The Senate Finance Committee has released a summary of its proposed tax legislation (what we refer to as the Senate Mark), though without any legislative text. Following the House, the Senate Mark would lower tax rates and reduce or eliminate deductions and credits for corporations, but in several respects it takes an approach that differs from the House bill (which you can read about here). Here are some of the highlights:
Rate Reduction. Like the House bill, the Senate Mark would eliminate the corporate alternative minimum tax and replace today’s graduated corporate tax rates, which include a top marginal rate of 35%, with a flat rate of 20%. This rate would apply to all corporations, including personal service corporations (which, under the House bill, would face a 25% rate). The deduction for dividends received from less-than-100% owned corporations would be reduced, largely preserving current effective tax rates on dividends received by corporations (the House bill, as amended and reported to the Floor last week, incorporates a similar proposal). The changes under the Senate Mark would take effect beginning in 2019 (a year later than in the House bill) and would be permanent.
Increased Expensing. As in the House bill, corporations (and other businesses) would be entitled to deduct 100% of the cost of certain capital expenditures, an increase from 50% under current law. The new rules would apply to property placed in service after September 27, 2017 and would expire after five years. Expensing would not be available to certain regulated utilities (but as a tradeoff, these utilities would be exempt from new limits on interest deductions). Unlike the House bill, the Senate Mark does not exclude real property businesses from the entitlement to increased expensing.
Interest Deduction Limited. The Senate Mark would cap the annual deduction for net business interest expense at 30% of a taxpayer’s “adjusted taxable income,” which is equal to a taxpayer’s taxable income plus certain modifications. Unlike the House bill, the Senate Mark would not add back depreciation and amortization in calculating adjusted taxable income, a difference that could yield a materially lower annual limit on a taxpayer’s ability to deduct interest expense. (In essence, the House bill’s limit is based on a definition of “adjusted taxable income” that is similar to EBITDA, while the Senate proposal is based on a definition that is similar to EBIT). The Senate Mark would, however, allow an indefinite carryforward of unused interest expense (as compared to a five-year carryforward under the House bill). In the case of consolidated groups, the limitation would apply at the consolidated return level. The Senate Mark also includes a separate provision that limits interest deductions to U.S. taxpayers that are members of international groups based on relative debt/equity ratios.
- Like the House bill, the Senate Mark does not make mention of an exception for financial or insurance businesses, although it allows interest expense to fully offset interest income.
- The rules would not apply to certain small businesses, certain regulated utilities or, at the taxpayer’s election, real property businesses. Real property businesses that elect out of the limitation, however, would generally be required to use slower depreciation schedules with respect to real property placed in service after 2017 than real property businesses that do not so elect. You can read more about that here.
Net Operating Losses. As in the House bill, under the Senate Mark net operating loss carryforwards would no longer expire (they currently expire after 20 years), and net operating loss carrybacks generally would be eliminated. Net operating loss carryforwards could be used to offset only 90% of taxable income in a given year. The Senate Mark says that carryforwards would be adjusted to take account of the 90% limit, but does not provide detail on the nature of the adjustment.
FDIC Premiums Deduction Limited. Like the House bill, the Senate proposal would disallow a deduction for a percentage of the premiums paid to the Federal Deposit Insurance Corporation by financial institutions with more than $10 billion in assets. The percentage is equal to the financial institution’s assets in excess of $10 billion divided by $40 billion, capped at 100%, which would result in financial institutions with assets of $50 billion or more being ineligible for the deduction. These premiums can amount to hundreds of millions of dollars for the largest financial institutions.
Income Recognition. In a clear divergence from current law and the House bill, the Senate Mark would require that income be recognized for tax purposes no later than the year that it is taken into account as income on an “applicable financial statement,” with certain exceptions. An “applicable financial statement” is generally a financial statement using accepted accounting principles and prepared for nontax reasons, such as a Form 10-K or governmental filing.
Modification or Elimination of Various Deductions and Credits. The Senate Mark lists certain other deductions and credits that would be eliminated or limited, including those for:
- Income attributable to domestic production activities (section 199),
- Entertainment expenses and de minimis fringe benefits, and
- Historic rehabilitation.
The list of deductions and credits that would be eliminated or limited is substantially shorter than in the House bill, however.
Finally, we note again that the Senate Mark is only a summary of the Senate bill. This summary is the subject of markup in the Senate Finance Committee this week, and may be amended as markup progresses. Moreover, actual legislative text is yet to come, and will of course include more detail that may clarify, modify, or add to the points listed above.