The Tax Cuts & Jobs Act (TCJA) has passed another significant milestone in Congress. The full Senate resumed consideration of its version of the bill following the Thanksgiving holiday and voted to approve the bill by the end of that week. There are a number of differences between the House and Senate bills, which Congress will now begin to reconcile.
Passage in the Senate
The Senate worked early into the morning of December 2 and voted 51-49 to approve its version of the TCJA. The bill was previously approved by the Senate Finance Committee on November 16. Following debate and the offering of amendments, the final vote proceeded along partisan lines with only one Republican voting nay.
The reappearance of the alternative minimum tax (AMT) in the Senate bill may prevent corporations from claiming certain credits such as the research credit.
During debate in the Senate, two key issues emerged within the Republican ranks. First, the costs associated with the tax bill were raised as a concern by some Senators. On November 30, the Joint Committee on Taxation released an analysis indicating that the Senate bill would increase the federal deficit by more than $1 trillion during the 10-year budget window, even after accounting for increased economic growth. Second, other Senators raised concerns about whether sufficient benefits were being provided to pass-through businesses. The latter concerns were addressed through several amendments that were made to the bill prior to its passage in the Senate. The former concerns were left unaddressed leading to the one Republican dissenting vote, Senator Bob Corker of Tennessee.
Changes to the Senate bill
Senators offered amendments to the TCJA that made the following changes from the version of the bill that was previously approved by the Senate Finance Committee:
- Increased the deduction for pass-through income from 17.4 to 23 percent.
- Retained the alternative minimum tax (AMT) for both individuals and corporations but with modifications including a significantly increased exemption amount. Previously, the Senate bill matched the House bill by fully repealing the corporate and individual AMT. With the Senate maintaining the AMT on corporations while also reducing the regular corporate tax rate to 20 percent, many corporations will be unable to take advantage of credits that would otherwise reduce their regular tax liabilities to an amount less than their AMT liabilities. This would include credits such as the research credit and new markets tax credit.
- Added a $10,000 property tax deduction, which mirrors the provision included in the House bill. State and local income taxes would continue to be eliminated under both bills.
- Temporarily expanded the medical expense deduction.
- Increased the deemed repatriation tax rates for accumulated foreign earnings and profits to 14.49 percent for cash (up from 10 percent) and 7.49 percent for illiquid assets (up from 5 percent). Those changes bring the Senate closer to the House bill, which included rates of 14 and 7 percent, respectively.
- Removed the provision that would have repealed the IC-DISC regime.
Next step: Reconciling the bills
The passage of the Senate version of the TCJA sets the stage for the formation of a conference committee that will reconcile the House and Senate bills. The following are among the items that will need to be resolved:
- Tax on pass-through business income — The House and Senate have approached pass-through business income in mechanically different ways. The House bill generally provides a maximum tax rate that would apply to qualifying pass-through business income. The maximum rate ranges from 25 to 39.6 percent depending on the type of the business, whether the taxpayer is passive or active in the business, and the amount of basis in depreciable assets held by the business. Conversely, the Senate bill provides a 23 percent deduction for a specified portion of qualifying pass-through income leading to an effective maximum tax rate of 29.6 percent. Ultimately, both bills reduce the tax burden on many pass-through businesses. However, the conference committee will need to determine which approach to take (maximum tax rate v. deduction), which businesses will qualify, and how to determine the amount of income that will qualify.
- Corporate taxes — There are minimal differences between the House and Senate bills related to corporate income taxes except that the Senate would delay the effective date of the 20 percent tax rate by one-year until 2019. The conference committee will need to reconcile the effective date.
- Alternative minimum tax — With the Senate’s last-minute removal of the repeal of the AMT, the conference committee will need to determine if it will keep this provision and, if not, what others provisions will be used to offset the revenue loss.
- Child tax credit — The House and Senate bills both use enhanced child tax credits to soften the blow of the elimination of personal exemptions and many itemized deductions. However, the conference committee will need to reconcile the amount of the credit, the amount that will be refundable, and at what income levels it will phase out.
- Sunset of individual tax provisions — Most tax provisions related to individuals sunset after 2025 in the Senate bill. Those terms were necessitated by procedural rules in the Senate. The House bill does not contain similar sunset provisions since different procedural rules apply in that chamber. It is expected that the conference committee will need to adopt the sunsets contained in the Senate bill in order to allow for final passage in the Senate.
The conference committee will need to determine which pass-through income approach to take, which businesses will qualify, and how to determine the amount of income that will qualify.
The Senate’s passage of the TCJA is a significant milestone. While taxpayers cannot yet count on these provisions becoming law, they should certainly consider tax-planning ideas for 2017 that take into consideration the likelihood of decreasing tax rates and the elimination of certain deductions in future years.