Chairman Brady released another manager’s amendment to the House Bill this afternoon. This amendment was promptly approved by the House Ways and Means Committee 24-16 and included in the House Bill reported to the floor.
We have incorporated this amendment into the text of the Chairman’s Mark and have generated a PDF comparison showing the revised sections, which you can find here. Click here for a comparison that shows the entirety of the bill’s text. Both comparisons are against the bill as amended on November 6th. We will follow up in the morning with an updated Tax Bill Navigator, reflecting the final bill as reported to the House floor.
Here are the amendment’s highlights:
Dividends Received Deduction. In an unexpected change, the amendment reduces the 80% dividends-received-deduction (DRD) to 65% and the 70% DRD to 50%, reinstating the effective tax rate that applies under current law to dividends received by corporations from corporate subsidiaries outside of the consolidated return context. Effective beginning in 2023, the amendment also repeals the immediate deduction for R&D expenses, instead requiring that R&D expenses be capitalized and amortized over 5 years (15 years for expenses attributable to foreign research). The amendment also imposes an 8% surtax on life insurance company income, but deletes a handful of the other insurance-related changes proposed by the original Chairman’s Mark. (The Ways and Means Committee Summary indicates that this surtax is a placeholder.)
Pass-Throughs. The amendment also adds a number of provisions that are intended to be favorable to businesses conducted in pass through form. Specifically the amendment:
- introduces a new 9% tax rate for the first $37,500 of an individual’s share ($75,000 for married couples filing jointly) of active business income received from a pass-through business (phased out for individuals with taxable income in excess of $75,000 ($150,000 for married couples filing jointly)) (This rate would be phased-in over three years);
- reinstates the current law exception from self-employment tax for an individual’s share of income received as a limited partner in a partnership, deleting a change in the Chairman’s Mark that would have provided that individuals are subject to self-employment tax on their “labor percentage” of trade or business income, including from pass-through entities; and
- for S-corporations that convert to C-corporations within two years following enactment and maintain the same ownership, (i) allows any income inclusions resulting from Section 481 adjustments to be paid over 6 years (instead of 4 years under current law) and (ii) allocates the accumulated adjustments account to distributions and makes distributions chargeable to accumulated earnings and profits in the same ratio as the amount of such accumulated adjustments account bears to the amount of accumulated earnings and profits.
International. On the international side, the amendment:
- increases the tax rates applicable to the deemed repatriation to 14% on cash and cash equivalent earnings and 7% on non-cash earnings (12% and 5% under the Chairman’s mark); and
- on the foreign excise tax provisions, it deletes the markup on deemed expenses that was added by the Chairman’s November 6th amendment and expands the foreign tax credit to apply to 80% of foreign taxes, determined by applying Section 906(a) principles.
Benefits/Compensation. The amendment also makes a number of important changes to the bill’s employee compensation provisions, including a full restoration of the current law treatment of nonqualified deferred compensation under Section 409A. (The original bill generally would have taxed compensation when it vested, rather than when paid). This means that nonqualified stock options generally will continue to not be taxable until exercised. In addition, the amendment preserves the provision added by the Chairman’s November 6th amendment that allows employees of private companies who receive stock options or RSUs to defer for up to 5 years the income tax arising on exercise or settlement of the awards. The amendment does not touch the Chairman Mark’s changes to Section 162(m), including the repeal of the exception to the $1 million annual deductibility limit for performance-based compensation (including stock options) and commissions.
Estate Tax. The amendment delays the repeal of the estate tax for another year (until 2024), a change not included in the Committee’s Summary.
Other Individual Items. The amendment also allows tax-free rollovers from qualified tuition programs into ABLE programs and reinstates the exclusion of qualified moving expense reimbursements for members of the armed services.
Tax Exempts. Lastly, on the tax exempt side, the amendment clarifies that when determining whether the 1.4% excise tax on net investment income applies to a college or university, the institution must include the value of endowment assets held by organizations related to the institution, and not merely those that are directly held by the institution. The amendment also expands the Chairman’s Mark’s repeal of the Johnson Amendment to cover all 501(c)(3) organizations, not just churches. This provision is set to sunset by the end of 2023.