Tax Cuts and Jobs Act: What’s in the Final House-Senate Tax Bill

By Windham Brannon

December 19, 2017

On December 15, a House and Senate conference committee reached agreement on a final version of the Tax Cuts and Jobs Act, the most significant overhaul of the US tax code in more than 30 years.  Almost 1100 pages in length, the final bill follows several weeks of negotiations between the House and the Senate and includes some last-minute changes aimed at garnering the support necessary for passage.
 
Following you’ll find a high-level summary of how the conference committee bill impacts key areas of the tax code.  All changes are effective in 2018 unless noted otherwise. 
 
INDIVIDUALS
  • The personal exemption for the taxpayer, spouse, and dependents is eliminated.
  • The standard deduction increases to $24,000 for married individuals filing a joint return, $12,000 for single individuals, and $18,000 for heads of household.
  • There are seven tax brackets, with the top marginal rate dropping from 39.6% to 37%.
  • The individual alternative minimum tax is retained with the exemption increased to $109,400 for joint filers ($70,300 for all other individuals).  The phase-out thresholds are increased to $1 million for joint filers ($500,000 for all other individuals).
  • There is no change to the 3.8% net investment income tax.
  • The child tax credit increases to $2,000, with $1,400 being refundable.  Dependents ineligible for the child tax credit are eligible for a new $500 per-person nonrefundable family tax credit.  Phase-out of the credit begins at $400,000 for joint filers and $200,000 for all other filers.
  • Section 529 plans may distribute up to $10,000 per student tax-free during the taxable year for payment of elementary or secondary school tuition.
  • There are no changes to the student loan interest deduction, the deduction for qualified tuition expenses, or the exclusion for graduate student tuition waiver programs.
  • The phase-out of overall itemized deductions for higher income earners is eliminated.
  • Unreimbursed medical expenses greater than 7.5% of adjusted gross income are deductible in 2017 and 2018.  After 2018, unreimbursed medical expenses are deductible to the extent they exceed 10% of adjusted gross income.
  • An individual carrying on a business or engaged in an income-producing activity may deduct state and local property and sales taxes related to the business or activity.  Otherwise, the general itemized deduction for state and local income, sales, and property taxes is limited to $10,000. 
  • Mortgage interest on an acquisition loan of up to $750,000 is deductible.  Loans incurred before December 15, 2017, are grandfathered at the current $1,000,000 limit.
  • Home equity loan interest is not deductible regardless of the origination date of the loan.
  • The deduction for cash donations to public charities is increased to 60% of adjusted gross income.  The deduction for charitable contributions for college athletic event seating rights is eliminated.
  • All miscellaneous itemized deductions currently subject to the 2% of adjusted gross income limit are eliminated.  This includes investment management fees, unreimbursed business expenses of employees, retirement plan fees, and tax return preparation fees.
  • There is no change to the exclusion of gain on sale of a primary residence.
  • Beginning in 2019, the penalty for failure to maintain minimal essential coverage under the Patient Protection and Affordable Care Act is reduced to zero.
ESTATE AND GIFT
  • The estate and gift tax exemption doubles to $11,200,000.
  • This exemption is indexed for inflation.
BUSINESSES
  • Corporations are taxed at a flat rate of 21%.
  • The corporate alternative minimum tax is repealed.
  • Pass-through entity owners may deduct 20% of business income from a partnership, S corporation, limited liability company, or sole proprietorship.  A limitation on this deduction, based on the business’s W-2 wages and investment in depreciable assets, is phased in for pass-through owners filing joint returns with taxable income above $315,000 ($157,500 for single filers).  Owners of certain types of service businesses are eligible for the deduction if their income is below the threshold.  There are also limits on offsetting passive income (dividends, interest, and rental income) with losses from an active business for owners over certain income levels.
  • The deduction for domestic manufacturing under IRC Section 199 is repealed.
  • Net operating losses arising in years after 2017 may only be carried forward, not back, and may offset up to 80% of taxable income.
  • Like-kind exchanges are no longer allowed, other than those involving real property.
  • A business’s deduction for interest expense is limited to 30% of income before interest, taxes, depreciation, and amortization (EBITDA) through 2021.  After 2021, the deduction is limited to 30% of income before interest and taxes (EBIT).  Businesses with average gross receipts for the three previous years of $25 million or less are not subject to these rules.
  • The ability to expense property additions under IRC Section 179 is increased to $1 million and begins to phase out when the cost of additions exceeds $2.5 million.  Qualified real property eligible for Section 179 expensing is expanded to include nonresidential real property improvements for roofs; heating, ventilation, and air conditioning; fire protection; and alarm and security systems.
  • 100% bonus depreciation applies to qualified property placed in service on or after September 28, 2017, through the end of 2022.  After 2022, the bonus depreciation rate decreases by 20% each year until finally phased out at the end of 2026.  Both new and used property qualify for bonus depreciation.
  • Businesses with average gross receipts for the three previous years of $25 million or less may use the cash basis of accounting, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor.
  • Partnership interests received in connection with performing services for businesses involved in raising capital and investing in, disposing of, or developing specified assets (carried interests) must be held for three years to be eligible for the long-term capital gain tax rate upon disposition.
  • Beginning in 2022, research and experimentation expenses must be capitalized and amortized over five years (fifteen years if research is conducted outside the US).
 
INTERNATIONAL
  • This law moves the US from a worldwide taxation system to a territorial system.
  • Corporations receive a 100% dividends received deduction for dividends distributed by a specified 10%-owned foreign corporation, which is any foreign corporation other than a passive foreign investment company.  No foreign tax credit or deduction is allowed for any taxes, including withholding, paid or accrued with respect to a dividend qualifying for this exemption.
  • To transition to the new system, the law imposes a one-time deemed repatriation tax for the last taxable year beginning before January 1, 2018, on the greater of post-1986 unremitted foreign earnings and profits as of either November 2, 2017, or December 31, 2017.  The rate of tax is 15.5% for liquid assets and 8% for illiquid assets.  Corporations have eight years to pay this tax.
  • The law imposes a new base erosion anti-abuse excise tax on US multinational corporations making “excessive” deductible payments to foreign affiliates.
To comply with the Senate’s budget reconciliation rules, nearly all of the individual provisions, the pass-through deduction, and the estate and gift tax provisions sunset at the end of 2025.
 
This conference agreement must now be approved by both houses of Congress, with votes expected this week.  Assuming House and Senate passage, the President is expected to sign and Tax Cuts and Jobs Act into law before the end of the year.
 
Please contact your Windham Brannon tax advisor to discuss any questions you have on the provisions of this bill, the impact on you and your business, and potential tax planning opportunities.