The Senate Finance Committee Chairman’s Mark (Senate Mark) released last night diverges sharply in many respects from the House Bill. Although in summary form, the Senate Mark describes a comprehensive tax reform proposal that will take some time to analyze. In the meantime, the table below summarizes key features of the Senate Mark, together with a comparison to the final House Bill.
We have also released an initial version of our Senate Bill Navigator, a hyperlinked version of the Senate Mark built to ease your navigation of its text, which you can find here.
Corporates. As expected, the Senate Mark calls for a permanent reduction in the corporate tax rate to 20%, with implementation delayed until 2019. The Senate Mark significantly limits the deductibility of net interest expense (with additional limitations that apply to U.S. members of international groups) but, like the House Bill, allows for immediate expensing for certain depreciable assets on a temporary basis. In a departure from the House Bill, the Senate Mark does not specifically exclude assets of a real property business from immediate expensing. Corporate provisions in the Senate Mark also include a number of new revenue raisers summarized below.
Pass-throughs. For pass-through businesses, the Senate Mark seems to focus more on tax cuts for small businesses, allowing individual taxpayers to deduct 17.4% of “qualified business income” from a pass-through business, limited to 50% of the taxpayer’s W-2 wages, and excluding service businesses except in the case of taxpayers whose income does not exceed $75,000. The Senate Mark does not include any changes to the taxation of carried interest. However, the Senate Mark does include a provision intended to treat the sale by a non U.S, person of an interest in a partnership that conducts a U.S. trade or business as effectively connected income subject to tax in the U.S.
International. On the international side, the Senate Mark contemplates a shift toward a modified territorial system with the introduction of a dividend exemption system. As expected, the bill calls for a mandatory one-time deemed repatriation of previously untaxed offshore earnings at two rates: 10% for earnings held in cash or cash equivalents and 5% on the remainder. In lieu of the House Bill’s tax on high-profit foreign subsidiaries, the Senate Mark imposes a 12.5% “patent box” that would impose current taxation on net income of a CFC that generally exceeds a routine rate of return on the CFC’s tangible business assets (income the Senate Mark defines as “global intangible low-taxed income” abbreviated (perhaps unintentionally) as GILTI). The patent box proposal is coupled with special base erosion provisions designed to limit the ability of multinationals to reduce the taxable income of their U.S. groups.
Individuals. For individuals, the Senate Mark retains six tax brackets, ranging from 12% to 38.5% with the top rate applicable to income above $500,000 for individuals and $1,000,000 for joint filers. Although the tax rates applicable to capital gains remain unchanged, the thresholds at which the capital gains rates apply is indexed to inflation. The Senate Mark nearly doubles the standard deduction to $12,000 ($24,000 for joint filers) but eliminates personal exemptions. As expected, the Senate Mark repeals the individual deduction for state and local income taxes, but continues to permit an uncapped deduction for state and local property taxes paid or accrued in carrying on a trade or business. The Senate Mark repeals the deduction for interest on home equity loans, but the deduction for interest on mortgages taken out to acquire a home remains intact. The precise effects of these changes on individual taxpayers will depend on their circumstances.
Compensation. The Senate Mark also makes a number of important changes to the taxation of employee compensation, most notably by effectively eliminating the ability to defer compensation, which would generally be taxed when vested based on service. This effectively reinstates the changes proposed by the original House Bill which were stripped out in last night’s amendments, but without the ability to defer taxation on stock options or RSUs issued by certain private companies that was included in the House Bill. The Senate Mark modifies Section 401(k) to eliminate catch-up contributions for employees with wages of $500,000 or more.