Senate Republican Tax Bill:
Summary of Major Individual, Business, and International Provisions
- All of the new individual tax provisions described below expire December 31, 2025 unless specified otherwise – except for indexing the tax code to chained CPI and repeal of the individual mandate, which are both permanent.
- Tax Rates: Retains seven brackets, but modifies rates: 10%, 12%, 22%, 24%, 32%, 35%, 38.5%. Top rate applies to incomes over $1 million (over $500,000 for singles).
- Standard Deduction and Personal Exemption: Repeals personal exemptions. Doubles standard deduction to $24,000 for joint filers and $12,000 for single filers.
- Tax Rates on Capital Gains and Dividends: Keeps current brackets and top 20% rate.
- Alternative Minimum Tax: Retains the AMT, but expands exemptions (and the income thresholds at which these exemptions phase out) so that fewer taxpayers pay the AMT (or pay less AMT).
- Exemptions: Increased from $84,500 in 2017 to $109,400 for joint filers ($54,300 to $70,300 for single filers).
- Phase-out threshold: Increased from $160,900 in 2017 to $208,400 for joint filers ($120,700 to $156,300 for single filers).
- Child and Family Provisions: Expands child tax credit to $2,000 per child under 18 but families cannot claim additional $1,000 without sufficient tax liability. Refundable credit would phase in against earnings above $2,500 (compared to $3,000 currently). Refundable portion of the credit is indexed for inflation and denied to children without Social Security Numbers. The expanded credit for under 18 expires 12/31/2024. Also provides a $500 tax credit for each non-child dependent. Credits phase out above $500,000.
- Itemized Deductions: Scraps most itemized deductions, including State and Local Tax Deduction except for up to $10,000 in real estate property taxes. Keeps medical expense deduction. Keeps mortgage interest deduction as is, but disallows deduction for interest on home equity loans (current maximum of $100,000). Property/casualty losses limited to federally declared disasters.
- Gain Exclusion on Principal Residence: Expands the occupancy requirement for claiming the capital gains exclusion on the sale of a home, from living in your home 2 out of 5 years, to living there 5 out of 8 years.
- Health and Retirement: Effectively repeals the ACA’s coverage requirement (by reducing the penalty rate to zero). No other changes to the ACA, and no changes to health savings accounts (HSAs). Rothification of 401(k) plans is not included.
- Education: Doubles the above the line deduction for educator expenses from $250 to $500; and permits 529 college savings accounts to be used for primary and secondary school expenses, including certain homeschooling expenses. Does not expand 529 beneficiaries to include the unborn.
- Charitable deduction & exempt orgs: Retains the itemized charitable deduction in form and increases the AGI limitation from 50% to 60%, but interactions with other provisions significantly limit the scope and magnitude of charitable giving incentives. The bill establishes a new 1.4 percent excise tax on certain large university endowments. In addition, the bill expands the applicability of unrelated business income tax, and imposes other limitations on tax exempt entities.
- Estate tax: Doubles the estate tax exemption from $11 million per family ($5.5 million per person) to $22 million per family ($11 million per person).
- The bill switches inflation indexing for the entire tax code from regular CPI to Chained CPI, which provides less inflation adjustment to tax brackets over time.
- Corporate rate & Alternative Minimum Tax: Permanently reduces corporate rate to 20% beginning in 2019. It also retains the corporate alternative minimum tax (AMT) at a 20% rate which appears to have the effect of (unintentionally) forcing all C corporations to pay AMT. As a result, certain tax preferences like the R&D credit, certain energy credits, and certain natural resources cost recovery preferences are disallowed. In addition, accrued AMT credits are suspended indefinitely. This provision is expected to be modified or stricken in conference.
- Deduction to certain pass-through income: Allows a 23% deduction of domestic qualified business income from pass-throughs. Owners of service businesses (e.g. accounting firms, law firms, consulting firms, etc) are eligible to the extent the owner’s total taxable income is below $250,000 single / $500,000 married filing jointly. There is a phased in limitation of the deduction starting at the same threshold and after which the deduction is limited to 50% of business W-2 wages from the business activity. Passive owners (e.g. those that do not actively participate in the trade or business) are eligible for the deduction. The deduction is also available to owners of publicly-traded oil and gas partnerships and not subject to the W-2 wage limitation. The deduction sunsets after 2025.
- Carried interest: Does not address carried interest directly. Changes the required holding period to achieve long-term capital gain treatment from 1 year to 3 years for certain partners holding profits interests. Gains on assets held 3 years or less would be taxed as short-term capital gains. The rule only applies to profits interests of a partnership in the trade or business of raising and returning capital and that either invests in or develops specified assets. Specified assets include securities, real estate held for investment, cash and equivalents, options or derivatives, and other partnership interests.
- Expensing: Temporarily allows 100% expensing for machinery and equipment through 2022. Phased down annually for years 2023 through 2026 at percentages of 80%, 60%, 40%, and 20% respectively. In certain cases, businesses exempt from the interest deductibility limitation are excluded from this provision. Also shortens recovery periods of real property to 25 years generally, and makes a number of smaller changes to farm property.
- Interest deductibility: Limits interest deductibility to 30% of adjusted taxable income, with disallowed deductions carried forward for five years. Businesses with less than $15 million in gross receipts as well as certain electing public utility, farming, and real property businesses are exempt from this limitation.
- Other base broadeners: The following business provision are repealed or limited: Section 199 manufacturing deduction is repealed, limitation of NOLs to 90 percent of taxable income (80% after 2022), like-kind exchange for machinery and equipment is repealed (but retained for real property), certain fringe benefits are repealed or limited, and the deduction for FDIC premiums paid by large state chartered banks is limited.
- Small business: Establishes a uniform definition for small business accounting purposes (cash accounting, UNICAP, inventories, percentage completion, etc.) and establishes an exemption from the interest deductibility limitation at $15 million in gross receipts. Permanently expands section 179 small business expensing to $1 million, phasing out for businesses with more than $2.5 million in capital expenditures.
- Energy: Retains wind PTC and solar ITC phaseouts. Does not extend 48 orphans or nuclear PTC, and does not repeal any oil and gas incentives. Subjects energy credits to the Base Erosion Anti-Abuse Tax (BEAT, see below), which could limit their value.
- Repatriation: The bill includes a transition rule to address the accumulated “trapped cash” by providing a 14.5% effective tax rate on cash and cash-like securities and a 7.5% rate on all other previously untaxed (by the U.S.) foreign earnings and profits. Includes a rule that would claw back the benefit of the low tax rate (i.e., tax the earnings at the old 35% U.S. corporate rate) if a corporation undergoes an inversion in the ten year period after the enactment of the legislation.
- Territorial: The bill shifts to a territorial tax system by providing a 100% deduction for foreign-source dividends repatriated to the U.S.
The following provides a carrot and stick approach to taxing U.S. multinational corporations:
- Foreign Intangible Income (Minimum Tax): The bill taxes foreign low-taxed intangible income (called global intangible low-taxed income or GILTI) at a 10% rate (half the U.S. rate) after excluding income subject to a routine return (i.e., only income associated with high-value returns is subject to the tax). The rate increases to 12.5% after 2025. This income qualifies for a foreign tax credit limited to 80% of the GILTI resulting in tax at an effective 12.5 percent rate. The GILTI is calculated on a global basis.
- Intangible Income in the U.S.: The bill creates a new category of income called “foreign derived intangible income” that qualifies for a 12.5% rate. The income is calculated following the same formula as GILTI but tied to income from sales of property for use, consumption, or disposition outside the U.S. This effectively means that high-return foreign-derived income qualifies for a lower tax rate than the same U.S.-derived income. The rate increases to 15.625% after 2025.
- Domestication of Intangible Property: Allows U.S. corporations to repatriate intellectual property held by controlled foreign corporations on the date of enactment tax-free.
The following primarily affect foreign-parented corporations with corporations in the U.S.:
- Base Erosion Anti-Abuse Tax (BEAT): Applies a 10% minimum tax on deductible payments from the U.S. to a related foreign party. The tax applies to a recalculated taxable income amount after ignoring amounts that are deductible or includible in the basis of a depreciable asset, reductions based on gross receipts, or amounts paid to an inverted corporation. The BEAT is non-deductible and no tax credit can be claimed. The rate increases to 12.5% after 2025.
- Interest Disallowance (Thinly Capitalized U.S. Corporations): The bill denies a deduction on interest payments when the worldwide group is overleveraged in the U.S. The proposal would apply to interest in excess of 110% of what such debt would be if the U.S. debt to equity ratio was proportionate to the worldwide group’s debt-to-equity ratio.