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Industry Alerts

The U.S. House of Representatives and the Senate recently unveiled their own versions of the 2018 Tax Bill, which contains a plethora of major of changes to the tax landscape for both businesses and individuals. Below are a few highlights and a comparison between both bills:

Businesses

Topic

House Bill

Senate Bill

Tax rateLowers the corporate tax rate to 20% and 25% for certain personal services corporations beginning calendar year 2018.Lowers the corporate tax rate to 20% beginning calendar year 2019.
Alternative Minimum Tax (AMT)EliminatedSame
Expansion of Section 179Businesses may immediately expense qualifying property up to a limit of $5 million.
  • Businesses may immediately expense short-lived capital investments, such as equipment and machinery, up to $1,000,000.
  • Phase-out threshold is increased from $2 million to $2.5 million.
  • Residential and nonresidential real property lives are reduced to 25 years.
Net interest expense cappingCaps the deductibility at 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA).Caps the deductibility at 30% of earnings before interest and taxes (EBIT).
Net operating loss carrybacksEliminates net operating loss carrybacks and limits net operating loss (NOL) carryforwards to 90% of taxable income.Eliminates net operating loss carrybacks and limits net operating loss (NOL) carryforwards to 80% of taxable income.
Deductions and credits (highlights)Eliminates these popular deductions/credits:

  • Local lobbying expenses
  • Entertainment expense and travel expense (fringe benefits)
  • Domestic Production Activities Deduction (DPAD/Sec 199)
  • Employer-provided child care credit
  • Work Opportunity Tax Credit
  • New Markets Tax Credit
  • Credit of FICA and tips for restaurant owners
Eliminates:

  • Domestic Production Activities Deduction (DPAD/Sec 199)
  • Eliminates employer paid meal expense deduction.
Small business eligibility for cash accountingIncreases from $5 million to $10 million.Increases from $5 million to $15 million.
Territorial tax system for U.S. subsidiaries of foreign-based entitiesEnacts territorial tax system with base erosion rules for passive income and anti-abuse rules for U.S. subsidiaries of foreign-based entities.Same
Deferred foreign incomeImplements a one-time repatriation rate of currently deferred foreign income:

  • 14% on cash and cash-equivalent profits
  • 7% on non-cash profits
Implements a one-time repatriation rate of currently deferred foreign income:

  • 10% on cash and cash-equivalent profits
  • 5% on non-cash profits
Employee compensationN/AEnacts new credit for compensation paid to employees while on leave.

Estates and Trusts

Topic

House Bill

Senate Bill

Basic exclusionDoubles it from $5 million to 10 million.Same
Estate and Generation-skipping Transfer (GST) taxesRepealed after 2023. Beneficiary will maintain a step-up in basis in the estate property.N/A

Individuals and Families

Topic

House Bill

Senate Bill

Tax bracketsConsolidates tax brackets/rates:

RateSingle – Income BracketMarried – Income Bracket
12%$0 – $45,000$0 – $90,000
25%$45,000 – $200,000$90,000 -$260,000
35%$200,000 – $500,000$260,000 – $1,000,000
39.60%$500,000 & up$1,000,000 & up
Changes to tax brackets/rates:

RateSingle Income BracketMarried Income Bracket
10%$0 – $9,525$0 – $19,050
12%$9,525 – $38,700$19,050 – $77,400
22%$38,700 – $70,000$77,400 – $140,000
24%$70,000 – $160,000$140,000 – $320,000
32%$160,000 – $200,000$320,000 – $400,000
35%$200,000 – $500,000$400,000 – $1,000,000
38.5%$500,000 & up$1,000,000 & up
Standard deduction and personal exemptionsIncreases standard deduction and eliminates personal exemptions:

  • Individuals: from $6,350 increased to $12,200
  • Married Filing Jointly: from $12,700 increased to $24,400
  • Heads of Household: from $9,350 increased to $18,300
  • Personal exemptions, currently $4,050, will be eliminated
Increases standard deduction and eliminates personal exemptions:

  • Individuals: from $6,350 increased to $12,000
  • Married Filing Jointly: from $12,700 increased to $24,000
  • Heads of Household: from $9,350 increased to $18,000
  • Personal exemptions, currently $4,050, will be eliminated
Alternative minimum taxRepeals the alternative minimum tax with the ability to claim refund of 50% of unused AMT credits.Same
Taxation of pass-through entitiesLowers maximum rate for pass-through income to 25% with anti-abuse rules:

  • Assumes that 70% of income derived by a business is subject to ordinary rates.
  • Assumes that 30% is business income subject to the maximum 25% rate.
  • Specified service industries (healthcare, law, financial services, professional services, performing arts) are excluded from the 70/30 split.
  • The excluded service industries can claim the lower pass-through rate to the extent they can “prove out” their business income.
  • Enacts a 17.4% deduction of qualified business income for certain pass-through businesses up to a cap of 50% of wage income.
  • The deduction is disallowed for specified service industries which include, but are not limited to: healthcare, legal, financial, and certain professional services.
  • Joint filers with income below $150,000 and other filers with income below $75,000 can claim the deduction fully on income from service industries.
Mortgage Interest DeductionLimits Home Mortgage Interest Deduction:

  • For existing homeowners (as of Nov 2, 2017), mortgage interest can still be deducted for mortgages valued up to $1.1 million.
  • For NEW homeowners (as of Nov 3, 2017), the mortgage interest deduction will be limited to mortgages valued up to $500,000.
Retains mortgage interest deduction for home purchases, but eliminates the mortgage interest deduction for home equity debt.
State and local income/sales tax deductionEliminatedAlso eliminated with the exception of taxes accrued or paid in operating a trade or business.
Real property taxesLimits State and local deduction of real property taxes to $10,000 maximum.Eliminated
Health insuranceN/AEliminates the Affordable Care Act (ACA) individual shared responsibility payment to zero.
Itemized deductions
  • Eliminates the medical expenses deduction.
  • Eliminates the student loan interest deduction.
Most itemized deductions are eliminated.  This excludes, but is not limited to:

  • Medical expense deduction
  • Student loan interest deduction
  • Adoption deduction

On Tuesday, November 14, 2017, House Speaker Paul Ryan described the current plans as a “work in progress.” He said he expects the two chambers to pass separate legislation before going to a conference committee to craft a joint plan. In an interview with CNBC on Tuesday, House Majority Leader Kevin McCarthy contended that the House and Senate can quickly reconcile the differences and get a final bill to Trump’s desk by the end of the year.

Moore Colson will provide all relevant updates so you can stay informed and plan appropriately. Please contact your Moore Colson Partner with any questions.

 

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