PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Tax Cuts and Jobs Act: Small Business Summary of Final Conference Report, Compared to House and Senate Bills

By at 18 December, 2017, 10:12 am

The House and Senate have each passed their versions of the “Tax Cuts and Jobs Act.” A conference committee will now work out the differences and develop a consensus package, which will then be voted upon by each chamber. President Trump wants to sign a tax bill this year.

Here are some of the key elements, and differences, between the House and Senate bill:

TAX RATE REDUCTION ON SMALL BUSINESS PROFITS

CONFERENCE REPORT

Provides for a 20% tax deduction that applies to the first $315,000 of joint income earned by all businesses organized as S corporations, partnerships, LLCs, and sole proprietorships. For Main Street job creators with income above this level, the bill generally provides a deduction for up to 20% on business profits – reducing their effective marginal tax rate to no more than 29.6%.

HOUSE PASSED BILL

Reduces the top personal income tax rate applied to non-C-Corp business profits from 39.6 percent to 25 percent. The lower rates are permanent.

The House bill also drops the lowest tax bracket from 12 percent to 9 percent for certain small businesses. The 9% rate would apply to the first $75,000 in net business taxable income of an active owner or shareholder earning less than $150,000 in taxable income through a pass-through business and married filing jointly. (For single taxpayers, the $75,000 and $150,000 amounts would be $37,500 and $75,000, and, for heads of households, they’d be $56,250 and $112,500.) As taxable income exceeds $150,000 for married joint filers, the benefit of the 9% rate relative to the 12% rate is reduced, and it’s fully phased out at $225,000 for such filers. Businesses of all types would be eligible for the preferential 9% rate.

Phase in of 9 Percent Rate Over 5 tax years. The rate for 2018 and 2019 would be 11%. For 2020 and 2021, it would be 10%, and for 2022 and thereafter, it would be 9%.

Limitations and “Anti-Abuse Rules:” A variety of professional service businesses are excluded from the 25% rate.  In terms of how income is categorized, there is a choice: small business owners can choose to categorize 70% as wages (the individual tax rate would apply) and 30% as business income (taxable at 25% or the rate that applies), OR set the ratio of their wage income to business income based on the level of their capital investment.

SENATE PASSED BILL

The Senate bill adopted a 23% deduction for pass-through income, which is limited to 50 percent of wage income. The change would be temporary and expire after 2025.

The deduction would be disallowed for certain professional services subject to income limits. The new limit would be $500,000 for married filers and $250,000 for individuals, increased from $150,000 and $75,000 respectively in the introduced bill.” Publicly trade partnerships qualify for the 23% deduction, with a longer list of ineligible service providers.

Most small business owners file taxes as individuals. Non-C-Corp “pass throughs” represent roughly 95 percent of U.S. businesses, and consider that 90 percent of S-Corp employer firms, for example, have fewer than 20 employees, 98.6 percent less than 100, and 99.8 percent fewer than 500 workers. As noted in a recent SBE Council analysis titled Tax Reform and Boosting Entrepreneurship.

CORPORATE TAX RELIEF

CONFERENCE REPORT

Lowers the corporate tax rate to 21% (beginning Jan. 1, 2018) – down from 35%, which today is the highest in the industrialized world – the largest reduction in the U.S. corporate tax rate in our nation’s history. The new rate is permanent.

HOUSE PASSED BILL

The House bill reduces the corporate income tax rate from 35 percent to 20 percent starting in 2018. The lower rate is permanent.

SENATE PASSED BILL

The Senate plan reduces the corporate income tax rate from 35 percent to 20 percent effective in 2019. The lower rate is permanent.

The corporate tax rate is not just a big business issue. In terms of the number and shares of C-Corps in the U.S., this is mostly about small businesses. Based on the latest Census Bureau data, 86 percent of C-Corps have less than 20 employees; 96.7 percent less than 100 workers; and 99.1 percent fewer than 500 workers.

 

SECTION 179 AND IMMEDIATE EXPENSING

CONFERENCE REPORT

The Section 179 expensing cap is expanded to $1 million, with the phase-out beginning at $2.5 million. Full and immediate expensing would be in effect for five years, and phases over a five year period after that.

HOUSE PASSED BILL

In the House bill, the Section 179 expensing cap is increased from $500,000 to $5 million, with the phase-out beginning at $20 million, up from $2 million.  The bill maintains current depreciation schedules for real property. These higher levels are temporary for five years.

Immediate expensing would be in effect for five years.

SENATE PASSED BILL

The Section 179 expensing cap is expanded to $1 million, with the phase-out beginning at $2.5 million. The Senate changes are permanent.

Full immediate expensing would be in effect for five years, and phase out after year five. There is also shorter depreciation for buildings (25 years).

 

CASH ACCOUNTING CHANGES

CONFERENCE REPORT

Expands the annual revenue level from $5 million to $25 million.

HOUSE PASSED BILL

The House bill expands the small business eligibility level for the use of cash accounting. The annual revenue level is increased from $5 million to $25 million.

SENATE PASSED BILL

The Senate bill increases the annual revenue level to $15 million.

 

TAX TREATMENT OF INTEREST

CONFERENCE REPORT

Caps net interest deduction at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years, and 30 percent of earnings before interest and taxes (EBIT) thereafter.

HOUSE PASSED BILL

Caps net interest deduction at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA)

SENATE PASSED BILL

Caps net interest deduction at 30 percent of earnings before interest and taxes (EBIT).

 

NET OPERATING LOSSES

CONFERENCE REPORT

Eliminates net operating loss carrybacks while providing indefinite net operating loss carryforwards, limited to 80 percent of taxable income.

HOUSE PASSED BILL

Eliminates net operating loss (NOL) carrybacks while providing for indefinite net operating loss carryforwards, increased by a factor reflecting inflation and the real return to capital, while restricting the deduction of NOLs to 90 percent of current year taxable income.

SENATE PASSED BILL

Eliminates net operating loss carrybacks while limiting NOL carryforwards to 80 percent of taxable income.

 

ALTERNATIVE MINIMUM TAX

CONFERENCE REPORT 

The report eliminates the corporate AMT, and increases the exemption on the individual AMT so that fewer families and individuals are affected. Increases the exemption to $109,400 and raises the phaseout threshold to $1 million for joint filers.

HOUSE PASSED BILL

The House bill repeals the individual and corporate alternative minimum taxes (AMT).

SENATE PASSED BILL

The corporate AMT remains in place for corporations and individuals. On the individual side, the AMT exemption would increase by about 40 percent.

 

DEEMED REPATRIATION

CONFERENCE REPORT

Enacts deemed repatriation of currently deferred foreign profits at a rate of 15.5 percent for liquid assets and 8.0 percent for illiquid assets.

HOUSE PASSED BILL

The House imposes a one-time “repatriation” tax of 14% for liquid assets and 7% for illiquid assets.

SENATE PASSED BILL

Under the Senate bill, the one-time “repatriation” tax would be 14.49% for liquid assets and 7.49% for illiquid assets.

 

INTERNATIONAL TAX RULES

CONFERENCE REPORT

Moves to a territorial system with anti-abuse rules and a base erosion anti-abuse tax (BEAT) at a standard rate of 5 percent of modified taxable income over an amount equal to regular tax liability for the first year, then 10 percent through 2025 and 12.5 percent thereafter, with higher rates for banks

HOUSE PASSED BILL

Moves to a territorial system. A 10% international minimum tax and a 20% excise tax on certain transactions with foreign subsidiaries is imposed.

SENATE PASSED BILL

Moves to a territorial system, and imposes a 10% tax on low-tax intangible income and certain transactions with foreign subsidies.

 

TREATMENT OF STOCK OPTIONS

CONFERENCE REPORT

The conference report maintains the changes that were included in both the House and Senate passed bill (same language.)

HOUSE PASSED BILL

The House bill helps startups attract and retain skilled talent by allowing employees to elect to defer recognition of income (for tax purposes) from stock options for up to five years, if the corporation’s stock is not publicly trade.

SENATE PASSED BILL

The Senate bill includes a provision similar to the House-passed bill.

 

INDIVIDUAL INCOME TAXES

Current brackets: 10%, 15%, 25%, 28%, 33%, 35%, 39.6%

CONFERENCE REPORT

The conference report lower rates, and sets the rates at 0%, 10%, 12%, 22%, 24%, 32%, 35%, and 37% (maintains 7 brackets.)

Tax table graph courtesy of the Tax Foundation (TaxFoundation.org.)

HOUSE PASSED BILL

The House bill consolidates the brackets into four rates – 12%, 25%, 35% and 39.6%.

Courtesy Tax Foundatin (TaxFoundation.org)

SENATE PASSED BILL

The Senate passed bill keeps the current seven individual income tax brackets and replaces them with lower brackets – 10%, 12%, 22%, 24%, 32%, 34%, and 38.5%. These changes are temporary and expire after 2025.

Courtesy Tax Foundation (TaxFoundation.org)

STANDARD DEDUCTION – Current deduction: Single, $6350. Married, $12,700.

CONFERENCE REPORT

Increases the standard deduction to $12,000 and $24,000 for individuals and married couples, respectively.

HOUSE PASSED BILL

The bill increases the standard deduction to $12,200 for single filers, $18,300 for heads-of-households, and $24,400 for joint filers.

SENATE PASSED BILL

The bill increases the standard deduction to $12,000 for single filers, $18,000 for heads-of-households and $24,000 for joint filers.

 

DEATH TAX

CONFERENCE REPORT

The exemption level is doubled to $11 million.

HOUSE PASSED BILL

The House bill phases out the death tax with its full elimination after 2024.

SENATE PASSED BILL

The Senate bill doubles the exemption level from $5.5 million to $11 million.

 

CHILD TAX CREDIT

Current credit: $1,000 for each child. Phases out at $110,000 for married couples.

CONFERENCE REPORT

Increases the Child Tax Credit from $1,000 to $2,000 for single filers and married couples. The tax credit is fully refundable up to $1,400 and begins to phase-out for families making over $400,000.

HOUSE PASSED BILL

The House adopted a $1600 credit and a $300 credit for each parent and non-child dependent. The credits phase out at $230,000 (married couples.)

SENATE PASSED BILL

The Senate passed a $2,000 credit and a $500 credit for non-minor child dependents. The credits phase out at $500,000 (married couples.)

 

STATE AND LOCAL TAX DEDUCTION

CONFERENCE REPORT

Allows people to write off the cost of state and local taxes – up to $10,000. Gives individuals and families the ability to deduct property taxes and income – or sales – taxes to best fit their unique circumstances.

HOUSE PASSED BILL

Repeals the state and local tax deduction and caps the property tax deduction at $10,000.

SENATE PASSED BILL

Repeals the state and local tax deduction and caps the property tax deduction at $10,000.

 

MORTGAGE INTEREST DEDUCTION

CONFERENCE REPORT
For all homeowners with existing mortgages that were taken out to buy a home, there will be no change to the current mortgage interest deduction. For homeowners with new mortgages on a first or second home, the home mortgage interest deduction will be available up to $750,000.

HOUSE PASSED BILL

Under the House bill, current mortgages won’t be affected. New mortgages, however, would be capped at $500,000 for purposes of the deduction.  The deduction would only apply to a primary residence.

SENATE PASSED BILL

The deduction would remain in place for mortgages up to $1,000,000.  The deduction for equity debt, that is re-financing not related to home improvement, would be eliminated.

 

OBAMACARE’S INDIVIDUAL MANDATE

CONFERENCE REPORT

The individual mandate in Obamacare is repealed.

HOUSE PASSED BILL

No action taken.

SENATE PASSED BILL

Repeals Obamacare’s individual mandate.

 

MEDICAL EXPENSE DEDUCTION

CONFERENCE REPORT

Expands the medical expense deduction for 2017 and 2018 for medical expenses exceeding 7.5 percent of adjusted gross income, and rising to 10 percent beginning in 2019.

HOUSE PASSED BILL

Repeals the deduction.

SENATE PASSED BILL

For tax years 2017 and 2018, the medical expense deduction may be taken if these expenses exceed 7.5 percent, rather than 10 percent under current law, of adjusted gross income.

SBE Council will continue to update entrepreneurs and small business owners about the progress of conference committee negotiations. Follow us on Twitter @SBECouncil!

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