Blog Posts Tagged With Proposed Reform

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Post-Reform Estate Planning

Among the many changes to the U.S. tax code that became law today when the President signed the legislation known as the Tax Cuts and Jobs Act (the “TCJA”) are the doubling of the Federal estate, gift and generation-skipping transfer (“GST”) tax exemption amounts from $5 million to $10 million per individual, with additional inflation adjustments as under prior law. The increased exemption amounts, however, are scheduled to expire on December 31, 2025.

We anticipate that estate planning in 2018 will be focused on reviewing Wills and other testamentary documents to make sure they continue to function appropriately in this new tax environment (particularly if they contain “formula dispositions” of the type described in this memorandum) and, where appropriate, on taking advantage of the increased exemption amounts through additional lifetime gifting.
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It’s Official: Congress Passes Tax Reform

The GOP Tax bill, formerly known by the short title Tax Cuts and Jobs Act (“TCJA”), the most significant tax legislation since the Tax Reform Act of 1986, has passed both houses of Congress and awaits the President’s signature. The TCJA makes major changes to the taxation of individuals, modifying individual tax brackets and marginal tax rate, while limiting (eliminating) deductions and exemptions. However, the most significant changes are on the business side, where it fundamentally changes the taxation of corporations, pass-thru entities and multinational groups.

We have prepared a series of memos analyzing the legislation, which you can find here.
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Where the Final Tax Reform Bill Landed on Executive Compensation

On December 15, the Conference Committee reconciling the House and Senate tax reform bills released its full bill text to be voted on by both chambers of Congress and, if approved, presented to the President.  The compensation provisions in the final bill are substantially the same as those in the Senate bill.  The most important of these provisions are as follows:

Deduction Limit on Executive Compensation Paid by Public Companies.

The final bill makes the following changes to Section 162(m):

  • The exceptions for performance-based compensation (including stock options) and commissions are repealed.
  • The list of covered employees is expanded to include the CFO.

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Conference Committee Releases Final Bill

The Conference Committee has released its final legislative text of the Tax Cuts and Jobs Act of 2017.  At the same time, the committee released its conference report (an explanation of the final text), together with the JCT’s preliminary revenue estimates. You can read the final legislative text here, conference report here and JCT revenue estimates here.

We also ran a comparison of the final legislative text against the final Senate Bill, which is available here.

 

 
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Comparison of the Final House and Senate Bills

While the last-minute changes made to the Senate Bill brought the House and Senate Bills closer together, a number of important differences remain.  The House and Senate will attempt to hammer out these differences over the next few weeks in conference committee. In the meantime, we have prepared a comparison of the more salient provisions of the two bills.

You can view the full text of the bills on our House Bill Navigator and Senate Bill Navigator. We also ran a comparison of the final Senate Bill against the initial legislative text, which is available here.
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Where We Stand on Executive Compensation Under the Final House and Senate Bills

In the early morning hours of December 2nd, the Senate passed its own version of the tax reform bill.  The compensation provisions in the final Senate Bill are very similar to those in the final House Bill, with only a few exceptions.

Outside of the provisions directly impacting compensation, described below, the Senate Bill differs from the House Bill in two key ways, which could have a significant effect on compensation program decisions depending on how they are ultimately reconciled.

  • First, the Senate Bill reduces the corporate tax rate effective January 1, 2019, as opposed to January 1, 2018 in the House Bill.

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Updated JCT Score of Senate Bill

The Joint Committee on Taxation released an updated estimate of the revenue effects of the Senate Bill, revising earlier estimates to account for the Manager’s Amendment introduced shortly before the Senate Bill passed the Senate on December 1. The JCT found that the Senate Bill as modified by the Manager’s Amendment would reduce federal revenues by $1.447 trillion over 10 years, up slightly from the $1.414 trillion estimate produced for the Senate Bill as reported to the floor by the Senate Finance Committee. You can view the revenue effects here.
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Last Minute Retention of Corporate AMT in Senate Tax Bill has Unintended Consequences

The tax reform bill passed by the Senate early Saturday morning (the “Senate bill”) retains the corporate alternative minimum tax (“AMT”) apparently without any changes to current law.  Earlier versions of the Senate bill, consistent with the bill passed by the House, repealed the corporate AMT.  This late change to the Senate bill has a number of apparently far-reaching (and hopefully unintended) consequences for corporate taxpayers, including potentially undoing many of the benefits of the international tax reform provisions that are part of the bill.

Background on AMT.  Under section 55, a corporation’s federal income tax for the year is increased to the extent that its “tentative minimum tax” (“TMT”) for the year exceeds its “regular tax” for the year. 
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Senate Passes Tax Bill

After a late night flurry of re-drafting, the Senate voted 51-49 to pass its tax reform bill, with the support of all Republican Senators other than Senator Bob Corker (R-TN).

The Senate Bill as reported to the floor was replaced by a Manager’s Amendment shortly before the final vote occurred. You can view the text of the Manager’s Amendment (with hand-written adjustments here). The final bill text has not been released yet, but we will update the blog when it is. Stay tuned early next week for an updated comparison grid between the House and Senate bills as well.

From here, the Senate and House bills head to conference committee to resolve the differences between the two bills.
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JCT Releases Dynamic Score of Senate Bill

The Joint Committee on Taxation (“JCT”) released their dynamic score of the Senate Bill as reported by the Senate Finance Committee this afternoon. You can read the release here.

The JCT estimates that the Senate Bill would increase the level of GDP relative to the baseline forecast by 0.8 percent on average throughout the ten-year budget window.   This forecasted increase in GDP reduced the JCT’s estimates of the revenue lost by the Senate Bill over the 10-year budget window by $458 billion over the JCT’s static score, resulting in an estimated revenue loss of $956 billion over the budget window.
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Senate Publishes Legislative Text

The Senate Finance Committee released legislative text this evening, implementing the summaries contained in the Senate Mark reported out of Committee last Thursday. We will follow up tomorrow with an updated Senate Bill Navigator tool, keyed to the bill.  In the meantime, you can read the the full text of the bill here.
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House and Senate Proposals Affecting Exempt Organizations

The Tax Cuts and Jobs Act passed by the House and the Senate Mark approved by the Senate Finance Committee each contain numerous proposals that would affect tax-exempt organizations, in some cases materially. Below we highlight some of the provisions that are of relevance to public charities and certain other exempt organizations.

Excise tax on “excessive” executive compensation.  Both the House Bill and Senate Mark would introduce a new 20% excise tax on compensation above $1 million paid by tax exempt organizations to their highest paid employees in any tax year after December 31, 2017—the top five employees under the House bill, and the top three under the Senate plan.
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Weekly Roundup

With Congress in recess for the Thanksgiving holiday, this week is expected to be significantly less exciting than the last two weeks of tax reform. The House passed its tax reform bill last Thursday afternoon. Later that night, the Senate Finance Committee approved a series of manager’s amendments to the Senate Mark (the Senate’s summary of its tax reform proposal), and promptly thereafter reported the revised Senate Mark out of committee. You can read the amendments offered here.

On Friday, the Joint Committee on Taxation released a revised revenue score for the Senate Mark as reported out of committee, which you can read here.  
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Key Compensation Changes in Chairman Hatch’s Modifications to the Senate Bill

On November 14, the Joint Committee on Taxation released a summary of the Chairman’s Modifications to the Senate’s tax reform bill, which add or remove a number of provisions relating to compensation.

  • Deferred Compensation.  The Chairman’s Modifications remove a provision that would have taxed almost all compensation at vesting (when no longer subject to a service requirement) and thereby effectively would have ended the ability to defer compensation. This provision was included in the original House bill but was not included in the bill passed by the House.
  • Deferral of Stock Options and RSUs.  The Chairman’s Modifications add a provision that allows employees of certain private companies to elect to defer the taxation of stock options and RSUs for up to five years after exercise of the options or settlement of the RSUs.

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Senate Finance Committee Reports Mark to Floor

The Senate Finance Committee voted to report the Senate Mark to the floor on party lines (14-12). The final Mark reported to the floor includes a set of manager’s amendments offered by Chairman Orrin Hatch shortly before debate ended. You can read the amendments here.

In one key change, the amendment would impose a three-year holding period requirement for qualification as long-term capital gain with respect to partnership interests received in connection with the performance of services – i.e. a similar carried interest proposal to the one contained in the House Bill. The amendment also allows for a modified historic rehabilitation tax credit and adds an exception to the Senate Mark’s FIFO rule for regulated investment companies.
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House Ways and Means Committee Report on the Tax Cuts and Jobs Act

The House Ways and Means Committee’s official Report on H.R. 1, the Tax Cuts and Jobs Act, the tax reform bill that passed the House, includes additional explanations of the bill that were not previously included in the Committee’s initial section-by-section summary (or additional summary) or the Joint Committee on Taxation’s description of the bill.  The Committee Report also addresses certain technical issues with the bill.

Deemed repatriation inclusion mechanics.  For example, the Committee Report acknowledges that the bill’s mandatory deemed repatriation provisions requiring U.S. shareholders to include their pro rata share of their specified foreign corporation’s earnings and profits could be interpreted to require multiple inclusions with respect to the same earnings and profits in certain cases. 
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House Passes Tax Cuts and Jobs Act

Today the House of Representatives passed the Tax Cuts and Jobs Act by a vote of 227 to 205, with only 13 GOP House members voting no.  As expected, the bill did not receive a single vote from the Democratic caucus. All attention now turns to the Senate, which is still in the process of marking up the Senate Mark and is expected to report a bill out of Committee by the end of the weekend.
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JCT Releases Updated Distributional Effects of Revised Senate Mark

This morning the Joint Committee on Taxation released updated distribution tables for the Senate Mark, revised to take into account the amendments proposed by Senate Finance Committee Chairman Orrin Hatch (R-UT) on Tuesday. (You can read our summary of the amendments here).

In contrast to the JCT’s estimates of the original Senate Mark, the revised estimate shows those earning less than $75,000 facing a tax increase by 2027 (including a 25.4% increase for those earning between $20,000 and $30,000 when compared to current law).

On Thursday morning, Senator Hatch told reporters that the increase was driven in large part by the repeal of the individual mandate, because removing the penalty would lead to fewer individuals signing up for federally subsidized health coverage (the subsidies are delivered in the form of tax credits in many instances). 
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