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Ways and Means Republicans fill in the blanks on tax reform

The House of Representatives and tax reform

House Ways and Means Committee Republicans unveiled a tax reform legislative draft November 2 that, among other things, calls for ambitious cuts to tax rates for corporations, pass-through entities, and individuals. Since then, the House of Representatives approved its version of comprehensive tax reform legislation. Learn more about the House tax reform legislation—formally known as the Tax Cuts and Jobs Act (H.R. 1).

Making sense of tax reform

Jonathan Traub, managing principal, Tax Policy group, Deloitte Tax LLP, provides perspective on the legislative draft in this video. Learn more about: the potential impact on multinationals, individuals, pass-throughs, S-Corps, and states; the new base erosion safeguard provision; corporate reactions to the proposed bill; and actions you may consider in your modeling and planning for tax reform.

Update: Tax reform proposal clears House


Congressional Republican efforts to rewrite the federal tax code took a significant step forward on November 16, as the House of Representatives approved its version of comprehensive tax reform legislation. House Republicans pushed through their proposal—the Tax Cuts and Jobs Act (H.R. 1)—by a largely party-line vote of 227-205.

Learn more

Building on the GOP ‘framework’

The legislation—formally known as the Tax Cuts and Jobs Act (TCJA)—advances the objectives of the tax reform framework put forward in late September by the “Big Six” team of congressional Republican leaders and White House officials (that is, House Speaker Paul Ryan, R-Wis., Senate Majority Leader Mitch McConnell, R-Ky., House Ways and Means Committee Chairman Kevin Brady, R-Texas, Senate Finance Committee Chairman Orrin Hatch, R-Utah, Treasury Secretary Steven Mnuchin, and National Economic Council Director Gary Cohn).

But the framework addressed GOP tax policy goals largely in broad strokes, with few details on how various tax relief provisions would operate and how they would be paid for. (Unofficial estimates from the nonpartisan Tax Policy Center suggested the Republican-backed framework could cost several trillion over ten years, but the recently approved unified budget resolution for fiscal year 2018 only affords budget reconciliation protections to a tax bill that increases the federal deficit on net by up to $1.5 trillion over ten years).

The TCJA fills in those blanks: for example, it includes income thresholds for the proposed new individual rate brackets, “guardrails” for the proposed new pass-through regime, and deemed repatriation rules and base erosion protections to accompany the transition to a territorial tax regime; moreover, it lays out an array of proposed base-broadening provisions that would have a significant impact on corporations, pass-through entities, individual taxpayers, and tax-exempt organizations. An initial estimate from the Joint Committee on Taxation projects the bill as released would result in a ten-year deficit spike of $1.49 trillion—just under the limit established in the budget resolution.

But some of the emerging details have the potential to become lightning rods for opposition as the legislation advances. The drafting process for the TCJA was highly secretive—so much so that many of the finer points of the proposal were unknown even to a number of Ways and Means Republicans and their staff until just recently. Indeed, as Republican committee members learned just what was being proposed and voiced their concerns with specific provisions, Chairman Brady and his staff scrambled to make last-minute modifications, and as a result, the proposal’s official release slipped beyond the original November 1 target date. Other pockets of opposition could emerge among rank-and-file House Republicans as they study the measure in the coming days.

What’s here, what’s ahead

This special edition of Tax News & Views offers an overview of the package, makes observations on key provisions, and looks at some of the political and policy challenges ahead as the tax reform process unfolds on Capitol Hill.

Read below for an overview of the topics included in this special edition, or download the full PDF.

Corporate tax provisions — page 2

  • Corporate rate reduction

Cost recovery — page 2

Alternative minimum tax (AMT) repealed — page 3

Business-related exclusions and deductions — pages 3-5

  • Limitation on business interest
  • Modification of the net operating loss deduction
  • Like-kind exchanges of real property
  • Contributions to capital
  • Lobbying expenses
  • Section 199 deduction
  • Entertainment and similar expenses
  • Unrelated taxable business income increased by certain fringe benefits
  • Treatment of self-created property
  • Sale or exchange of patents

Business credits — pages 5-6

  • Clinical testing expenses
  • Employer-provided child care
  • Historic building rehabilitation credit
  • Work opportunity tax credit
  • Unused business credits
  • New markets tax credit
  • Expenditures to provide access to disabled individuals
  • Employer Social Security taxes on employee cash tips

Energy credits — pages 6-7

  • Production tax credit
  • Solar investment tax credit
  • Credit for residential energy-efficient property
  • Oil recovery credit
  • Credit for oil and gas production from marginal wells
  • Credit for production from advanced nuclear power facilities
  • Credit for plug-in electric vehicles

Territoriality — pages 7-8

  • Dividends received deduction
  • Limitation on losses with respect to 10-percent-owned foreign corporations
  • Deemed repatriation of deferred foreign income upon transition to territoriality

Base erosion provisions — pages 8-9

  • High returns of foreign subsidiaries
  • Limitation on interest deductibility
  • Interest paid by a domestic corporation that is a member of an international financial reporting group
  • Excise tax on payments to related foreign corporations
  • Information reporting requirements for payments subject to section 882(g)(1)

Other modifications — pages 9-10

  • Foreign tax credit provisions
  • Subpart F provisions
  • Provisions related to possessions of the United States
  • Limitation on treaty benefits for certain deductible payments
  • Restriction on insurance business exception to passive foreign investment company rules

Pass-through provisions — pages 10-11

  • 25 percent rate
  • Passive vs. active business activity
  • Capital percentage

Repeal of technical termination of partnerships — page 11

Insurance company provisions — pages 11-14

  • General corporate net operating loss (NOL) carryback and carryover periods would apply to life insurers
  • Repeal of small life insurance company deduction
  • Proposed section 807(e) would prescribe the computation of reserves for future unaccrued claims
  • Repeal of change in basis 10-year-spread
  • Modification of life company dividends received deduction (DRD) proration rules
  • Repeal special rule for distributions from policyholders surplus accounts
  • Modification of proration rules for property-casualty insurance companies
  • Modification of discounting rules for property-casualty insurance companies
  • Repeal of special estimated tax payments
  • Increase deferred acquisition cost (DAC) capitalization rates
  • Restrict insurance business exception to passive foreign investment company (PFIC) rules
  • Excise tax on payments from domestic corporations to related foreign corporations

Small business provisions — pages 14-15

  • Section 179 expensing
  • Accounting methods
  • Exemption from limitation on business interest deduction

Ordinary income tax rates for individuals — pages 15-16

Itemized deductions and personal exemptions — page 16

Other individual provisions and items to note — pages 16-17

  • AMT
  • Exclusion of gain from sale of principal residence
  • Child credit

Estate and gift tax provisions — pages 17-18

Executive compensation — page 18

  • Nonqualified deferred compensation 
  • Modification of limitation on excessive employee remuneration
  • Excise tax on excess tax-exempt organization executive compensation

Savings, pension, and retirement provisions — pages 18-20

  • Repeal of special rule permitting recharacterization of Roth IRA contributions as traditional IRA contributions
  • Reduction in minimum age for allowable in-service distributions
  • Modification of rules governing hardship distributions
  • Modification of rules relating to hardship withdrawals from cash or deferred arrangements
  • Extended rollover period for the rollover of plan loan offset amounts in certain cases
  • Modification of nondiscrimination rules for certain “closed” plans

Exclusions for employer-provided benefits — page 20

  • Employer-provided housing
  • Employee achievement awards
  • Dependent care assistance programs
  • Qualified moving expense reimbursement
  • Adoption assistance programs

Tax-exempt organizations — page 20

ASC 740 Implications — pages 20-21

State tax considerations — page 21

Next steps: Ways and Means markup, House floor vote — page 21

Finance Committee guarding its prerogatives — pages 21-22

 

Download the PDF for all of the details.

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