< Back

Tax Tuesday


Prime’s Tax Hub is your one-stop shop for all of the important tax developments.

To receive these updates in your inbox, please email Casie Daugherty

November 13, 2018

This election saw almost half of the Republicans currently serving on the Ways and Means Committee leave in one way or another. By our count, 10 Republicans and 2 Democrats on the Committee announced their retirements or were defeated, with Republican Reps. Roskam (IL), Paulsen (MN), Curbelo (FL), and Bishop (MI) losing to their Democratic opponents last week and Rep. Joseph Crowley (NY) losing his Democratic primary earlier in the cycle.

As Democrats currently have at least 228 in the House next year, and currently lead in four additional races, the breakdown of majority-to-minority slots on the Committee is likely to be the same or very close to the current make-up – Democrats will have around 24 seats and Republicans will have around 16. Thus, there are not enough Republican members left to fill all the seats in the minority on the Committee next Congress. We will likely see at least a dozen new members, collectively, on the Committee come January.

On the other side of the capitol, the Senate Finance Committee will lose as many as three members, possibly four, depending on the outcome of the Senate recount in Florida. Most importantly, the Committee will have a new Chairman next year, as a result of the retirement of Sen. Orrin Hatch (UT). Sen. Chuck Grassley, who has previously served as Chairman of the Committee and maintains a year and a half of eligibility to return to that position, has indicated that his decision to lead SFC in the 116th Congress or remain as Chairman of the Judiciary Committee will come next week. If he chooses to remain at the helm of Judiciary, Sen. Michael Crapo (ID) would become Chairman.

But before the eulogy can be read, there is work to do in the lame duck session. It is unclear at this moment how many tax agenda items will be promoted, but there is a collection of tax extenders and retirement enhancements, including the Tax Reform 2.0 package that the House approved before Congress left for the November elections that could be offered in the coming weeks. Some of these have bipartisan support. Additionally, there is the new middle class tax cut that received some attention when the President floated it before the election, but Chairman Brady said today such action was contingent on the Republicans holding both chambers, which they failed to do. We also expect that a tax technical corrections bill will be discussed and/or offered, but it is unclear if there is any momentum for such action.

We believe that Republican leadership will probably play a major role in deciding which measures are worth the effort and can be negotiated with the Democrats. Senator Schumer is likely to be asked to protect the interests of House Democrats during this period before the Democrats assume control in January. Ultimately, we continue to believe that any tax proposal that loses significant amounts of revenue will be the most difficult to pass.

Finally, please watch for Prime’s 116th Congress Outlook reports starting the week after Thanksgiving, featuring policy-area specific looks at what the priorities in the House and Senate will be next year. We expect to release the Tax Outlook on December 11.


October 23, 2018

The Treasury Department released new regulations on Friday to implement a new program in last year’s tax reform law for “opportunity zones” in economically depressed areas around the country.  The regulations were written more broadly than anticipated and will reach some 8,700 “zones” in all 50 states.  The program will allow investors with capital gains to invest those gains in these zones to reduce taxes and avoid paying taxes on resulting gains if the investments are held long enough.  According to the Administration, the goal of the program is to create businesses and jobs in low income areas.

The Labor Department has proposed a new 401(k) rule to make it easier for small business to offer these retirement plans to their employees.  Under the proposed rule, companies and business associations could combine their efforts to offer 401(k)s.  This would expand the current guidelines for “multi-employer plans” by allowing companies in different types of business associations to join together to offer this benefit.   The Administration hopes that this effort will address a gap in coverage for 401(k) plans that currently exists, preventing millions of employees access to such savings plans for retirement.

A report worth passing along is that Treasury Secretary Steven Mnuchin told The New York Times that he is working on a plan with Ways and Means Chairman Kevin Brady that will be released “shortly.”  The plan reportedly is a 10 percent tax cut for the middle class according to sources and the effort was echoed by White House Economic Advisor, Larry Kudlow earlier today.  This effort was confirmed by Chairman Brady of the Ways and Means Committee this afternoon.  Brady said he will work with the Administration “over the coming weeks” to develop President Donald Trump’s proposal.


October 2, 2018

Tax Reform
Chairman Brady and Speaker Ryan acted on their promise to consider and pass a tax reform 2.0 bill.  The Ways and Means  Committee considered and approved legislation to permanently extend many of the individual tax reform cuts which were “sunsetted” in the last year’s Tax Cuts and Jobs Act, including the individual income tax brackets and the deduction for qualified business income of pass-through entities.

Last Thursday and Friday, the House considered and approved the following three bills that now make up the larger tax reform 2.0 proposal:

  • The Protecting Family and Small Business Tax Cuts of 2018 would also modify the breakpoints between the zero and 15-percent rate on long-term capital gains and qualified dividends; and modify the tax filing requirement for married taxpayers if the combined gross income is less than the standard deduction. The bill passed 220-191. The three Democrats supporting this measure include: Sinema (AZ), Rosen (NV), Lamb (PA)
  • The Family Savings Act of 2018 would make a number of changes to retirement savings. It makes changes to the tax treatment of multiple employer plans and pooled employer plans, and provides relief from the “one bad apple” rule for certain multiple employer plans among other provisions. The bill passed 240-177. The ten Democrats supporting this measure include: Gottheimer (NJ), Peterson (MN), Sanford Bishop (GA), Sinema (AZ), Lipinski (IL), Murphy (FL), Polis (CO), Correa (CA), Cuellar (TX), Lamb (PA)
  • And finally, the American Innovation Act of 2018 would consolidate rules for start-up expenditures and organizational expenditures. The bill passed 260-156. The 31 Democrats who supported this measure include:  Aguilar (TX), Bera (CA), Sanford Bishop (GA), Brownley (CA), Carbajal (CA), Cartwright (PA), Correa (CA), Crist (FL), Cuellar (TX), Delaney (MD), Mike Doyle (PA), Garamendi (CA), Gottheimer (NJ), Kuster (NH), Lamb (PA), Lawson (FL), Lipinski (IL), Loebsack (IA), Sean Maloney (NY), Murphy (FL), O’Halleran (AZ), O’Rourke (TX), Peterson (MN), Rice (NY), Rosen (NV), Ruiz (CA), Ryan (OH), Schneider (OR), Sinema (AZ), Suozzi (NY), and Titus (NV)
The future of these proposals is uncertain in the Senate. No hearings are scheduled yet in the Senate Finance Committee and it is not likely that Senate Majority Leader will put the measures on the Senate floor for consideration before the elections in November.  That adds this legislation to the long list bills for consideration in the lame duck session this year.
50% Business Meal Deduction
According to reports, the Treasury Department and the IRS are expected to offer guidance soon that the 50% deduction will be preserved under the new tax reform law.  There was and is serious concern that the changes made to entertainment expenses in the new tax law would further limit or eliminate the meal deduction all together.  As the corporate and pass-through tax rates were lowered, the legislation called for eliminating many entertainment deductions.  According to the WSJ, the 50% meal deduction for the cost of meals with clients will be preserved in most circumstances.
We will keep you informed.

 

 


 

September 13, 2018

Today, the House Ways and Means Committee reported out a series of three bills that they have referred to as “Tax Reform 2.0.”

House leadership has already indicated that these bills will be on the floor the last week in September.

As expected, much of the debate and discussion during the mark-up was a continuation of the talking points and/or complaints that were features of last year’s tax reform debate. Below, you will find a rundown of each piece of legislation, as well as relevant documents produced by JCT, and any amendments that were offered. It should be noted that outside of the adoption of Amendments in the Nature of a Substitute, no amendments were added to the legislation.

H.R. 6760, the Protecting Family and Small Business Tax Cuts of 2018: 

This bill would make permanent a number of provisions found in last year’s TCJA, among them the individual tax brackets and the deduction for qualified business income of passthrough entities. Additionally, the legislation modifies the breakpoints between the zero and 15-percent rate on long-term capital gains and qualified dividends; modifies Section 15 of TCJA; and modifies the tax filing requirement for married taxpayers if the combined gross income is less than the standard deduction.

JCT Description Estimated Revenue Effects
Estimated Distribution Effects Amendment in the Nature of a Substitute
Green Sheet
Amendments Offered to H.R. 6760
  • Pascrell Amendment: Eliminate limitations for the SALT deduction by increasing the corporate rate. Amendment Rejected on a vote of 14-21.
  • Neal Amendment: Return the top income tax rate to 39.6% in order to expand the EITC, adoption tax credit, and the child and dependent care credit. Amendment Rejected on a vote of 14-21.
  • Thompson Amendment: Expand disaster tax relief. Amendment Rejected on a vote of 14-21.
  • Sanchez Amendment: Make the 7.5% AGI threshold for the medical expense deduction permanent. Amendment Rejected on a vote of 14-21.
  • Doggett Amendment: Require the release of President Trump’s tax returns. The amendment was ruled not germane and was tabled on a vote of 21-15.
  • Larson Amendment: Prohibit any portion of the legislation from going into effect unless the chief actuaries of the Medicare and Social Security certify that the bill will not harm the financial position of either trust fund. Amendment Rejected on a vote of 14-21.
  • Doggett Amendment: Suspend the tax rate on repatriated income found in TCJA until JCT certifies that the average household has experienced a $4000 wage increase, as promised by the Trump Administration. Amendment was ruled not germane.

H.R. 6760 (as amended by the Amendment in the Nature of a Substitute) was reported favorably out of committee by a vote of 21 – 15.

H.R. 6757, the Family Savings Act of 2018

This bill would make a number of changes to retirement savings. It makes changes to the tax treatment of multiple employer plans and pooled employer plans, and provides relief from the “one bad apple” rule for certain multiple employer plans. It makes changes to  the rules for the nonelective contribution 401(k) safe harbor; repeals the maximum age for traditional IRA contributions; expands 529 plans; allows for penalty-free withdrawals from retirement plans for individuals in the case of the adoption or birth of a child; and many others.

JCT Description Estimated Revenue Effects
Amendment in the Nature of a Substitute Green Sheet
 
Amendments Offered to H.R. 6757
  • Kind Amendment: Expands the number of changes made to retirement savings, including modifying premiums for Cooperative and Small Employer Charity pension plans. Amendment Rejected on a vote of 14-21.
H.R. 6757 (as amended by the Amendment in the Nature of a Substitute) was reported favorably out of committee by a vote of 21 – 14.

H.R. 6756, the American Innovation Act of 2018

The legislation consolidates the rules for start-up expenditures and organizational expenditures. It amends sections 382 and 383 to allow the pre-change net operating loss carryforwards, net operating losses, general business credit carryforwards, and general business credits of a start-up business to be available in a post-change year without limitation. It also allows unused general business credits earned by a start-up business prior to an ownership change to be used in a post-change year without limitation.

JCT Description Estimated Revenue Effects
Amendment in the Nature of a Substitute Green Sheet

H.R. 6756 (as amended by the Amendment in the Nature of a Substitute) was reported favorably out of committee by a voice vote.


August 21, 2018

As we noted in our last edition of Tax Tuesday, on August 8 Treasury released one of its first big proposed rulemakings emanating from the Tax Cuts and Jobs Act. Below, we walk you through our initial assessment of that regulation.

As usual, please do not take this as tax advice for accounting purposes.

Proposed Regulations for the 20 Percent Income Deduction for Pass-Through Taxpayers.

These proposed regulations (REG-107892-18) extend from Section 199A in last year’s Tax Cuts and Jobs Act, PL 115-97 and describe how small businesses that pay taxes through their individual tax return will be able to deduct 20% of their income from their taxes.

All pass-through business owners making less than $157,000 for individuals and $315,000 for married couples of qualified income are eligible for this deduction.  Above these thresholds, the deduction is limited.

This tax break fully phases out for “service professionals” after they earn more than $207,500 for individuals and $415,000 for married couples. If taxpayers are not service professionals, then they must meet tests to take the deduction above these thresholds. That formula includes calculations of employee wages and capital invested in real estate.

These thresholds are indexed to inflation.

“Service Professionals” are defined as highly paid veterinarians, lobbyists, reality stars, health professionals, doctors, pharmacists and nurses, financial advisers, hedge funds, investment bankers, securities brokers, if they are over the income limits. This definition does not cover real estate agents and brokers, retail banking, and insurance businesses structured as pass-throughs.

There are numerous examples referenced throughout the proposed rule. Those examples are outlined an a table of contents beginning on page 104.

The National Federation of Independent Business (NFIB) and the U.S. Chamber of Commerce offered positive comments for the new proposed regulations.

Anti-Abuse Provisions. Multiple trusts are still eligible for this deduction as long as the beneficiaries of each trust are different.  However, businesses that seek to split up into multiple entities – called “Crack the Pack” – to take multiple deductions and lower their tax bills are not allowed.  Treasury will be issuing additional rules regarding the formation of cooperatives by highly paid professionals to take advantage of this deduction.

There are limitations to ensure that the 20% deduction is not taken against income that is taxed at preferential rates.  Here is an example in the proposed rule and edified in a recent Forbes article,

Ex. In 2018, A, a married taxpayer, has $100,000 of qualified business income, $100,000 of long-term capital gain, and $30,000 of deductions, resulting in taxable income of $170,000. A’s Section 199A deduction is limited to the lesser of $20,000 (20% of $100,000) or $14,000 (20% of $70,000, the excess of taxable income of $170,000 over net capital gain of $100,000).

Cost.  The JCT cost estimate of this provision is $415B over ten years.  However, a recent analysis of costs to comply with the 180+ pages of new proposed rules indicates that taxpayers could end up paying $1.3B which could add 25 million hours for the 10 million pass-through taxpayers.

Comment Period.  Written or electronic comments must be received by October 1, 2018. There is a public hearing scheduled for October 16, 2018, to hear public comment on the proposed rules.

Again, so we don’t get angry phone calls from your accountants, please don’t use our initial read of this regulation as legal tax/accounting advice.


August 8, 2018

Tariffs are taxes! As Chairman Hatch noted recently, “If the Administration continues forward with its misguided and reckless reliance on tariffs, I will work to advance trade legislation to curtail presidential trade authority.” And Senator Corker tweeted, “As the president taxes Americans with tariffs, he pushes away our allies and further strengthens Putin. It is time for Congress to step up and take back our authorities. We have legislation to do that. Let’s vote.” The Senate did vote, 88-11, on a non-binding resolution to check the President’s trade authority. Many committees on the Hill are conducting hearings about the effects of imposed and proposed tariffs on U.S. products. Ways and Means and Finance have held and scheduled numerous hearings to gather testimony from farmers and manufacturers about the U.S. tariffs imposed on imports and retaliatory tariffs placed on U.S. exports. Trade associations have organized “fly-ins” and “drive-ins” to draw attention to the harmful effects of the tariffs.

There are also several pieces of legislation floating around that would attempt to reign in the president’s power on tariffs, specifically as it relates to section 232. The bipartisan Trade Security Act of 2018 (S. 3329) would shift the national security determination from the jurisdiction of the Commerce Department to the Department of Defense. Sen. Corker’s legislation (S. 3013) and its House companion (H.R. 6337) introduced by Rep. Mike Gallagher (R-WI) would require Congressional approval before tariffs could be implemented.

Tax Cuts 2.0 Chairman Brady announced that the House will have a package to vote on in September. His two-page outline is here. He proposes to make many of the individual tax cuts permanent from the TCJA last year that are set to expire in 2025. Brady has announced that the Ways and Means Committee will have a package to vote on in September.

The proposal will make many of the individual and small business tax cuts permanent from the TCJA last year. It will promote family and retirement savings by creating Family Savings Plans, create new Universal Savings Accounts, create New Baby accounts and expand 529 accounts in current law. For new businesses, the proposal calls for greater write off of their initial start-up costs.

We do not believe that it will carry any technical corrections nor any tax extenders, but time will tell. If the legislation is before the House in the “Lame Duck” session of Congress after the elections, then the few number of vehicles may require combining some proposals.

SALT. We understand that House Republicans may also seek to make the controversial SALT cap permanent. Brady said making the new $10,000 cap permanent, as part of their so-called Tax Cuts 2.0, is a matter of “fairness.” “Half of the SALT deductions above that level go to homes of a million dollars or households of a million dollars or more,” he said. “So we think out of fairness, that cap ought to remain.” Treasury has made good on its stated intention to check the efforts in several states to bypass the state and local tax deduction limit of $10,000. It forwarded to OMB proposed regulations on August 2nd. We could see these proposed regulations within the next week.

TCJA Regs. OMB and its OIRA division are in review with many of the implementing regulations for the new tax reform law. On Friday, Treasury released proposed rules on the full expensing provision of the new tax law. This came a few days after Treasury and the IRS released instructions for repatriation payments from overseas profits. Today, Treasury released its proposed regulations on the new 20 percent income exemption/deduction for pass-through businesses, and specifically what types of income will qualify for the deduction and which industries could be left out of this proposal. We will have a more detailed explanation on this regulation in the coming days.

Gas Tax Increase? Chairman Bill Schuster released his infrastructure plan outline which calls for raising the gas tax by 15 cents a gallon before eliminating it entirely in 10 years in favor of a tax method using vehicle miles traveled (VMT). Many Members of Congress have been reluctant to support an increase in the gas tax.


July 24, 2018

Tax Cuts 2.0  Chairman Brady released his framework for Tax Reform 2.0 today.  You can review the two-page release here.  Brady has announced that the Ways and Means Committee will have a package to vote on in September.
We understand that the proposal will make many of the individual and small business tax cuts permanent from the TCJA last year.  It will promote family and retirement savings by creating Family Savings Plans, create new Universal Savings Accounts, create New Baby accounts and expand 529 accounts in current law. For new businesses, the proposal calls for greater write off of their initial start-up costs.
We do not believe that it will carry any technical corrections nor any tax extenders, but time will tell.  If the legislation is before the House in the “Lame Duck” session of Congress after the elections, then the few number of vehicles may require combining some proposals.  Stay tuned.

June 5, 2018

Below are insights that we have gleaned from recent conversations with senior tax writers.

New Tax Bill.  As we have noted, Chairman Brady is serious about a new tax bill this year. Brady has talked about making some of the new tax law provisions permanent for individual and pass-through tax payers that were left to expire in the ten-year window in the new tax law. Brady has also talked about tax law changes to savings and education tax planning for families and to assist U.S. competitiveness and technology through the tax code. The current thinking is that this House bill might not be acted on until the Lame Duck session of Congress this year.

Technical Corrections.  We expect that there will be a bill or approved list of truly technical corrections to act upon.  It is important to note that the designation of “technical” by several authorities is necessary for this bill to be considered. We believe that this measure could be considered as late as Lame Duck.

Tax Extenders. Brady’s desire to have all tax extenders put into three categories is well established. Those that should be permanent, those that need a glide path out of use, and those that should be eliminated.  This was also the strategy going into tax reform last year. But as we have seen this year, the W&M Committee has held a hearing on most all of the expired or expiring tax provisions that were not made permanent in the new tax law. Brady offered at that hearing in May that his new tax bill this year might be a vehicle for some of these tax provisions. Again, we believe this effort might also play out during a Lame Duck session.

Repatriation Tax. Revenues may be lower than estimates.  According to a review of Fortune 500 companies that reported their expected tax payments, the estimates would produce lower income to the Treasury than was expected by the JCT, which estimated some $340M in tax revenues over 10 years. The Fortune 500 estimated that they would owe only some $130 according to Bloomberg Tax, but the JCT notes that its estimate includes other estimates of stock buybacks and debt retirement that would be possible with repatriated monies.

Tax Simplification.  Not so fast. A new JCT review of tax expenditures in the new tax law suggest that the total number of salient tax provisions was left unchanged as a result of the new tax law. The JCT found that there were 220 tax breaks in current law. The new tax law added 17 and ended 9 tax expenditures.

SALT.  As some states attempt to provide their residents with additional deductions to make up for the new federal limit on state and local tax deductions ($10,000), the IRS has advised caution with such state attempts.  New Jersey, New York and California are attempting just such workarounds. The New York workaround could be more generous than the old federal deduction. The NJ State Attorney General even threatened to take the IRS to court to preserve their new law allowing tax payers to make deductible payments to non-profits in order to maintain as much of the former tax benefit of the unlimited deduction before the new tax law.

In a federal notice in late May, IRS/Treasury said their plan was to propose regulations to address these workarounds. They indicated that they will take a tough line on state laws aimed at allowing taxpayers to get around a new limit on deducting their state and local taxes from their federal income taxes.


May 1, 2018

New Tax Bill

Speaker Ryan and Chairman Brady have been clear that they would support another tax bill later this year that would carry several items.  First, it could make some of the individual tax cuts, the “temporary” provisions, of the new tax law permanent.  As you recall,  many of the provisions have a 5 or 8-year life and then expire in the 10-year window of the law.  Second, Brady has suggested that it could carry the technical corrections and improvements in retirement and education provisions.  Third, it could carry some tax extenders that were extended in legislation attached to the February CR, but only extend them through 2017.  Brady suggested this in his testimony before the committee at the hearing on tax extenders in March.

While most tax policymakers believe that more timely reviews of the tax law are appropriate, getting another bill cleared this year seems most difficult.  No new hearings have been scheduled to date on this matter.  We expect that getting 60 votes for the measure will be difficult in the Senate and some have speculated that Leader McConnell might not want to give some Democratic Senators, who are up for reelection in red states this year, the opportunity to vote for a tax package after opposing the original last December.

OMB Review of IRS Regulations

One other bit of controversy concerns whether OMB’s Office of Information and Regulatory Affairs will get to review and analyze on a cost-benefit basis some of the new tax law regulations.  Under an agreement in the early 1980’s, OMB does not get to review Treasury\IRS regulations.  As the CRS reports OMB and Treasury have now agreed on a process that will include OMB/OIRA review of certain tax regulations.  The two agencies signed a new memorandum of agreement (MOA), under which OIRA will review certain significant tax regulations under a specified time limit.  According to the MOA, OMB’s Office of Information and Regulatory Affairs will review the regulations if they could create an inconsistency with a regulatory action planned by another agency, raise “novel legal or policy issues,” or have an effect on the economy of at least $100 million.  This will add 45 days to some regulation review and generally not longer.  The MOA also allows for the potential for an expedited review for some proposed regulations.

State and Local Tax Deductions

New York became the first state to enact a workaround to the new federal limitation on state and local property tax deductions for individuals.  The scheme, which may have problems with federal tax authorities, allows contributions to two New York State charitable funds that support education and health care.  Governor Cuomo says that the new federal limitation could cost New Yorkers an estimate $14B.

Conformity with State Tax Laws

Most states will have issues conforming to the new federal tax law.  While most states already “conform” as a matter of state law, the new federal law would increase individual and corporate income taxes to states unless states seek to “decouple” from federal law to prevent these increases.  For example, proposals considered in the most recent New York State budget bill would have decoupled the New York State tax law from the new federal tax law with regard to 163(j) profit splitting and the new federal tax on corporate payments for intellectual property and intangible assets held in low tax countries.  These proposals did not survive in the final bill, but most states will have to manage these questions as they each consider conforming issues in their next legislative sessions.

IRS Regulations

The IRS has begun its roll-out of regulations on various work projects related to the new tax bill.  Treasury and the IRS have released guidance on the foreign withholding tax, the business interest deduction limit and the transition tax on foreign earnings repatriated to the U.S.

Section 965 in the new tax law will require companies to pay a one-time tax on income they’ve had overseas since 1986. It imposes a tax of 15.5 percent on cash or cash equivalents and a tax of 8 percent on “illiquid” assets.  The law deems the repatriation to have taken place before Jan. 1, 2018.

The recent IRS guidance pertains to when a company’s tax year begins.  For many companies, their tax years are not the calendar year.  If this has been a standard practice for those companies, then the Treasury will not consider this fiscal year schedule as tax avoidance.  The Treasury also  released an FAQ page about the transition tax for the new Section 965.


March 27, 2018

We understand that Ways and Means and Finance are keeping a list of technical changes to the new tax law that need correction.  Just when the committees will reveal these changes and how they plan to enact them are not known.  The Republican messaging on the new tax law continues to be loud and constant.  Chairmen Brady and Hatch may not want to hand the mic to Democrats to criticize the bill for errors and omissions just yet.  But we expect that by summer, the committees of  consideration will write legislation to make technical corrections to the new tax law.

As we review the landscape of consequences, intended and unintended, of the new tax law, the following list includes items where stakeholders seek change because of the consequence as well as interest groups that wish to make changes to the new law to mitigate the potential effects of the new tax law.  Not all of these changes are “technical” and may not receive much sympathy from Republican tax writers.  Democrats may also consider changes to the tax law if some of their concerns are acknowledged.

Regulations for the new law will come slowly this year from Treasury and the IRS.  The departure of Dana Trier as Deputy Assistant Secretary for Tax Policy at Treasury will be also be a factor in how quickly the Treasury and the IRS can propose new regulations.  The IRS did receive additional funding in the recently passed Omnibus package for FY 2018 to help implement the new tax law.  For example, some $320 million was added to the Service’s budget for upgrades to schedules, forms, and systems, while an additional $350 million was added for IRS customer support, fraud prevention, and cybersecurity.

15-year Depreciation for Restaurants 

A mistake acknowledged by tax writers is that the new tax law accidentally changed the 15-year depreciation for restaurants to 39 years.  Staff have admitted the mistake and intend to correct the drafting error in the technical corrections legislation.

20% Deduction for Pass-throughs 

Acting IRS Commissioner and Assistant Secretary for Tax Policy at the Treasury Department Dave Kautter said that new rules for directing pass-throughs and small businesses on this 20 percent deduction will not come out until late this summer or early fall.  Another area of concern will be how regulations are written to allow pass-throughs to use the state and local income tax deductions.  As noted later, there are legislative efforts already under way to eliminate the limitation on state and local tax deductions for individuals.

Charitable Deduction 

Although charitable donations were preserved as a Schedule A deduction in the new tax law, the non-profit world wanted a “universal, above the line” deduction before taxable income is determined.  This universal deduction was not included in the final bill.  Many charitable organizations believe that smaller donations will dry up as a result of the increase in the standard deduction, which was doubled in the new tax law.  Having a universal deduction would have allowed individuals giving smaller donations to deduct those contributions.

Advanced Refinancing Bonds

While the tax status of municipal bonds was preserved in the new tax law, advanced refinancing bonds lost their tax preferred status.  This is the most widely used bond by municipalities and legislation has already been introduced in Congress to restore these bonds’ tax status.  Rep. Hultgren (R-IL) has introduced H.R. 5004 to restore the tax status of advanced refinancing bonds. 

State and Local Tax Deduction  

The new tax law capped the state and local tax deduction at $10,000 for individuals.  Several states have already begun to design tax payment schemes to allow individuals to fully deduct their state and local taxes.  As noted, several of the states with the highest property taxes are leading the efforts including California, New Jersey and Connecticut among others.  Members of Congress from New York and New Jersey have already introduced legislation to reinstate the full deduction of state and local property taxes.  Representatives Lowey (D-NY), Lance (D-NJ) and Gottheimer (D-NJ) have introduced H.R. 4740, H.R. 4803, and H.R. 4789 respectively.

College Endowment Tax 

The new tax law places an excise tax of 1.4 percent on college endowments of private schools with at least 500 students and at least $500,000 per student in endowment.  Presidents of many universities wrote to congressional leaders even before the tax law was passed to express their opposition to the tax.

Business Meals and Entertainment  

The deduction for meals and entertainment related to business was already subject to a complicated analysis, but the new tax law may mean that the disallowances may apply to far greater amounts and types of business meals, according to Bloomberg Law.  The score for this enhanced disallowance will raise some $23.5 billion according to the JCT score of the final bill.  The new rules will apply to “entertainment, amusement and recreation” expenses and tighter rules on business meals.

Carried Interest

Regulations were issued on March 1st to implement the three-year holding period for capital gains treatment under the new tax law.  This included S corporations, according to a release quoting Secretary Mnuchin.  The regulations will be effective beginning January 1, 2018, according to Treasury.

Tax Extenders for 2018

As we reported last week, the House Ways and Means Committee held a hearing to consider many of the 26 tax extenders that expired in 2016 but were recently extended only through 2017.  During the hearing and in subsequent statements, Chairman Brady noted that he would like to consider another tax bill later this year.  While it is unclear how many issues this legislation might carry, he offered that it could be a vehicle for tax extenders that were considered to be most economically viable.  Many of these provisions were energy-related and there was bipartisan support for considering some of them further in the legislative process.

BEAT Tax, GILTI, and Interest Expensing Regulations

Last but not least are the regulations to be written to implement the Base Erosion and Anti-inversion Tax (BEAT), the Global Intangible Low-Taxed Income (GILTI) provision, and the interest expensing provisions of the new tax law.  These are among a host of issues in the new territorial tax structure of the new tax law that require interpretation and regulation.  Treasury and the IRS are already fielding questions and considerations by stakeholders on these items.


February 20, 2018

Treasury and the IRS recently updated their Priority Guidance Plan for 2018 to help inform taxpayers and practitioners about the priority and expectations for regulation and guidance by Treasury on the new tax law.  The Plan can be found here. The plan now contains nearly 30 regulatory projects to implement the 2017 tax law.  The government hopes to release guidance on all of these areas by June 30th according to the Treasury’s Office of Tax Legislative Counsel.  The IRS says that it does not have the resources to focus on too many other issues other than the new tax law.  There are some guidance projects that will continue, however.
For, example, Secretary Mnuchin noted that the Treasury would soon issue guidance for pass-through taxpayers and their use of the new 20 percent deduction from personal income taxes for qualifying business income.  Mnuchin noted that the Treasury will be publishing regulations soon that would prevent potential abuse of this new provision.  Other priority items include guidance curbing the interest expense deduction, and rules to prevent multinationals from moving intangible assets offshore.
Mnuchin also noted that guidance on carried interest income would be forthcoming to guide hedge fund managers who are compensated in this manner.
Treasury also issued guidance for companies that owe the repatriation tax on assets held offshore as a result of the new tax law.  Treasury refers to this tax as a “transition tax” and the guidance is provided to prevent changes to accounting periods of certain foreign corporations if those changes could result in avoiding, reducing or delaying the tax.
The President recently announced a desire to impose a reciprocal tax on imports from countries that have higher tariffs on U.S. imports than the US imposes on those countries’ exports to the United States.  While there are no details and the Treasury and the IRS declined to comment, this sounds like another attempt by the President to create leverage in trade negotiations.
The Treasury and the IRS have announced plans to eliminate 298 regulations they say are obsolete.  The proposal was issued last week (Reg-132197-17, RIN:1545-BO17).  President Trump had issued an executive order in 2017 to create a Treasury Regulatory Reform Task Force.  The task force was charged with reviewing and proposing elimination obsolete regulations.  There is a 90-day comment period to give taxpayers and practitioners the opportunity to comment on the proposal.  Comments are due by May 14.

February 8, 2018

The budget deal announced yesterday includes a one-year extension for most of the tax extenders that expired at the end of 2016 – with a few anomalies as the budget folks say.  Below is a list of the provisions with generally included all the energy tax extenders and the traditional tax extenders compiled by the Senate in S. 2256.  Some of the back story is that as the House and Senate made offers and counter offers, the result was a compromise to extend them for one year (2017) and the House agreed/announced that it would hold hearings to discuss the fate of these tax provisions later this year.

For your convenience the text of the budget agreement, our Prime Insight on what the bill contains, a JCT score of the tax provisions, and a description of each of the extenders are all linked here and can be found on the Tax Hub.  The 652 page bill contains over 50 tax provisions.  Extension of expiring business and energy provisions include:

  •  Extension of railroad track maintenance credit.
  • Extension of mine rescue team training credit.
  • Extension of election to expense mine safety equipment.
  • Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.
  • Extension of empowerment zone tax incentives.
  • Extension of credit for nonbusiness energy property.
  • Extension and modification of credit for residential energy property.
  • Extension of credit for new qualified fuel cell motor vehicles.
  • Extension of second generation biofuel producer credit.
  • Extension of biodiesel and renewable diesel incentives.
  • Extension of credits with respect to facilities producing energy from certain renewable resources.
  • Extension of credit for energy-efficient new homes.
  • Extension and phaseout of energy credit.
  • Extension of special allowance for second generation biofuel plant property.
  • Enhancement of the Carbon Dioxide Sequestration Credit

January 30, 2018

Tax writers are back in the saddle and the task at hand is a finding out how the new law will affect all taxpayers.  We thought we would make a short list of items being discussed with the understanding that there are more issues to be discovered.

Treasury announced that it will publish a work plan of issues that it will address this year on tax reform and regulation in the next several weeks.  Also, the Joint Committee on Taxation has suggested that it may also issue its “Blue Book” for 2017 rather than wait the customary two-year publication cycle at the end of each Congress.  The so-called “Blue Book” is a detailed technical explanation of what changes have been made to the tax code and would reflect the new tax law.  One other scheduling note, House and Senate Republicans will hold a retreat Jan. 31 – Feb. 2 to set priorities for 2018.  The Democrats will take their retreat February 8 and 9.

We understand that there will be another tax bill to correct some of the unintended consequences of the new tax law, which could be considered in the mid-year time frame. However, as technical corrections bills can only include provisions with a de minimis score, there is a question as to whether some corrections would require an additional piece of “clean up” legislation. Therefore, passage of a technical corrections and/or a “clean up” bill will depend on how expansive the fixes are, what they cost, and whether any Democrats can be persuaded to pass them given that none supported the bill at passage.

Two of the greatest changes in the new tax law are the new international provisions and the taxation of pass-through entities.

New Tax Law Issues

  • There are many questions already attending the new territorial tax system design in the new tax law.  First among them is how to pay the one-time repatriation tax.  Also there are questions about the anti-abuse tax (the BEAT) and the minimum tax on global intangible income.
  • Pass-Through Entities.  There are already questions about how to pass-throughs will be taxed.  One provision for farmers creates an incentive that may not have been intended for sales of grain to co-ops.
  • Tax extenders.  There are two packages drafted by the Senate.  One package consists of the energy provisions that have bipartisan support.  The other is a package of tax extenders that expired in 2016, S. 2256, which proposes a two year extension of these provisions.  It is unclear whether these packages will be able to be included in the CR/Omnibus bills coming in February.
  • Keeping the parallel track of Treasury’s on-going review of tax regulations (the two-for-one White House directive) while trying to issue new tax law guidance may compete for resources.  Secretary Mnuchin said in October that the IRS had already identified 200 regulations to repeal or change.  And then there is the question of providing more resources to the IRS to do its job.
  • One of the issues that Treasury will manage first are tax items that are withholding sensitive.  This of course includes wage and income taxes.
  •  Legislation has already been introduced to restore the full SALT deduction or modify it to allow for full equivalent deductions elsewhere.  No one is taking bets on the success of making a change like this so soon after the new tax law became effective.

December 19, 2017

Today the House and Senate passed H.R. 1, The Tax Cuts and Jobs Act.  The House vote was 227-203 and the Senate vote was 51-48. The Conference Report for H.R. 1, the Congressional Budget Office score, and final bill text  can be found here. All information on the House and Senate tax bills, including the Chairman’s Marks, Revenue Effects, and other policy papers can be found on the Prime Policy Group Tax Hub.

It has been 47 days since the House released its draft bill in October. This legislative effort set a land speed record for major tax legislation. No Democrat voted for the bill in the House or Senate.  Twelve Republicans did not support the bill in the House including House Appropriations Committee, Rep. Rodney Frelinghuysen (R-NJ).  The other Republicans were Reps. Dan Donovan (NY), Darrell Issa (CA), Walter Jones (NC), Dana Rohrabacher (CA), John Faso (NY), Chris Smith (NJ) Frank LoBiondo (NJ), Lee Zeldin (NY), Elise Stefanik (NY), Peter King (NY), and Leonard Lance (NJ).

During the Senate debate this evening, two provisions found to be in violation of the Senate rules were removed from the bill.  This will require the House to reconsider the bill tomorrow, Wednesday.  Its passage is expected again.

We anticipate that there will be a technical corrections bill in the late spring next year, and perhaps another tax bill to amend or correct larger than technical issues.

Here are highlights of the bill:

Business

  • Corporate rate is permanently lowered to 21% beginning January 1, 2018.
  • Generally achieves a “territorial” tax system from a worldwide tax system
  • Repeals Corporate AMT
  • Creates a special 20% deduction for pass-through taxpayers on the first $315,000 of joint income.  Also a 20% deduction on income at higher income levels.  Expiring in 2025
  • 100% expensing is allowed through January 1, 2023
  • Section 179 small business expensing is increased to $1,000,000 with a phase-out threshold at $2,500,000
  • Interest deductions will be limited to 30% of businesses adjustable taxable income (defined as EBITDA for first four years and EBIT after that).  There is an exemption for businesses with annual gross business receipts of $25M and an exemption for businesses with floor plan financing interest
  • Preserves the R&D tax credit
  • No change to Master Limited Partnerships
  • No change to the LIFO method of accounting
  • Preserves the Earned Income Tax Credit
  • No change in Advertising Deductibility
  • On the international side, the legislation sets a repatriation tax rate on earnings and profits comprising liquid assets at 15.5% and illiquid assets at 8%
  • Base Erosion provision creates a BEAT (Base Erosion Anti-inversion Tax) that follows the Senate construct and not the House’s Excise Tax.  The BEAT Imposes a tax on modified taxable income and does not include the cost of goods sold in its calculation. The BEAT will be 5 percent for 2018, 10 percent for 2019-2025 and 12.5 percent starting in 2026.  As we understand, the provision PTC and ITC benefits are retained.  Also the provision will not curtail the use of renewable-energy credits for banks and other financial institutions
  • The Base Erosion provision limiting interest deductions, 163(n), for taxpayers that are members of a worldwide group, was not included in the final bill

Individual

  • Individual tax rates will be 0%, 10%, 12%, 22%, 24%, 32%, 35% and 37%. Expiring in 2025
  • Modifies AMT for higher income individuals by increasing the exemption amount
  • Doubles the exemptions for the Estate Tax but is not repealed
  • Preserves the Deduction for Medical Expenses exceeding 7.5% for two years and rising to 10% beginning in 2020
  • Keeps the Home Mortgage Interest Deduction for homeowners up to $750,000 of indebtedness for new mortgages.
  • The Child Tax Credit increases to $2,000 from $1,000 per child under 17.  And the credit is made refundable up to $1,400
  • The bill preserves the Child and Dependent Care Tax Credit and the Adoption Tax Credit
  • Almost doubles the standard deduction from $6,350/$12,000 to $12,700/ $24,000 for individuals/married filing jointly
  • SALT deduction for state and local property and income taxes will be capped at $10,000
  • Preserves the Charitable Deductions
  • Preserves student loan interest deductions

Other

  • Private Activity Bonds are preserved
  • The New Market Tax Credit is preserved
  • Rehabilitation Credits are preserved as modified by the Senate
  • Advanced Refinancing bonds are effectively repealed
  • The Investing in Opportunity Act, which connects private capital with underserved communities was included in the final bill
  • Repeals the Individual Mandate from the 2010 Affordable Care Act

We will not publish a Tax Tuesday for a least the next two weeks.  We would like to wish everyone a very Merry Christmas and a Happy New Year.  

 


December 12, 2017

The House and Senate tax conferees will meet on Wednesday at 2PM for perhaps their only public meeting of the conference.  Tax writers will need to finalize their conference report in time to give the Senate parliamentarian time to ensure all the provisions comply with Senate budget reconciliation rules.  We hear if everything goes according to plan, the Senate could vote on the final tax plan next Monday or Tuesday, and the House would then vote Tuesday or Wednesday. The House-Senate conference report is scheduled to be filed this Friday.

One note on the procedural advantage to using a conference report rather than ‘ping ponging’ amendments between the two Houses. The message route with its amendments would be amendable in the Senate whereas the conference report is not amendable.  So using the conference report track eliminates the need to deal with a possible 2nd vote-a-rama.

So you have the complete list, the House appointed 14 conferees – nine Republicans and five Democrats.  They are: House Ways and Means Chairman Kevin Brady (R-TX), who will serve as the conference chairman, four Members of his committee, Devin Nunes (R-CA), Peter Roskam (R-IL), House Budget Chairman Diane Black (R-TN) and Kristi Noem (R- SD). Other Members will be Rob Bishop (R-UT) and Don Young (R-AK), both members of the Natural Resources Committee, and Greg Walden (R-OR) and John Shimkus (R-IL), who serve on the Energy and Commerce Committee.  House Minority Leader Nancy Pelosi (Calif.) named the five Democratic members. They are: Richard Neal (D-MA), Sander Levin (D-MI) and Lloyd Doggett (D-TX), all on Ways and Means; Raul Grijalva (D-AZ) of the Natural Resources Committee; and Kathy Castor (D-FL) from Energy and Commerce.

The Senate appointed 15 conferees – eight Republicans and seven Democrats. They are: Chairman Orrin Hatch (R-UT) of the Senate Finance Committee, four Senators from his committee, John Cornyn (R-TX), John Thune (R-SD), Rob Portman (R-OH), Tim Scott (R-SC), and Pat Toomey (R-PA).  Chairman Mike Enzi (R-WY) of the Senate Budget Committee and Chairwoman Lisa Murkowski (R-AK) of the Senate Energy and Natural Resources Committee are also members.  On the Democratic side from the Senate Finance Committee are Ranking Member Ron Wyden (D-OR) of Oregon, Debbie Stabenow (D-MI), Robert Menendez (D-NJ) and Tom Carper (D-DE).  Ranking Member from the Senate Budget Committee, Bernard Sanders (I-VT) and Patty Murray (D-WA) will join Ranking Member Maria Cantwell (D-WA) of the Senate Energy and Natural Resources Committee (she is also a member of the Finance Committee).

While these are the official members of the conference committee, we expect that the Republican leadership in Congress will also have prominent negotiation positions.

Republican leaders remain committed to completing their work before the end of the year. While the House and Senate versions share a great many similarities, there are significant differences in a number of areas including restoration of the AMT in the Senate bill, the new international tax system regimes, when the 20% corporate rate will be effective, the tax rate for pass-throughs, and whether to repeal some popular individual provisions. We think it likely that Congress will complete its work before the beginning of 2018.

 


December 5, 2017

The House and Senate have begun the process of conferencing their versions of H.R 1, the Tax Cuts and Jobs Act. The House officially appointed conferees yesterday- nine Republicans and five Democrats.  They are House Ways and Means Chairman Kevin Brady (R-TX), who will serve as the conference chairman, four Members of his committee, Devin Nunes (R-CA), Peter Roskam (R-IL), House Budget Chairman Diane Black (R-TN) and Kristi Noem (R- SD). Other Members will be Rob Bishop (R-UT) and Don Young (R-AK), both members of the Natural Resources Committee, and Greg Walden (R-OR) and John Shimkus (R-IL), who serve on the Energy and Commerce Committee.  House Minority Leader Nancy Pelosi (Calif.) named the five Democratic members. They are: Richard Neal (D-MA), Sander Levin (D-MI) and Lloyd Doggett (D-TX), all on Ways and Means; Raul Grijalva (D-AZ) of the Natural Resources Committee; and Kathy Castor (D-FL) from Energy and Commerce.

We expect that the Senate will name conferees this week. Whether there is a formal or informal conference is an important distinction. A formal conference report would not be subject to amendment when the bill is finally considered on the House and Senate floors.  Also, the subject matter would be restricted to provisions considered within “the scope of the differences”  (the Congressional Research service put together an excellent piece entitled Senate Rules Restricting the Content of Conference Reports).

Republican leaders remain committed to completing their work before the end of the year. However, while the House and Senate versions share a great many similarities, there are significant differences in a number of areas including the new international tax system, when the 20% corporate rate will be effective, the tax rate for pass-throughs, and whether to repeal some popular individual provisions. We think it likely that Congress will complete its work before the beginning of 2018.


December 2, 2017

The Senate passed its tax reform bill this evening on a vote of 51-49.  Senator Corker (R-TN) joined the Democrats in voting against the bill.  The final managers amendment by Leader McConnell and Chairman Hatch contained enough “sweetners” to assure passage of the bill without any Democratic votes.  The bill will not contain a “tax trigger” proposal sought by deficit hawks.  The House and Senate bills now proceed to a formal or informal conference.  It is the hope of the Republican leadership that the final bill can be approved by Congress before the holiday recess.
The McConnell/Hatch Amendment made several changes to the bill including:
  • Increase to 23% of the income exclusion for pass-through business  income (it was 17.4% in the original Senate bill);
  • Provide a $10,000 deduction for property taxes (matches the House provision);
  • Extend the phase-down of bonus depreciation after year 2023;
  • Lower the threshold for medical expense deductions from 10 percent to 7.5 percent for two years;
  • Make several changes to interest limitation provision that allow for full deductibility for motor vehicle floor plan financing interest costs and to worldwide interest calculations.
The new payfors for these provisions include:
  • Retention of the corporate Alternative Minimum Tax (AMT) and increase the individual AMT exemption amounts and phase-out threshold in lieu of full repeal;
  • Increase the repatriation tax rates for “liquid” and “illiquid” assests to 7.5% and 14.5% respectively (matching the House provision);
A Fun Byrd Cartoon from the Leader’s Office

Several provisions fell out due to the Byrd Rule:

  • The provision to allow parents to establish 529 accounts for unborn children
  • The provision to provide assistance to provide flood victims in Louisiana
  • The provision that would require some foreign airlines (from countries that don’t have tax treaties with the U.S.) to pay U.S. corporate taxes on part of their profits

Friday evening the Democrats offer several amendments that were all defeated on party-line votes.  The amendments included

  • Sanders Amendment #1720– Budget Point of Order on Social Security, Medicare, and Medicaid. The measure to table the point of order failed 46-54.
  • Brown/Bennet Amendment #1854– Changes to the child tax credit. A budget point of order was waived, and the measure to table the point of order failed 48-52.
  • Rubio/Lee Amendment #1850– Increase refundability of the child tax credit. A budget point of order was waived, and the measure to table the point of order failed 29-71
  • Cruz Amendment #1852– Allow limited 529 accounts to be used for elementary and secondary education, including homeschool. It passed 51-50.
  • Kaine Amendment #1846–  Restores AMT to current law, raises corporate tax to 25%, and discontinues tax break on high incomes. A budget point of order was waived, and the measure to table the point of order failed 34-65.
  • Cantwell Amendment #1717– Strikes the provision on Arctic digging. A budget point of order was waived, and the measure to table the point of order failed 48-52
  • Merkley Amendment #1856– Strikes the carve-out for Hillsdale College in the college endowment tax. The amendment passed 52-48.

November 28, 2017

“It’s going to be harrowing and could be some near-death moments,” a senior administration official said to reporters. “But I think we get it done.”

The Senate Budget Committee today reported out the two reconciliation items sent to it per the Budget Resolution’s instructions. These are the Energy Committee bill which meets its instructions of raising $1 billion over the next 10 years by opening up a portion of the Alaska National Wildlife Refuge (ANWR) to oil exploration and drilling and the Senate Finance Committee’s piece which also meets its ‘Get Out of Jail Card’ instructions to add up to $1.5 trillion to the deficit over the same 10 years.

When more than one Senate committee has reconciliation instructions, they report their respective bills to the Senate Budget Committee, which is not allowed to amend their work product if the committee meets their instruction. Since this is a tax measure, the House bill, HR 1, needs to be the ultimate vehicle sent to the President so the Senate will offer its Energy/Finance committee package as an amendment to the House bill. Senator McConnell last night began the Rule 14 process of placing the House bill on the Senate Legislative Calendar, rather than having it referred to the Finance Committee, which would allow him on Wednesday to move to proceed to the bill and begin its consideration.

Since this is a Budget Reconciliation bill, it is privileged, and the motion to proceed is non-debatable and only requires a majority vote. Once the bill is pending, Senator McConnell can be expected to offer the Senate package as a substitute for the House language.

If they begin consideration of the House bill, HR 1, on Wednesday then it will have a time limit for debate of 20 hours, equally divided between the two leaders, or their designees. Within that timeframe amendments also have time limits of 2 hours on a first degree amendment and 1 hour on a 2nd degree amendment. However,  during the pendency of any amendment, the manager can yield time from his bill time to other senators for their debate. As a result, sometimes only a few amendments sometimes are debated and voted on during the statutory 20 hour debate cap. The Budget Act also requires that the amendments be germane to the Energy/Finance Committees work product.

At the end of the debate time, senators can offer amendments that are voted on without debate, in return for reducing the vote time down to 10 minutes from the standard 15 they will allow the proponent 30 seconds and the opponent 30 seconds to ‘discuss’ the amendment. They average 3 votes per hour during this non-stop vote period referred to as the “vote-a-rama.” Since it’s a Republican initiative, most of the amendments will be from the Democratic side of the aisle. If necessary, Leader McConnell can continue to negotiate with his members right up to the end of the vote-a-rama and, if he puts together some ‘tweaks’ to get his votes, can then he can offer that amendment to the substitute, get it adopted and then proceed, if there are no further amendments, to vote on the substitute and then vote on final passage of the House bill, as amended, and send it back to the House.

They can resolve their differences in one of two ways- through a conference, which produces an ‘unamendable’ conference report, or through a further amendment process, called a ‘message between Houses’.  In each case there is a time limitation of 10 hours for debate, equally divided between the two leaders, but the message route is open to amendment  and as such a new vote-a-rama’ would be possible which makes the conference route far more preferable.

If at the end of the process Leader McConnell still finds a majority elusive, he can hit the ‘pause button’ before they vote on final passage. He can move to consider other matters like a nomination or another piece of legislation leaving the Reconciliation Tax bill in suspension or status quo. If, at a later time, he has put together a winning package of ‘tweaks,’ he can return to the measure and offer his changes, adopt them, and then perhaps the vote-a-rama resumes, but in any case he will then be on track to a successful vote on final passage of the bill.

It appears that the Senate has only enough energy at this time to focus on getting its Senate bill passed, and not any resources to “pre-conference” a final bill with the House.  If that is the case, then some form of a conference will be needed with the House to create a final bill.  There may not be enough time to conduct a formal conference with the FY-2018 budget bearing down upon us next week.


November 21, 2017

The Senate Finance Committee concluded work on its version of the tax reform bill last week.  It must be sent through the Senate Budget Committee where it will be combined with legislation from the Energy and Natural Resources Committee authorizing limited energy exploration in the Artic National Wildlife Refuge (ANWR).  Then to the Senate floor.  We believe that these activities are ongoing.  We expect the Senate will have the bill on the floor for consideration by Wednesday or Thursday of next week where it will have only 20 hours of debate by rule.  The Senate’s legislative text was released late last night.  That text, the modified Section-by-Section, and modified JCT score are available here.  All other information on the House and Senate bills, including the Manager’s Amendments, Modified Marks, original and modified JCT Descriptions,  Revenue Effects, and other policy papers can be found on the Prime Policy Group Tax Hub.

There is still much to consider.  Several Senators have expressed concerns with the current bill.  These include Sen. Collins (R-ME), Sen Murkowski (F-AK), Sen. Flake (R-AZ), Sen. McCain (R-AZ), Sen. Corker (R-TN) and Sen. Johnson (R-WI). The issues raised include deficit spending, small business taxes, and defense spending.

Also the bill, as currently drafted, will trigger budget sequestration under PAY-GO budget rules which will trigger automatic spending cuts to many federal programs.  Language could possibly be included in this bill or a future bill to waive off sequestration but that may require 60 votes in the Senate.  So stay tuned.

Finally, we want to wish everyone a Happy Thanksgiving.


November 15, 2017- Day 3 of the Senate Finance Committee Mark-Up

The Senate Finance Committee continued work on its version of the tax reform bill today. All information, including the Chairman’s Modified Mark, original JCT Description of the Chairman’s Mark (in lieu of bill text), Revenue Effects, and other policy papers can be found on the Prime Policy Group Tax Hub.
Late last night, Chairman Hatch introduced his Modified Chairman’s Mark. It contained at least 30 amendments (in part or in full) that had been previously filed. Most were Republican amendments; however, four were sponsored by Democratic Members.
Today, Committee Members met for approximately 9 hours and offered 15 amendments.
  • Wyden (D-OR) Amendment #1 to require JCT analysis be available 72 hours before the Committee votes on whether to report the bill.
  • Wyden (D-OR) Amendment #2 to require that the Committee hold public hearings on the impact of the bill.
  • Wyden (D-OR) Amendment #18 to prohibit the bill from going into effect until JCT and CBO says that it will not effect the health care coverage, insurance premiums, or tax liability for Americans making under $250,000
  • Bennet (D-CO)  Amendment #6 to prohibit costs to Medicare or Medicaid
  • Casey (D-PA)  Amendment #18 to require JCT certify that the bill does not increase health insurance premiums for the diasbled
  • Stabenow (D-MI) Amendment to require that JCT and CBO certify the economic effects of the tax law in the future
  • Carper (D-DE) Amendment #17 to establish a stability fund for high-risk pools for 2018-2020.
  • Cardin (D-MD) Amendment #13 to prohibit the bill from taking effect if CBO cannot guarantee that the number of people with health insurance will not increase
  • Wyden (D-OR) Amendment #13 to strike the bill text and replace it with the text of H.R. 1.
  • Bennet (D-CO) Amendment #15 to prohibit the bill from taking effect if rural areas see health insurance premiums increase.
  • Carper (D-DE) Amendment #12 to prohibit the bill from taking effect if veterans or their families see health insurance premiums increase.
  • Brown (D-OH) Amendment #24 to preserve the current tax law exclusion for company’s moving expenses.
  • Brown (D-OH) Amendment #5 to create a tax credit for employers of 10% for the first $15,000 paid to an employee (his Patriot Employers bill).
  • Brown (D-OH) Amendment #11 to create a fully refundable credit for medical expenses above 5% of gross income.
All amendments were defeated on party line votes except for the 0-26 vote on the text of H.R. 1 where Republicans joined Democrats to support instead the Senate bill language.
Finance will continue its amendment work Thursday at 10AM.  Chairman Hatch expressed his hope that the Committee would finish its work Thursday.
You know that you are working in the big time when a stock fund is created for tax reform.  EventShares is confident enough tax reform will pass that it launched an actively managed ETF called Eventshares U.S. Tax Reform Fund (ticker TAXR) CIO Ben Phillips says in phone interview.  “We think something will get done.”  He sees a finished product in the March time frame.  And if efforts fail in next few months, he believes legislators will keep trying.
We will keep you informed.

November 14, 2017- Day 2 of the Senate Finance Committee Mark-Up

The Senate Finance Committee continued work on its version of the tax reform plan this morning. All information, including the JCT Description of the Chairman’s Mark (in lieu of bill text), Revenue Effects, and other policy papers can be found on the Prime Policy Group Tax Hub.

Today, Committee Members met for approximately 6 hours and walked through the JCT Description of the Chairman’s Mark. Tom Barthold, Staff Director of the JCT, was joined at the witness table by staff members from the Majority and Minority, as well as the U.S. Treasury Department.

The parties hold their policy luncheons on Tuesdays. After returning from the lunches, Republicans announced that the Senate bill would now repeal the individual mandate in the Affordable Care Act. This created mayhem, and the Chairman recessed Committee activity until 9am Wednesday. We expect the Chairman’s Amendment to be released before the Committee continues its work tomorrow.

We will keep you informed.


November 13, 2017- Day 1 of the Senate Finance Committee Mark-Up

The Senate Finance Committee started work on its tax reform plan this afternoon. All information, including the Bill Text, Section-By-Section Analysis, and other policy papers can be found on the Prime Policy Group Tax Hub.

The Committee’s activities today were comprised completely of opening statements. They will continue their work at 9am on Tuesday morning, and the mark-up is expected to continue for several days.

It should be noted that 355 amendments to the Chairman’s mark have been filed, with 144 of them coming from Republican members of the Committee.. This is a notable departure from the House Ways and Means Committee where Republican members outside of Chairman Brady offered zero amendments.

Though there had been some suggestion that the Senate would put their tax plan on the floor next week, Majority Leader McConnell said today that it would be debated the week after Thanksgiving.

We will keep you updated throughout the week as their work continues.


November 9, 2017- Senate Tax Bill Analysis

After closer examination of the bill, below are some of the more significant provisions. Note that the explanations are pulled from the JCT Description of the Chairman’s Mark, as there is no legislative text at this time.  We have provided you with the description of the Senate’s proposal but have not provided the recitation of current law and considerations. If you would like this additional information, please use the section number provided and the link below.

Complete coverage can be found on the  Prime Policy Group Tax Hub.

Advertising Deductibility: No change from current law

AMT: The Senate bill repeals individual and corporate AMT.

Base Erosion (Anti-Inversion Provisions): Title IV- International Tax Reform, Subtitle D- Prevention of Base Erosion – The Senate proposal constructs significant international tax reform and base erosion provisions. For details, please email Keith.

Cost Recovery: Title III- Business Tax Reform, Subtitle C- Cost Recovery

  1. Limitation on deduction for interest
  • Description of Proposal: In the case of any taxpayer for any taxable year, the deduction for business interest is limited to the sum of business interest income plus 30 percent of the adjusted taxable income of the taxpayer for the taxable year. The amount of any interest not allowed as a deduction for any taxable year may be carried forward indefinitely. The limitation applies at the taxpayer level. In the case of a group of affiliated corporations that file a consolidated return, it applies at the consolidated tax return filing level.

Business interest means any interest paid or accrued on indebtedness properly allocable to a trade or business. Any amount treated as interest for purposes of the Internal Revenue Code is interest for purposes of the proposal. Business interest income means the amount of interest includible in the gross income of the taxpayer for the taxable year which is properly allocable to a trade or business. Business interest does not include investment interest, and business interest income does not include investment income, within the meaning of section 163(d).

By including business interest income in the limitation, the rule operates to limit the deduction for net interest expense to 30 percent of adjusted taxable income. That is, a deduction for business interest is permitted to the full extent of business interest income. To the extent that business interest exceeds business interest income, the deduction for the net interest expense is limited to 30 percent of adjusted taxable income.

Adjusted taxable income means the taxable income of the taxpayer computed without regard to: (1) any item of income, gain, deduction, or loss which is not properly allocable to a trade or business; (2) any business interest or business interest income; (3) the 17.4 percent deduction for certain pass-through income;192 and (4) the amount of any net operating loss deduction. The Secretary may provide other adjustments to the computation of adjusted taxable income.

  1. Temporary 100-percent expensing for certain business assets
  • Description of Proposal: The proposal extends and modifies the additional first-year depreciation deduction through 2022 (through 2023 for longer production period property and certain aircraft). The 50-percent allowance is increased to 100 percent for property placed in service after September 27,
    2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft), as well as for specified plants planted or grafted after September 27, 2017, and before January 1, 2023. Thus, the proposal repeals the phase-down of the additional first-year depreciation deduction for property placed in service after December 31, 2017, and for specified plants planted or grafted after such date. Similarly, the proposal maintains the section 280F increase amount of $8,000 for passenger automobiles placed in service after December 31, 2017.

The proposal excludes from the definition of qualified property certain public utility property, i.e., property used predominantly in the trade or business of the furnishing or sale of (1) electrical energy, water, or sewage disposal services, (2) gas or steam through a local distribution system, or (3) transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof.

 

As a conforming amendment to the repeal of AMT, the proposal repeals the election to accelerate AMT credits in lieu of bonus depreciation.

 

Child and Dependent Tax Credit: Title I- Tax Reform for Individuals, Subtitle C- Reform of the Child Tax Credit

  • Description of Proposal: The proposal increases the child tax credit to $1,650 per qualifying child. Additionally, the age limit for a qualifying child is increased by one year, such that a taxpayer may claim the credit with respect to any qualifying child under the age of 18.The credit is further modified to provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children. The proposal generally retains the present-law definition of dependent. In 2018, the threshold at which the credit begins to phase out is increased to $1,000,000 for married taxpayers filing a joint return and $500,000 in the case of all other taxpayers. These amounts are not indexed for inflation. The proposal lower the earned income threshold for the refundable child tax credit to $2,500. As under present law, the maximum amount refundable may not exceed $1,000 per qualifying child. Under the proposal, this $1,000 threshold is indexed for inflation with a base year of 2017, rounding up to the nearest $100 (such that the threshold is $1,100 in 2018). In order to receive the refundable portion of the child tax credit, a taxpayer must include a Social Security number for each qualifying child for whom the credit is claimed on the tax return.

Estate Tax: Title I- Tax Reform for Individuals, Subtitle E- Increase in Estate and Gift Tax Exemption

  • Description of Proposal: The proposal doubles the estate and gift tax exemption amount. This is accomplished by increasing the basic exclusion amount provided in section 2010(c)(3) of the Code from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011.

Last-In-First-Out (LIFO) Accounting Method: There is a clarification that if the taxpayer meets the $15 million gross receipts test they are not required to account for inventories.

Minimum Foreign Earnings Tax Rate: There appears to be no new foreign earnings minimum tax in the Senate proposal. The Senate proposal establishes a participation exemption system for the taxation of foreign income. See Title IV- International Tax Reform.

Repatriation Tax Rates: Title IV- International Tax Reform, Subtitle A- Establishment of Participation Exemption System for Taxation of Foreign Income

  1. Treatment of deferred foreign income upon transition to participation exemption system of taxation
  • Description of Proposal: The proposal generally requires that, for the last taxable year beginning before January 1, 2018, any U.S. shareholder of a specified foreign corporation must include in income its pro rata share of the undistributed, non-previously-taxed post-1986 foreign earnings of the corporation (“mandatory inclusion”). For purposes of this proposal, a specified foreign corporation is any foreign corporation that has at least one U.S. shareholder. It does not include PFICs that are not also CFCs. A portion of that pro rata share of foreign earnings is deductible; the amount of the deductible portion depends upon whether the deferred earnings are held in cash or other assets. The deduction results in a reduced rate of tax with respect to income from the required inclusion of pre-effective date earnings. A corresponding portion of the credit for foreign taxes is disallowed, thus limiting the credit to the taxable portion of the included income. The separate foreign tax credit limitation rules of present law section 904 apply, with coordinating rules. The increased tax liability generally may be paid over an eight-year period.

Rum Tax Cover Over: Senate has no provision.

State And Local Taxes (SALT): Senate fully repeals these provisions.

Territorial System Design: Title IV- International Tax Reform –The Senate proposal establishes a participation exemption system for the taxation of foreign income. For details, please email Keith.


November 9- The Senate Bill Arrives!

The Senate Finance Committee Tax Plan is here! All information, including the Chairman’s Mark, Revenue Effects, and other policy papers can be found on the Prime Policy Group Tax Hub.

We will provide a more detailed analysis after we review the 250+ pages of the Chairman’s Mark. In the interim, here is what we know:

  • Corporate rate is permanently lowered to 20% beginning January 1, 2019.
  • Individual tax rates 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%.
  • The Senate would not create a special, lower top rate for pass-throughs. Instead, the Senate would create a 17.4% deduction for pass-through owners of all income levels.
  • 100% expensing through January 1, 2023
  • Preserves the R&D tax credit.
  • Limit net interest deductions to 30% of adjusted taxable income
  • The repatriation tax rate on earnings and profits comprising liquid assets is 10%, while illiquid assets will be taxed at 5%.
  • Repeals the Corporate and Individual AMT.
  • Doubles the exemptions for the Estate Tax.
  • Preserves the Deduction for Medical Expenses.
  • Keeps the Home Mortgage Interest Deduction at $1 million.
  • The child tax credit would be increased to $1,650 from $1,000 per child under 17.  The bill preserves the Child and Dependent Care Tax Credit and the Adoption Tax Credit.
  • Repeals the State and Local Tax deduction entirely.
  • Almost doubles the standard deduction from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples.
  • Preserves the Earned Income Tax Credits

NOV. 13: Hatch has said the Committee will begin to mark up the tax legislation Monday, allowing members of that committee a chance to offer amendments that could alter the bill’s language before it’s sent to full Senate for a vote. The markup will likely run for several days next week


November 9, 2017- Final day of the Ways and Means Mark-up

The House Ways and Means mark-up on tax reform was completed today after four days of markup.  All information, including the Bill Text, Section-By-Section Analysis, and other policy papers can be found on the Prime Policy Group Tax Hub.

After nearly 40 hours of debate starting on Monday, the Ways and Means Committee considered 6 additional amendments including a manager’s amendment by Chairman Brady.  The Brady amendment made substantive changes to the bill.  Here are highlights:

  • A new 9 percent tax rate for all businesses on the first $75,000 of net business income of an active owner or shareholder earning less than $150,000 in taxable income through a pass-through business.  This rate is phased in over 5 years.
  • Restores the adoption tax credit
  • Provides an exclusion from the limitation on deductibility of net business interest for taxpayers with “floor plan financing indebtedness.”
  • Restores the current-law tax treatment of nonqualified deferred compensation.
  • Increases the tax rate on deemed repatriation earnings of 7% (from 5%) on illiquid assets and 14% (from 12%) on liquid assets.
  • Modifies the base erosion rules by eliminating the mark-up on deemed expenses and expands the use of foreign tax credits.
  • Restores the deduction for moving expenses for active military personnel

If you want to review what the think tanks think about the House tax reform proposal, we have provided a section on the Prime Policy Tax Hub.  You can review analysis by several policy research organizations.  We will keep this page updated for analysis on the Senate proposal when we receive it.

All the amendments were defeated along party line votes except for the Brady amendment which was passed on a party line vote.

The amendments are listed below.

  • Blumenauer amendment to restore the phase-out of the wind energy production tax credit
  • Sewell amendment would restore the historic tax credit for small projects
  • Chu amendment to restore the estate and gift transfer taxes
  • Kind amendment to create a tax deduction for domestic production in excess of current Section 199
  • Pascrell amendment to require the Treasury secretary to provide President Trump’s income and business tax returns to the Ways and Means committee

Senate Finance Chairman Orrin Hatch has released his conceptual draft of a tax reform bill.  We understand that amendments are due by Sunday and the Finance Committee will begin its markup next Monday.  The Senate’s plan is likely to take the form of a conceptual draft that will not contain legislative language.


November 8, 2017- Day 3 of the Ways and Means Mark-up

The House Ways and Means mark-up on tax reform continued for its third day today! All information, including the Bill Text, Section-By-Section Analysis, and other policy papers can be found on the Prime Policy Group Tax Hub.

After 10 hours of debate on Monday, 9 hours on Tuesday, the Ways and Means Committee deliberated for another 9 1/2 hours today and considered 14 amendments.  They are listed below.

  • Larson (D-CT) amendment to restore the medical expense deduction
  • Lewis (D-GA) amendment to restore the “Johnson Amendment,” which prohibits political statements by churches.
  • Doggett (D-TX) amendment to restore student loan interest deduction, restore the teacher expense deduction, employer education expense deduction, and expand the American Opportunity Tax Credit.
  • Thompson (D-CA) amendment would extend mortgage debt forgiveness and repeal the capital gains limitations in the bill
  • Chu (D-CA) amendment would expand the Earned Income Tax Credit to childless workers
  • DelBene (D-WA) amendment would restore provisions for private activity bonds and increase the low income housing tax credits by 50 percent.
  • Pascrell (D-NJ) amendment would add the “Give a Hand Act” to the tax bill.  His amendment was ruled not germane, and Pascrell appealed the ruling of the chair, which was defeated.
  • Sewell (D-AL) amendment would restore the exemption for advanced refunding bonds
  • Crowley (D-NY) amendment would provide a first time homebuyers credit and a renters credit.
  • Pascrell (D-NJ) amendment reintroduced his “Give a Hand Act” which would provide equal treatment to individuals and businesses to recover and rebuild after natural disasters.
  • DelBene (D-WA) amendment would repeal the High Cost Plan Excise Tax (“Cadillac Tax”).
  • Higgins (D-NY) amendment would create a wage growth test before the corporate tax cut could be effective. His amendment was ruled not germane; he appealed the ruling of the Chairman but was defeated.
  • Doggett (D-TX) amendment would restore the Alternative Minimum Tax to the tax code.
  • Levin (D-MI) amendment would tax carried interest compensation as ordinary income.
  • Lewis (D-GA) amendment would delay the effective date of the revenue-reducing provisions until the U.S. withdraws from the current wars in Afghanistan, Iraq, and Syria, and the deficit is zero.

We expect that Chairman Brady will offer another manager’s amendment to take care of several outstanding critical issues.  These issues including the a specific solution for small businesses to use the proposed lower pass-through tax rate of 25 percent.  These and other issues could the bill’s passage in the House.

Senate Finance Chairman Orrin Hatch suggests that a preliminary version of the chamber’s tax overhaul legislation could be released on Thursday.


November 7, 2017- Day 2 of the Ways and Means Mark-up

The House Ways and Means mark-up on tax reform continued today! All information, including the Bill Text, Section-By-Section Analysis, and other policy papers can be found on the Prime Policy Group Tax Hub.

After 10 hours of debate on Monday, the Ways and Means Committee deliberated for another 9 hours today and considered 8 amendments.  They are listed below.

They all were voted down on party-line votes.

At this rate, the Committee (working 24 hour days) would consider 46 more amendments if they are to wrap up by their stated goal of 12pm on Thursday.

For your enjoyment, we bring you a piece of information from today’s markup – The Moocher Map (left).

We expect Wednesday to be a long day of amendments and votes in committee starting at 9AM.  As of this writing we are not aware of  a committee deadline for submitting amendments. We believe that Chairman Brady may be preparing additional amendments that will be considered later in markup.  The plan will likely undergo several revisions as it moves through the next couple days of mark-up.

As we noted yesterday, Chairman Brady stated that healthcare provisions (including HIT, Medical Device Tax, tax on OTC medicines would not be included in tax reform. He suggested that they would be taken up separately when tax reform is done.


November 6, 2017- Day 1 of Ways and Means Mark-up

The House Ways and Means mark-up on tax reform started today! All information, including the Bill Text, Section-By-Section Analysis, and other policy papers can be found on the Prime Policy Group Tax Hub.

The Ways and Means Committee began its work by walking through the bill with Tom Barthold, Chief of Staff to the Joint Committee on Taxation. In a lively back and forth between Republicans and Democrats, this first day produced some great one liners and a preview of campaign commercials that may run against Members of both parties.  The Committee took an early vote on a motion to table the bill for another week before consideration.  That motion was not agreed to on a party-line vote.

To conclude the day’s work, the Committee approved Chairman Brady’s Amendment to the Amendment in the Nature of a Substitute on a party line vote, 24-16.

As of this writing we are not aware of  a committee deadline for submitting amendments.  We believe that Chairman Brady may be preparing additional amendments that will be tabled later in markup.  The plan will likely undergo several revisions as it moves through the next several days of mark-up. The Committee will resume its work tomorrow at 10am.

Chairman Brady stated that healthcare provisions (including HIT, Medical Device Tax, tax on OTC medicines would not be included in tax reform. He suggested that they would be taken up separately when tax reform is done.


November 2, 2017 (Part II)

After closer examination of the bill, below are some of the more significant provisions. Note that the explanations are pulled from the section-by-section analysis put out by the Committee. We have provided you with the proposed provision but have not provided the recitation of current law and considerations. If you would like this additional information, please use the section number provided and the link above.

Complete coverage can be found on the  Prime Policy Group Tax Hub.

Advertising Deductibility: No change from current law

Base Erosion (Anti-Inversion Provisions): Title IV- Taxation of Foreign Income and Foreign Persons, Subtitle D- Prevention of Base Erosion

Sec. 4301. Current year inclusion by United States shareholders with foreign high returns.

  • Provision: Under the provision, a U.S. parent of one or more foreign subsidiaries would be subject to current U.S. tax on fifty percent of the U.S. parent’s foreign high returns. Foreign high returns would be measured as the excess of the U.S. parent’s foreign subsidiaries’ aggregate net income over a routine return (7 percent plus the Federal short-term rate) on the foreign subsidiaries’ aggregate adjusted bases in depreciable tangible property, adjusted downward for interest expense. Foreign high returns would not include income effectively connected with a U.S. trade or business, subpart F income, insurance and financing income that meets the requirements for the active finance exemption (AFE) from subpart F income under current law, income from the disposition of commodities produced or extracted by the taxpayer, or certain related-party payments. Like subpart F income, the U.S. parent would be taxed on foreign high returns each year, regardless of whether it left those earnings offshore or repatriated the earnings to the United States.

Foreign high returns would be treated similarly to currently-taxed subpart F income for certain purposes of the Code, including for purposes of allowing a foreign tax credit. The foreign tax credits allowed for foreign taxes paid with respect to foreign high returns would be limited to 80 percent of the foreign taxes paid, would not be allowed against U.S. tax imposed on other foreign-source income (i.e., such foreign tax credits would only be allowed to offset U.S. tax on foreign high return inclusions), and would not be allowed to be carried back or forward to other tax years.

The provision would be effective for tax years of foreign corporations beginning after 2017, and for tax years of U.S. shareholders in which or with which such tax years of foreign subsidiaries end.

Sec. 4302. Limitation on deduction of interest by domestic corporations which are members of an international financial reporting group

  • Provision: Under the provision, the deductible net interest expense of a U.S. corporation that is a member of an international financial reporting group would be limited to the extent the U.S. corporation’s share of the group’s global net interest expense exceeds 110 percent of the U.S. corporation’s share of the group’s global earnings before interest, taxes, depreciation, and amortization (EBITDA). This limitation would apply in addition to the general rules for disallowance of certain interest expense under section 3301 of the bill. Taxpayers would be disallowed interest deductions pursuant to whichever provision denies a greater amount of interest deductions. Any disallowed interest expense would be carried forward for up to five tax years, with carryforwards exhausted on a first in, first out basis. For this purpose, an international financial reporting group is a group of entities that includes at least one foreign corporation engaged in a trade or business in the United States or at least one domestic corporation and one foreign corporation, prepares consolidated financial statements, and has annual global gross receipts of more than $100 million. The provision would be effective for tax years beginning after 2017.

Sec. 4303. Excise tax on certain payments from domestic corporations to related foreign corporations; election to treat such payments as effectively connected income.

  • Provision: Under the provision, payments (other than interest) made by a U.S. corporation to a related foreign corporation that are deductible, includible in costs of goods sold, or includible in the basis of a depreciable or amortizable asset would be subject to a 20 percent excise tax, unless the related foreign corporation elected to treat the payments as income effectively connected with the conduct of a U.S. trade or business. Consequently, the foreign corporation’s net profits (or gross receipts if no election is made) with respect to those payments would be subject to full U.S. tax, eliminating the potential U.S. tax benefit otherwise achieved. Exceptions would apply for intercompany services which a U.S. company elects to pay for at cost (i.e., no markup) and certain commodities transactions. To determine the net taxable income that is to be deemed ECI, the foreign corporation’s deductions attributable to these payments would be determined by reference to the profit margins reported on the group’s consolidated financial statements for the relevant product line. No credit would be allowed for foreign taxes paid with respect to the profits subject to U.S. tax. Further, in the event no election is made, no deduction would be allowed for the U.S. corporation’s excise tax liability. The provision would apply only to international financial reporting groups with payments from U.S. corporations to their foreign affiliates totaling at least $100 million annually. The provision would be effective for tax years beginning after 2018.

Cost Recovery: Title III- Business Tax Reform, Subtitle B- Cost Recovery and Subtitle C- Small Business Reforms

Sec. 3101– Increased Expensing

  • Provision: Under the provision, taxpayers would be able to fully and immediately expense 100 percent of the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023 (with an additional year for certain qualified property with a longer production period). The provision would expand the property that is eligible for this immediate expensing by repealing the requirement that the original use of the property begin with the taxpayer. Instead, the property would be eligible for the additional depreciation if it is the taxpayer’s first use. Under the provision, qualified property would not include any property used by a regulated public utility company or any property used in a real property trade or business. Under the provision, the taxpayer’s election to use AMT in lieu of the additional depreciation would be repealed. The repeal of this election would be effective for tax years beginning after 2017.

Sec. 3201– Expansion of section 179 expensing

  • Provision: Under the provision, the small business expensing limitation under section 179 would be increased to $5 million and the phase-out amount would be increased to $20 million. The provision would modify the expensing limitation by indexing both the $5 million and $20 million limits for inflation. The provision would modify the definition of section 179 property to include qualified energy efficient heating and air-conditioning property permanently. The provision to modify the definition of section 179 property to include qualified energy efficient heating and air-conditioning property would be effective for property acquired and placed in service after November 2, 2017. The provision to increase the dollar limitations would be effective for tax years beginning after 2017 through tax years beginning before 2023.

Child and Dependent Tax Credit: Title I- Tax Reform for Individuals, Subtitle B- Simplification and Reform of Family and Individual Tax Credits

Sec. 1101– Enhancement of child tax credit and new family tax credit

  • Provision: Under the provision, the child credit would be increased to $1,600. Alternatively, a credit of $300 would be allowed for non-child dependents. In addition, a family flexibility credit of $300 would be allowed with respect to the taxpayer (each spouse in the case of a joint return) who is neither a child nor a non-child dependent. The family flexibility credit and the non-child dependent credit would be effective for taxable years ending before January 1, 2023. As under current law, the refundable portion of the child tax credit would be limited to $1,000. That $1,000 amount would be indexed for inflation based on chained CPI, and over time would rise to match (but not exceed) the $1,600 base child tax credit. Neither the $300 credit for nonchild dependents nor the $300 credit for other taxpayers would be refundable. The phase out for the combined child credit, the non-child dependent credit, and the credit for other taxpayers would be increased from $110,000 (for joint filers) under current law to $230,000 (for joint filers), and from $75,000 (for single filers) to $115,000 (for single filers). This increase in the phase-out would eliminate the marriage penalty in the credit. Section 1103 of the legislation would require a taxpayer to provide a Social Security number (SSN) to claim the refundable portion of the credit. The provision would be effective for tax years beginning after 2017.

Estate Tax: Title I- Tax Reform for Individuals, Subtitle G- Estate and Generation-skipping Transfer Taxes

Sec. 1601 and 1602– Increase in credit against estate, gift, and generation-skipping transfer tax; repeal of estate and generation-skipping transfer taxes.

  • Provision: Under the provision, the basic exclusion amount is doubled from $5 million (as of 2011) to $10 million, which is indexed for inflation. This provision would apply to tax years beginning after 2017. Furthermore, beginning after 2023, the estate and generation-skipping taxes are repealed while maintaining a beneficiary’s stepped-up basis in estate property. The gift tax is lowered to a top rate of 35 percent and retains a basic exclusion amount of $10 million and an annual exclusion of $14,000 (as of 2017), also indexed for inflation.

Interest Deductibility: Title III- Business Tax Reform, Subtitle D- Reform of Business-related Exclusions, Deductions, etc.

Sec. 3301– Interest

  • Provision: Under the provision, every business, regardless of its form, would be subject to a disallowance of a deduction for net interest expense in excess of 30 percent of the business’s adjusted taxable income. The net interest expense disallowance would be determined at the tax filer level-for example, at the partnership level instead of the partner level. Adjusted taxable income is a business’s taxable income computed without regard to business interest expense, business interest income, net operating losses, and depreciation, amortization, and depletion. Any interest amounts disallowed under the provision would be carried forward to the succeeding five taxable years and would be an attribute of the business (as opposed to its owners). Special rules would apply to allow a pass-through entity’s unused interest limitation for the taxable year to be used by the pass-through entity’s owners and to ensure that net income from pass-through entities would not be double counted at the partner level. The provision, as amended by the provision under section 3204, would provide an exemption from these rules for businesses with average gross receipts of $25 million or less. Additionally, the provision would not apply to certain regulated public utilities and real property trades or businesses. These businesses would be ineligible for full expensing in section 3101. The provision would also repeal current law Code section 163(j). The provision would be effective for tax years beginning after 2017.

Last-In-First-Out (LIFO) Accounting Method: No change in current law

Minimum Foreign Earnings Tax Rate: Title IV- Taxation of Foreign Income and Foreign Persons, Subtitle D- Prevention of Base Erosion

Sec. 4301– Current year inclusion by United States shareholders with foreign high returns.

  • Provision: Under the provision, a U.S. parent of one or more foreign subsidiaries would be subject to current U.S. tax on fifty percent of the U.S. parent’s foreign high returns. Foreign high returns would be measured as the excess of the U.S. parent’s foreign subsidiaries’ aggregate net income over a routine return (7 percent plus the Federal short-term rate) on the foreign subsidiaries’ aggregate adjusted bases in depreciable tangible property, adjusted downward for interest expense. Foreign high returns would not include income effectively connected with a U.S. trade or business, subpart F income, insurance and financing income that meets the requirements for the active finance exemption (AFE) from subpart F income under current law, income from the disposition of commodities produced or extracted by the taxpayer, or certain related-party payments. Like subpart F income, the U.S. parent would be taxed on foreign high returns each year, regardless of whether it left those earnings offshore or repatriated the earnings to the United States. Foreign high returns would be treated similarly to currently-taxed subpart F income for certain purposes of the Code, including for purposes of allowing a foreign tax credit. The foreign tax credits allowed for foreign taxes paid with respect to foreign high returns would be limited to 80 percent of the foreign taxes paid, would not be allowed against U.S. tax imposed on other foreign-source income (i.e., such foreign tax credits would only be allowed to offset U.S. tax on foreign high return inclusions), and would not be allowed to be carried back or forward to other tax years. The provision would be effective for tax years of foreign corporations beginning after 2017, and for tax years of U.S. shareholders in which or with which such tax years of foreign subsidiaries end.

Partnerships and Pass-Throughs Definition of Business Income: Title I- Tax Reform for Individuals, Subtitle A- Reform of Rates, Standard Deduction, and Exemptions

Sec. 1004– Maximum rate on business income of individuals

  • Provision: Under the provision, a portion of net income distributed by a pass-through entity to an owner or shareholder may be treated as “business income” subject to a maximum rate of 25 percent, instead of ordinary individual income tax rates. The remaining portion of net business income would be treated as compensation and continue to be subject to ordinary individual income tax rates. Each owner or shareholder would separately determine their proportion of business income. Net income derived from a passive business activity would be treated entirely as business income and fully eligible for the 25-percent maximum rate. Owners or shareholders receiving net income derived from an active business activity (including any wages received) would determine their business income by reference to their “capital percentage” of the net income from such activities. Under the provision, owners or shareholders generally may elect to apply a capital percentage of 30 percent to the net business income derived from active business activities to determine their business income eligible for the 25-percent rate. That determination would leave the remaining 70 percent subject to ordinary individual income tax rates. Alternatively, owners or shareholders may elect to apply a formula based on the facts-and circumstances of their business to determine a capital percentage of greater than 30 percent. That formula would measure the capital percentage based on a rate of return (the Federal short term rate plus 7 percent) multiplied by the capital investments of the business. Once made, the election of the alternative formula would be binding for a five-year period. A special rule would apply to prevent the recharacterization of actual wages paid as business income. An owner’s or shareholder’s capital percentage would be limited if actual wages or income treated as received in exchange for services from the pass-through entity (e.g., a guaranteed payment) exceeds the taxpayer’s otherwise applicable capital percentage. The determination of whether a taxpayer is active or passive with respect to a particular business activity would rely on current law material participation and activity rules within regulations governing the limitation on passive activity losses under Code section 469. Under these rules, the determination of whether a taxpayer is active generally is based on the number of hours the taxpayer spends each year participating in the activities of the business. Income subject to preferential rates, such as net capital gains and qualified dividend income, would be excluded from any determination of a business owner’s capital percentage. Such income would not be recharacterized as business income for these purposes and would retain its character. Certain other investment income that is subject to ordinary rates such as short-term capital gains, dividends, and foreign currency gains and hedges not related to the business needs, would also not be eligible to be recharacterized as business income. Interest income properly allocable to a trade or business would be eligible to be recharacterized as business income. Under the provision, the default capital percentage for certain personal services businesses (e.g., businesses involving the performance of services in the fields of law, accounting, consulting, engineering, financial services, or performing arts) would be zero percent. As a result, a taxpayer that actively participates in such a business generally would not be eligible for the 25- percent rate on business income with respect to such personal service business. However, the provision would allow the same election to owners of personal services businesses to use an alternative capital percentage based on the business’s capital investments. This election would be subject to certain limitations. The provision would also apply a maximum 25-percent rate on certain dividends from a real estate investment trust (REIT) and patronage dividends from cooperatives. The provision would be effective for tax years beginning after 2017.

Repatriation Tax Rates: Title IV- Taxation of Foreign Income and Foreign Persons, Subtitle A- Establishment of Participation Exemption System for Taxation of Foreign Income

Sec. 4004– Treatment of deferred foreign income upon transition to participation exemption system of taxation

  • Provision: Under the provision, U.S. shareholders owning at least 10 percent of a foreign subsidiary, generally, would include in income for the subsidiary’s last tax year beginning before 2018 the shareholder’s pro rata share of the net post-1986 historical earnings and profits (E&P) of the foreign subsidiary to the extent such E&P has not been previously subject to U.S. tax, determined as of November 2, 2017, or December 31, 2017 (whichever is higher). The net E&P would be determined by taking into account the U.S. shareholder’s proportionate share of any E&P deficits of foreign subsidiaries of the U.S. shareholder or members of the U.S. shareholder’s affiliated group. The E&P would be classified as either E&P that has been retained in the form of cash or cash equivalents, or E&P that has been reinvested in the foreign subsidiary’s business (e.g. property, plant, and equipment). The portion of the E&P comprising cash or cash equivalents would be taxed at a reduced rate of 12 percent, while any remaining E&P would be taxed at a reduced rate of 5 percent. Foreign tax credit carryforwards would be fully available, and foreign tax credits triggered by the deemed repatriation would be partially available, to offset the U.S. tax. At the election of the U.S. shareholder, the tax liability would be payable over a period of up to 8 years, in equal annual installments of 12.5 percent of the total tax liability due. If the U.S. shareholder is an S corporation, the provision would not apply until the S corporation ceases to be an S corporation, substantially all of the assets of the S corporation are sold or liquidated, the S corporation ceases to exist or conduct business, or stock in the S corporation is transferred.

Rum Tax Cover Over: Title IV- Taxation of Foreign Income and Foreign Persons, Subtitle E- Provisions Related to Possessions of the United States

Sec. 4402– Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands.

  • Provision: Under the provision, the $13.25 per proof gallon excise tax cover-over amount paid to the treasuries of Puerto Rico and the U.S. Virgin Islands would apply retroactively to include imports after December 31, 2016, and be extended to rum imported into the United States before January 1, 2023.

State And Local Taxes (SALT): Title I- Tax Reform for Individuals, Subtitle D- Simplification and Reform of Deductions

Sec. 1303– Repeal of deduction for certain taxes not paid or accrued in a trade or business

  • Provision: Under the provision, individuals would not be allowed an itemized deduction for State and local income or sales taxes, but would continue to be entitled to a deduction for State and local income or sales taxes paid or accrued in carrying on a trade or business or producing income. Individuals would continue to be allowed to claim an itemized deduction for real property taxes paid up to $10,000. The provision would be effective for tax years beginning after December 31, 2017.

Territorial System Design: Title IV- Taxation of Foreign Income and Foreign Persons, Subtitle A- Establishment of Participation Exemption System for Taxation of Foreign Income

Sec. 4001– Deduction for foreign-source portion of dividends received by domestic corporations from specified 10-percent owned foreign corporations.

  • Provision: Under the provision, the current-law system of taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when these earnings are distributed would be replaced with a dividend-exemption system. Under the exemption system, 100 percent of the foreign-source portion of dividends paid by a foreign corporation to a U.S. corporate shareholder that owns 10 percent or more of the foreign corporation would be exempt from U.S. taxation. No foreign tax credit or deduction would be allowed for any foreign taxes (including withholding taxes) paid or accrued with respect to any exempt dividend, and no deductions for expenses properly allocable to an exempt dividend (or stock that gives rise to exempt dividends) would be taken into account for purposes of determining the U.S. corporate shareholder’s foreign-source income. The provision would be effective for distributions made after 2017.

Sec. 4002– Application of participation exemption to investments in United States property.

  • Provision: Under the provision, the imposition of current U.S. tax on U.S. corporate shareholders with respect to untaxed foreign subsidiary earnings reinvested in United States property would be repealed. The provision would be effective for tax years of foreign corporations beginning after 2017.

Sec. 4003– Limitation on losses with respect to specified 10-percent owned foreign corporations.

  • Provision: Under the provision, a U.S. parent would reduce the basis of its stock in a foreign subsidiary by the amount of any exempt dividends received by the U.S. parent from its foreign subsidiary – but only for purposes of determining the amount of a loss (but not the amount of any gain) on any sale or exchange of the foreign subsidiary stock by its U.S. parent. The provision would be effective for distributions made after 2017. In addition, if a U.S. corporation transfers substantially all of the assets of a foreign branch to a foreign subsidiary, the U.S. corporation would be required to include in income the amount of any post-2017 losses that were incurred by the branch. The provision would be effective for transfers after 2017.

Sec. 4004– Treatment of deferred foreign income upon transition to participation exemption system of taxation

  • Provision: Under the provision, U.S. shareholders owning at least 10 percent of a foreign subsidiary, generally, would include in income for the subsidiary’s last tax year beginning before 2018 the shareholder’s pro rata share of the net post-1986 historical earnings and profits (E&P) of the foreign subsidiary to the extent such E&P has not been previously subject to U.S. tax, determined as of November 2, 2017, or December 31, 2017 (whichever is higher). The net E&P would be determined by taking into account the U.S. shareholder’s proportionate share of any E&P deficits of foreign subsidiaries of the U.S. shareholder or members of the U.S. shareholder’s affiliated group. The E&P would be classified as either E&P that has been retained in the form of cash or cash equivalents, or E&P that has been reinvested in the foreign subsidiary’s business (e.g. property, plant, and equipment). The portion of the E&P comprising cash or cash equivalents would be taxed at a reduced rate of 12 percent, while any remaining E&P would be taxed at a reduced rate of 5 percent. Foreign tax credit carryforwards would be fully available, and foreign tax credits triggered by the deemed repatriation would be partially available, to offset the U.S. tax. At the election of the U.S. shareholder, the tax liability would be payable over a period of up to 8 years, in equal annual installments of 12.5 percent of the total tax liability due. If the U.S. shareholder is an S corporation, the provision would not apply until the S corporation ceases to be an S corporation, substantially all of the assets of the S corporation are sold or liquidated, the S corporation ceases to exist or conduct business, or stock in the S corporation is transferred.

November 2, 2017

The House Ways and Means Tax Plan is here! All information, including the Bill Text, Section-By-Section Analysis, and other policy papers can be found on the Prime Policy Group Tax Hub.
We will provide a more detailed analysis after we review the 490+ pages of bill text. In the interim, here is what we know:
  • Corporate rate is held at 20% and is permanent.
  • Individual tax rates 12% up to $90K, 25% up to $260K, 35% up to $1M, 39.6% above $1M and will stay the top tax rate.
  • The bill would reduce the top pass-through rate to 25 percent, but there are limits.  First, “professional services” — including doctors, lawyers, accountants and others — wouldn’t qualify for the rate.  Otherwise, business owners could chose one of two options: 1. The Camp 70/30 proposal where 70 percent of income is considered wage income – which will face the individual tax rate — and 30 percent as business income, which would be taxable at the 25 percent rate. Or 2. The business owner will set the ratio of their wage income to business income based on the level of their capital investment.  The guidelines are aimed at preventing abuse of the 25 percent rate — such as high-earning individuals forming themselves into corporations to get a tax cut.
  • 100% expensing through January 1, 2023
  • Business interest expense is allowed for businesses with average gross receipts of $25 million or less.
  • Preserves the R&D tax credit.
  • The repatriation tax rate on earnings and profits comprising cash or cash equivalents is 12%, higher than originally proposed, while remaining earnings and profits will be taxed at 5%.
  • Estate Tax, the exemption amount is initially doubled and then the tax is repealed after six years.
  • The child tax credit would be increased to $1,600 from $1,000 per child under 17.  The bill preserves the Child and Dependent Care Tax Credit of $300 to help families care for their children and older dependents (phased out after 5 years).
  • Repeals the State and local tax deduction except for property taxes (up to $10,000).
  • Almost doubles the standard deduction from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples.
  • Preserves the Earned Income Tax Credits
We expect the “Chairman’s Mark” with additional substantive changes to be released over the weekend in advance of the mark-up, which is scheduled to begin Monday afternoon.
NOV. 6: Brady has said his panel will begin to mark up the tax legislation Monday, allowing members of that committee a chance to offer amendments that could alter the bill’s language before it’s sent to full House for a vote; markup could stretch multiple days.

October 31, 2017

Happy “Tax or Treat” from Prime Policy Group!

Just before this writing, Chairman Kevin Brady confirmed that the Republican conference tomorrow morning would be briefed on the contents of his tax bill, which will then be released to the public. Brady also said that he will stay in “listening mode” until Ways and Means marks up the bill.

One Ways and Means Member noted last week that “All Saints Day” might not be such a bad day to release the bill text – as opposed to today which is Halloween.  You get the point. As you may have noted, the National Association of Homebuilders announced its opposition to the bill on Saturday.  “Rewriting the tax code, it turns out, means twisting a giant legislative Rubik’s cube: Each attempt to solve a problem potentially creates new ones.”

With the fate of the largest payfor in question – repeal of the state and local tax deduction – how lower rates and reform can be paid for will come into sharper focus.  In fact, the House tax bill may propose a phase-in of lower rates over several years and it may propose more tax extenders than currently exist.  If some of the provisions, like full expensing for businesses, only last for five years or so, then in a few years, Congress will have to decide on whether or not to extend these provisions.  This will create more tax extenders.  And we already have a list we are watching that expired in 2016!

Finally, a note of caution.  It could be that not all the details are released when the House plan gets introduced.  It may be that Chairman Brady is not ready to or wants to hold back some key details until markup, which we continue to hear will be next week.

President Trump offered some comments on tax reform today during a meeting with business leaders, including that he wants the House to pass a bill by Thanksgiving and to be able to sign a final bill by Christmas.

There are 11 days when both the House and Senate are in session before the Thanksgiving recess, and 19 combined legislative days before the CR expires on December 8. We share this with you again to emphasize how hard it will be for a “full monte” tax reform bill to be completed this year.

In the spirit of Halloween, Rep. Lloyd Doggett offered his candy-centric take on the Republican tax plan.

Below are some highlights from the press about recent developments in general tax policy and tax reform. News about specific provisions are broken out after.

Child Tax Credit

Estate Tax

Mortgage-Interest and Property Tax

Retirement Plans

State and Local

October 24, 2017

The Senate passed its FY 2018 Budget Resolution last week on a vote of 51-49. The senate language would allow a $1.5T deficit to result from tax reform.  Now the House will consider the Senate bill and will consider not changing anything in order to speed up the consideration of tax reform legislation. We expect that vote by the House this week perhaps on Thursday. We expect that Chairman Brady will introduce his legislation soon after the final budget resolution is passed, perhaps next week. One Member commented to us that Chairman Brady will likely take a pulse of the reactions to the draft legislation from Members and then schedule a markup of the legislation as soon as possible.  Likewise, Chairman Hatch has indicated that he will also release a draft bill in early November.

This morning and tomorrow morning the Ways and Means Committee Republicans will meet to work on more details of the House tax reform package. One member told us that many threshold decisions have not been made yet, particularly with regard to the definition of income for use of the 25% pass-through rate and interest expense deductibility and base erosion provisions on the international side, among others. President Trump addressed the Senate Republican policy lunch today and tax reform was on the menu. All the Republican messaging is now geared toward keeping momentum going for tax reform.

There are 14 days when both the House and Senate are in session before the Thanksgiving recess, and 22 combined legislative days before the CR expires on December 8. We share this with you again to emphasize how hard it will be for a “full monte” tax reform bill to be completed this year.

Below are some highlights from the press about recent developments in tax policy and tax reform:

October 17, 2017

On CBS “Face the Nation” on Sunday, Senator Lindsey Graham (R-SC) was ask how important tax reform was to Republicans.  “If we don’t [accomplish it], we’re dead,” Graham said.  He then predicted huge losses for the GOP in the House and primaries across the board in the Senate. “It will be the end of Mitch McConnell as we know it,” he added.  Leader McConnell met with President Trump and Vice President Pence for lunch on Monday to talk legislative strategy for the remainder of the year.  They then appeared at a press conference to declare how much in sync they were on many policy issues.

While the House is on recess this week, the Senate will tackle its FY 2018 Budget Resolution this week with instructions to produce a tax reform bill.   If the House and Senate can conference their differences and pass a final budget resolution, it could protect the resulting tax reform bill from a filibuster in the Senate.  Recall however, that Chairman Hatch has declared that the Senate Finance Committee will conduct a regular order and bipartisan markup of tax reform legislation.

The House resolution requires that the tax reform plan be deficit neutral. The Senate Budget Resolution allows for $1.5T that can be added to the deficit for tax reform and it asks the Finance Committee to report its tax reform proposal by November 13.  The House plan also calls for mandatory cuts of $203 billion while the Senate draft only calls for a $1 billion savings. These and other differences will have to be negotiated in a final budget resolution.

As far as expectations go, we believe that even Speaker Ryan may also think finishing tax reform by the end of the year may be an aggressive prediction.  He has threatened to keep the House in until Christmas Day if necessary to pass tax reform.

There were walk-through sessions with Ways and Means Republican Members last Thursday and Friday on the Brady tax reform package.

As many of these payfors are likely to create a stir across the board, we would commend to you the Wall Street Journal’s Richard Rubin and his lighthearted (but very thorough) video examination of the “Sacred Cows of the Tax Code.”

There are 16 days when both the House and Senate are in session before the Thanksgiving recess, and 24 combined legislative days before the CR expires on December 8. We share this with you again to emphasize how hard it will be for a “full monte” tax reform bill to be completed this year.

Below are some highlights from the press about recent developments in tax policy and tax reform:

October 10, 2017

The U.S. House voted to adopt their FY18 budget resolution last week with language to promote a tax reform bill.  The vote on H. Con. Res. 71 was 219-206.  The Senate Budget Committee voted to approve its FY18 budget resolution also last week.  The vote on the resolution was 12-11 and followed party lines.  We expect that the full Senate will begin its consideration next week when the Senate returns from its recess.   If the House and Senate can conference their differences and pass a final budget resolution, it could protect the resulting tax reform bill from a filibuster in the Senate.  Recall however, that Chairman Hatch has declared that the Senate Finance Committee will conduct a regular order and bipartisan markup of tax reform legislation.

As part of their “regular order” push, Senate Finance conducted three hearings on the various aspects of tax reform. Our thorough coverage of each is available: Individual Tax Reform (from September 14); Business Tax Reform (from September 19); and International Tax Reform (from October 3).

The House resolution requires that the tax reform plan be deficit neutral. The Senate Budget Resolution allows for $1.5T that can be added to the deficit for tax reform and it asks the Finance Committee to report its tax reform proposal by November 13th.  The House plan also calls for mandatory cuts of $203 billion while the Senate draft only calls for a $1 billion savings. These and other differences will have to be negotiated in a final budget resolution.

There is still an open question about how much of the package will be paid for. There is a cavernous divide between the Framework proposed last week and legislative achievement. In 2014, Chairman Camp’s draft achieved a 25% corporate rate. The Framework proposes a 20% corporate rate. It is likely that, many of the payfors that were drafted into the Camp tax reform draft will have to be considered in order for tax writers to get to a 20% corporate rate.  For example, Camp proposed longer depreciation periods for some property while the GOP Framework calls for a minimum of 5 years of immediate expensing.

In 2014, the Joint Committee on Taxation estimated what some of these payfors could raise. These included changing how life insurance reserves are calculated ($24.5 billion); repealing last-in, first-out method of inventory ($79.1 billion); altering amortization for advertising expenses ($169 billion); and repealing like-kind exchanges ($40.9 billion). This year the list also includes the repeal of the state and local income tax deduction and changes in how carried interest income is taxed. GOP leadership has been pretty quiet about how it plans to treat most of these provisions. The House Blueprint from 2016 did propose keeping the LIFO accounting method.

As many of these payfors are likely to create a stir across the board, we would commend to you the Wall Street Journal’s Richard Rubin and his lighthearted (but very thorough) video examination of the “Sacred Cows of the Tax Code.”

There are 16 days when both the House and Senate are in session before the Thanksgiving recess, and 24 combined legislative days before the CR expires on December 8. We share this with you again to emphasize how hard it will be for a “full monte” tax reform bill to be completed this year.

Below are some highlights from the press about recent developments in tax policy and tax reform:


October 3, 2017

The House Freedom Caucus and the Business Roundtable released statements supporting the GOP Tax Reform Framework last Wednesday, the day it was released. The support by the HFC may portend support for the House Budget Resolution which is scheduled for the House floor this week. But as one colleague noted, “Only if they understand they have to vote for the Budget, both on first passage and the Conference Report, in order to get to tax reform.” The Senate Budget Committee plans to markup its resolution this week also.

There is still an open question about how much of the package will be paid for. There is a cavernous divide between the Framework proposed last week and legislative achievement. In 2014, Chairman Camp’s draft achieved a 25% corporate rate. The Framework proposes a 20% corporate rate. It is likely that, many of the payfors that were drafted into the Camp tax reform draft will have to be considered in order for tax writers to get to a 20% corporate rate.  For example, Camp proposed longer depreciation periods for some property while the GOP Framework calls for a minimum of 5 years of immediate expensing.

In 2014, the Joint Committee on Taxation estimated what some of these payfors could raise.

These included changing how life insurance reserves are calculated ($24.5 billion); repealing last-in, first-out method of inventory ($79.1 billion); altering amortization for advertising expenses ($169 billion); and repealing like-kind exchanges ($40.9 billion). This year the list also includes the repeal of the state and local income tax deduction and changes in how carried interest income is taxed. GOP leadership has been pretty quiet about how it plans to treat most of these provisions. The House Blueprint from 2016 did propose keeping the LIFO accounting method.

The drafted Senate Budget Resolution allows for $1.5T that can be added to the deficit for tax reform and it asks the Finance Committee to report its tax reform proposal by November 13th.

The House resolution requires that the tax reform plan be deficit neutral. The House plan also calls for mandatory cuts of $203 billion while the Senate draft only calls for a $1 billion savings. These and other differences will have to be negotiated in a final budget resolution.

There are 18 days when both the House and Senate are in session before the Thanksgiving recess, and 26 legislative days before the CR expires on December 8. We share this with you again to emphasize how hard it will be for a “full monte” tax reform bill to be completed this year.

Chairman Hatch held the third in his series of tax reform hearings today on international tax reform. Casie Daugherty prepared a memo on today’s hearing, which is available here. An excerpt can also be found below.

Below are some highlights from the press about recent developments in tax policy and tax reform:


September 27, 2017

The GOP Tax Reform Framework is here!

Below is a summary below of key points, and the prepared one-pager can be found here.  We note that there is a considerable amount of discretion left to the tax writers in Congress.  For example, whether or not there will be a 4th higher tax rate or a surtax on wealthier tax payers.

The Framework, in its original format, can be found here.

 

 

Individual

  • Increasing the size of the zero-tax bracket
  • Doubling the standard deduction to $12,000 for individuals and $24,000 for families
  • 3 rates of 12%, 25% and 35% with the option of having a 4th on high income earners to address distributional issues
  • Significant increase but no specific amount in the child tax credit
  • Increasing the income limit on phase out of child tax credit
  • Phasing out marriage penalty for child tax credit
  • $500 deduction for non-child dependents (elderly parent, e.g.)
  • Repeal individual AMT
  • Eliminating most itemized deductions but keeping mortgage and charitable deductions and encouraging committees to keep deductions for higher education, retirement and work incentives
  • Repeals the estate tax

Business

  • Top rate of 25% for S corps
  • Top rate of 20% for C corps
  • Eliminate Corporate AMT
  • Write off the cost of new investments for 5 years
  • Limit on the deductibility of interest not defined
  • Eliminate most deductions but keeping R&D and Low Income Tax Credit

International

  • Territorial System
  • One-time tax on assets being brought back to the US
  • Different tax rates for cash being brought back and illiquid assets held offshore

September 26, 2017

Following tomorrow’s release of the Big Six tax outline, we will send a Special Wednesday Edition of Tax Tuesday.

The Big Six will release its tax reform framework tomorrow, and we expect it to have a limited number of details. The top tax rate for business will be 20%, passthroughs will be 25%, and individual taxpayers will have a with a top rate of 35%, though the committees may choose to add another higher bracket. We understand that the deduction for state and local taxes is in the bullseye as a payfor. Business expensing and income thresholds for pass-through tax payers are still being discussed and are not expected to be included. Ways and Means and Finance staff have described this reveal to us as a “high level” walkthrough by Republican leadership without many details.

Ways and Means Committee Republicans met on Sunday to begin marshalling support for the plan. House Ways and Means Committee Members – Republicans and Democrats – met this morning with President Trump to discuss the outline. Republicans will meet on Wednesday for a half-day retreat on the issue. Republican leadership hopes that committee Republicans will commit to supporting the bill before all details are released. All details will not be disclosed in this statement of goals for tax reform.

We are likely to have to wait for details on what income definitions will be used for passthrough taxpayers and what cuts and changes to business and individual deductions will be used as payfors. If enough details are released, then we expect that House leadership will try and put the House Budget Reconciliation Bill on the floor next week. It will contain the instructions for tax reform.

There are 22 days when both the House and Senate are in session before the Thanksgiving recess, and 30 legislative days before the CR expires on December 8. We share this with you again to emphasize how hard it will be for a “full monte” tax reform bill to be completed this year.

Below are some highlights from the press about recent developments in tax policy and tax reform:


September 19, 2017

While President Trump may be courting Democrats for immigration and tax reform, he is also charting an assertive tax reform messaging tour around the country.

Chairman Hatch noted that the coming information about the tax reform deal is to be taken with a grain of salt. “Any forthcoming documents may be viewed as guidance or potential signposts for drafting legislation,” he commented at a hearing on how individuals pay their taxes last week. “But, at the end of the day, my goal is to produce a bill that can get through this committee.” This message is consistent with comments by senior Administration officials who told us that the announced “deal” will only be an “opening bid.”

Chairman Hatch held his second hearing today on business tax reform. Casie Daugherty prepared a memo on today’s hearing, which is available here. Our report on last week’s Finance hearing on individual tax reform goals is available here. We expect that there will be a third hearing on international tax reform next week.

Meanwhile, the Republicans are working on an FY 2018 budget resolution that will contain reconciliation instructions that can be used for tax reform. This process in the House and the Senate has proven to be difficult at best. Senator Corker (R-TN) said today that Republicans are making progress on the total estimate for tax reform.  Chairwoman Black in the House is still seeking votes in the House budget resolution. One of the holdups is that the conservatives want to see details of the tax reform plan before they vote on the budget with reconciliation instructions for tax reform.

Below are some highlights from the press about recent developments in tax policy and tax reform:


September 12, 2017

We understand that the a tax reform deal by the Big Six is “95% to 97% agreed to.” The deal will be “socialized” over the next several weeks.  We also understand that it will seek a corporate tax rate of between 18 and 23%. The package “will not be a take it or leave it proposal,” but an “opening bid.” We may see some more descriptive prose about the deal, but we do not expect much detail on provisions, particularly the payfor provisions until markup.

The three-month deal to extend government funding for FY 2018 and the debt limit until December 8th, as well as provide a $15 billion Harvey relief package may help tax reform. But it might not.  Piling all the fiscal work up for a fixed date in December may be a distraction for the same resources that are also trying to work on tax reform. The president’s deal-making with Democratic Leadership may have done damage to the trust between Congressional Republicans and the Administration.

The Senate Finance Committee will begin a series of three tax reform hearings with the first one being held this Thursday called “Individual Tax Reform.”  The next two will be on business tax reform and then on international tax reform.

Meanwhile, the President hosted his cabinet at Camp David this weekend and one major topic was how to use the resources of the cabinet in support of tax reform this fall.  The President also continues to court Republicans and Democrats to his causes.  A dinner with six Senators is expected to focus on tax reform.

Below are some highlights from the press about recent developments in tax policy and tax reform:


September 5, 2017

No cliché will suffice.  Congress faces numerous “Must Pass” items with little time on the clock in September.  Our colleague Rich Meade recently posted a summary list here, and the list also includes Harvey relief, reauthorization or an extension of the National Flood Insurance Program and new authority for the Federal Aviation Administration.

The Big Six are meeting today at the White House on tax reform.  Decisions that still lie before them include how to pay for reform, how much to pay for, temporary or permanent provisions and what tax rate can be achieved.  One of our colleagues has suggested that it will be easier to pass tax reform than it will be to pass the FY 2018 budget resolution providing reconciliation instructions.  If that is the case, then Congress could add infrastructure to the tax bill late in the year and garner support Republicans and Democrats.  There is much more to come.

Below is President Trump’s statement tax reform from Thursday, as well as other information put out by the White House on it:

Below are some highlights from the press about recent developments in tax policy and tax reform:


Access the Tax Tuesday Archive (January-August 2017)