filing Jointly - $24,000
  • Estate, Generation-Skipping and Gift Taxes – Doubles Exemption on All Three Taxes, Reverts to Old Laws as of January 1, 2026

House and Senate Versions

  • Repeal of Personal Exemptions
  • Property Tax Deduction – Limited to $10,000
  • Repeal of State and Local Tax Deduction
  • Exclusion of Gain From Sale of Your Home – Required to Own and Occupy Home for Five Out of Eight Years

For questions or further discussion as it pertains to your business or personal tax situation, please contact one of RubinBrown’s Tax Services Group professionals.

 

Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.

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