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Comparing the House and Senate Tax Proposals for You and Your Business
On November 2, House Ways and Means Committee Chairman Kevin Brady introduced the Tax Cuts and Jobs Act, which proposes significant tax changes for businesses and individuals. The 429-page bill is generally consistent with the tax reform framework that Republican leaders previously released.
On November 9, the Senate Finance Committee released a summary of its tax reform plan (but not proposed statutory language). The proposals, if enacted, would generally be effective January 1, 2018.
The following table offers a first look at some of the significant aspects of the two proposals.
|Current law||House proposal, (as amended)||Senate proposal|
|Personal tax rates||Seven tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, 39.6%||Four tax brackets: 12%, 25%, 35%, and 39.6%, and a 6% surtax on a portion of income in excess of $1.2 million ($1 million for single filers)||Seven tax brackets: 10%, 12%, 22.5%, 25%, 32.5%, 35%, 38.5%|
|Personal long-term capital gains and qualified dividend tax rates||Up to 23.8%||Up to 23.8%||Up to 23.8%|
|Maximum pass-through tax rate||39.6%||Passive business: 25% plus net investment income tax; Active business: generally 30% of income subject to 25%, and 70% of income subject to 39.6%; Personal service business: maximum 39.6%||Ordinary rates with deduction of 17.4% of qualifying domestic income; limited deduction for income from lower-income service businesses|
|Maximum corporate tax rate||35%||20% (25% for personal service corporations)||20% effective years beginning after 2018|
|Dividends received deduction||70% deduction for dividends received by C corporations; 80% in the case of ≥20% owned corporation||50% deduction for dividends received by C corporations; 65% in the case of a ≥20% owned corporation||Same as House plan|
|Personal standard deduction|| Married filing jointly: $12,700
Head of household: $9,350
| Married filing jointly: $24,400
Head of household: $18,300
| Married filing jointly: $24,000
Head of household: $18,000
|Child tax credit||$1,000 per child||$1,600 per child and a $300 credit for taxpayer, spouse, and non-child dependents||$1,650 per child; $500 per non-child dependent|
|Depreciation||Fixed assets are generally capitalized and depreciated; In some cases, Section 179 immediate expensing of up to $500,000 is available||Immediate expensing of most new and used property (excluding structures) through 2022; Section 179 limit increased to $5 million||Immediate expensing of most new and used property (excluding structures) through 2022; Section 179 limit increased to $1 million|
|Depreciable life of buildings||39 years for most non-residential buildings; 27.5 years for residential rentals||39 years for most non-residential buildings; 27.5 years for residential rentals||25 years|
|Mortgage interest||Deductible on up to $1.1 million of debt; interest on second home deductible||Deductible on up to $500,000 of debt; interest on existing debt subject to pre-tax reform limit of $1.1 million no second home or home equity interest||Deductible on up to $1.0 million of debt (including interest on debt to acquire a second home); no home equity interest deduction|
|Personal state income and property tax||Allowable as an itemized deduction||Property tax capped at $10,000; income tax deduction repealed||No state income or property tax deduction|
|Business interest||Generally deductible||Generally limited to extent interest exceeds 30% of income; unlimited for small business||Same as House plan except unlimited carryover|
|Cash method of accounting||Generally limited to business with less than $1 million, $5 million, or $10 million in revenue depending on facts||Expanded to include businesses with less than $25 million in revenue||Expanded to include businesses with less than $15 million in revenue|
|Domestic production activities deduction||Domestic producers eligible for a deduction equal to 9% of their qualifying income||Repealed after 2017||Repealed after 2018|
|Alternative minimum tax (AMT)||Corporate AMT: 20%; Personal AMT: 26%/28%||Repealed||Repealed|
|Net operating losses (NOL)||Generally carried back 2 years and forward 20 years||Carryback repealed except farms (one year); carryover deduction limited to 90% of pre-net operating loss income||Carryback repealed except farms (two years), carryover limited to 90% of pre-net operating loss income|
|Gift and estate tax||Tax of up to 40% imposed on gifts and estates, subject to a $5.45 million lifetime exemption per spouse||Lifetime exemption doubled; estate tax repealed after 2023; gift tax remains in effect with 35% rate in 2023; step-up continues||Lifetime exemption doubled; estate tax remains in effect|
Keep in mind the House and Senate bills will experience several modifications before being signed into law and each proposal must pass the required constitutional steps.
The House bill will be taken up by the House Rules Committee and then considered by all members of the House.
The Senate Finance Committee will continue to modify its plan which, in turn, will be subject to amendment by the full Senate.
The House and Senate will most likely pass different tax reform bills, in which case an appointed conference committee will resolve differences between the two bills.
The final bill must be passed by both the House and Senate before being submitted to President Trump for approval.
How we can help
The tax reform process is fluid. We will continue to inform you of the major steps as they are completed to help you understand the potential impact on you and your business. Please contact us if you have any questions regarding the proposed bills, the impact the bills would have on you and your business if enacted, or tax strategies you can adopt to take advantage of opportunities and respond to challenges tax reform may present.