Blog Posts Tagged With Tax Rates

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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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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  Earlier versions of the Senate bill, consistent with the bill passed by the House, repealed the corporate AMT.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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Chairman Hatch’s Modifications at a Glance

Last night the Joint Committee on Taxation released a description of Senate Finance Committee Chairman Hatch’s proposed Modifications to the Senate Mark of the Tax Cuts and Jobs Act.  Reports in anticipation of the Chairman’s Modifications had described them as intended to reduce the deficit increases otherwise expected under the initial Senate Mark.  The JCT also released an updated score last night that reflects the impact of the Chairman’s Modification. In addition to modifying the tax brackets applicable to individuals, increasing the child tax credit, and repealing the individual mandate to obtain health insurance under the Affordable Care Act, the Modification make several noteworthy revisions to the original Chairman’s Mark.
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More on the Senate Mark’s Corporate Provisions

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%.
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More on the Senate Mark’s Real Estate-Related Proposals

The text of the Senate Finance Committee’s proposed tax reform bill has not yet been released, but the Senate Finance Committee Chairman’s Mark released in summary form (“Senate Mark”) suggests that it will differ from the House bill as reported to the House floor on November 9 in several material respects. Below, we highlight several of the proposals mentioned in the Joint Committee’s summary that are of interest to the real estate industry.

17.4% Deduction for Certain Pass-Through Income (including REIT dividends).  Subject to the wage limitation mentioned below, the Senate Mark generally allows an individual to deduct 17.4% of its “domestic qualified business income” from a partnership, S corporation, or sole proprietorship.
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Senate Mark at a Glance

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.
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Brady’s Second Amendment at a Glance

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.
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The House Tax Bill Provisions Affecting Private Equity

The House tax bill contains several provisions that could significantly affect private equity sponsors, investors and portfolio companies. Below we have highlighted a number of these proposals, including discussions of:

Carried Interest. The House bill generally would limit the favorable taxation of carried interest to investments that have a holding period of more than three years, and treat carried interest attributable to gains on investments held for three years or less as short-term capital gain (taxed at the rates applicable to ordinary income).
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Weekly Roundup: Key Posts and What’s on Deck This Week

Last week was a busy week at Tax Reform And Transition. House Republicans released text of a tax reform bill on Thursday (view the full bill through our Tax Bill Navigator), followed by an official Chairman’s Mark on Friday. Late Friday night, the Joint Committee on Taxation released an official summary of the Chairman’s Mark, together with their assessment of the revenue effects and distributional effects of the Chairman’s Mark.

You can read our grid summarizing the key provisions of the bill here. Here’s a round up of the tax reform topics covered in our more detailed posts so far:


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JCT Publishes Summary of House Tax Bill

Late last night the Joint Committee on Taxation released its description of the House’s draft tax bill, which you can find here. Yesterday the Joint Committee also released its estimates for the revenue effects of the bill (as revised by the Chairman’s mark), which you can find here, as well as its estimates for the distributional effects, which you can find here.

The Joint Committee is a nonpartisan committee of the Congress that is currently chaired by House Ways and Means Committee Chairman Kevin Brady (R-TX).
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More on the House Bill’s Proposed Taxation of Pass-Through Income

One of the more anticipated features of the House tax bill was a proposal to apply a special reduced tax rate to business income derived by individuals through sole proprietorships, partnerships and other pass-through entities and arrangements. We have previously written about the proposal from a private equity perspective as well as from an overall tax policy perspective.

The bill follows through on the proposal and introduces a special 25% maximum rate on “qualified business income” derived by individuals, but imposes several limitations on eligibility designed to prevent the conversion of wages and other personal services income into business income.
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More on the House Tax Bill’s Corporate Tax Changes

There is broad political support for the proposition that the U.S. corporate tax system makes U.S. companies less competitive. The House tax bill responds to this challenge by proposing to lower tax rates and reduce or eliminate deductions and credits. Here are the noteworthy items:

Rate Reduction.  The bill would replace today’s graduated corporate tax rate, which includes a top marginal rate of 35%, with a flat rate of 20%. Personal service corporations would be subject to a 25% rate. The changes would take effect next year and would be permanent. The bill would eliminate the corporate alternative minimum tax.
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More on the House Tax Bill’s Deemed Repatriation

As widely expected, the tax reform bill released today by House Republicans provides for a one-time transition tax on untaxed accumulated earnings and profits (“E&P”) of certain non-U.S. corporations. Under the “Tax Cuts and Jobs Act,” E&P would be split between cash or cash equivalents and non-cash amounts, with cash and cash equivalents taxed at 12% and non-cash amounts taxed at 5%. The highlights:

Basic Framework.  Under the bill, 10% U.S. shareholders of a non-U.S. corporation generally will include in income their pro rata share of the foreign corporation’s previously untaxed accumulated E&P, determined as of November 2, 2017 or December 31, 2017 (whichever produces more E&P).
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The House Tax Bill at a Glance

The draft legislative text released today comes in at over 400 pages, and will take some time to analyze.  In the meantime, the table below summarizes key features of the bill.  In addition, a section-by-section summary prepared by the House Ways and Means Committee is available here.  We have also released an updated version of our Tax Bill Navigator, a hyperlinked version of the bill built to ease your navigation of its text, which you can find here.

As expected, the bill calls for an immediate and permanent reduction in the corporate tax rate to 20%.  The bill significantly limits the deductibility of interest expense for certain businesses, introducing a cap equal to 30% of earnings before taxes, depreciation and amortization, and limits other deductions but provides for immediate expensing of depreciable assets on a temporary basis.  
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The Big Six Framework “Arrives”

The Big Six tax reform framework has arrived, sort of. The Big Six officially released “The Unified Framework for Fixing our Broken Tax Code” this morning, in a format (and in many ways content) that resembles the House Republican blueprint from 2016. Although more detailed than the proposal put forward by the Trump administration in April, the Framework leaves a number of key decisions up to the House and Senate tax writing committees. Without further ado, here is a summary of what the Framework contains:

A few initial observations:

Not a Lot of Detail.  While the framework sets forth a rough outline of a tax reform bill, the level of detail contained in the framework and the number of instances where the framework specifically leaves discretion to the tax writing committees indicates that the plan is very fluid at this stage.
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(Re)Setting the Stage for Comprehensive Tax Reform: Big Six Send First Signals

The Legislative Calendar: Six Months In.  With yesterday’s late night last ditch failed effort by the Senate to pass a so-called “skinny” repeal of the Affordable Care Act, the Republican controlled chamber has nearly run the clock on its strategy for passing major legislation by majority vote, which relied on reconciliation instructions under the FY 2017 budget resolution (a process we highlighted back in December). Congress will soon need to adopt budget resolutions for the 2018 fiscal year if regular order is to be readopted and any progress is to be made on the President’s budget proposals (which are traditionally only a starting point for negotiations).
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Prospects for Tax Reform in 2017?

House Speaker Paul Ryan (R-WI) addressed the National Association of Manufacturers on Tuesday in an effort to build support for tax reform, emphasizing the unique, and diminishing, window of opportunity that exists to enact permanent tax reform ahead of next year’s primaries and midterm elections. According to his press office, this speech marks the beginning of his “sales pitch” for tax reform in 2017. Speaker Ryan’s prepared remarks are available here. You can also watch his speech here (starting at 1:41:34).

Here are the key takeaways:

  • Republicans Are Aiming for End of 2017:  Speaker Ryan said that lawmakers would “begin to turn” their plan into legislation to put in front of Congress, and promised to “get this done in 2017.” We have heard this line before, both from Speaker Ryan and from Treasury Secretary Steve Mnuchin during the press conference unveiling Trump’s tax principles.

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Reactions to the Trump Tax Plan

As noted in yesterday’s summary, the basic outline of the Trump Administration’s tax plan is largely similar to the Trump campaign proposals, with fewer details and with one notable shift toward the House Blueprint’s approach – the move toward territoriality. The table below shows how this latest plan compares to the House Blueprint and the Trump 2016 campaign plan.

In the press conference to announce the “broad-strokes” plan, both Treasury Secretary Mnuchin and National Economic Council Director Cohn said that they were in agreement with members of Congress over the four driving goals of tax reform – grow the economy and create millions of jobs, simplify the tax code, provide tax relief to American families, especially middle-income families and lower the business tax rate from one of the highest in the world to one of the lowest.
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President Trump To Announce Tax Reform Principles

The Trump Administration is expected to announce its tax reform plan during a 1:30 PM press conference at the White House today. The Administration is boasting that the tax plan will be “the biggest tax cut and the largest tax reform in the history of our country.” We will be covering the press conference, so stay tuned for our summary and analysis of what is proposed. In the meantime, here are our predictions for what we may see:

  • Corporate tax rate reduced to 15%
  • Pass-through business income also taxed at 15%
  • Repeal the corporate AMT
  • Deemed repatriation of accumulated offshore earnings taxed at 10%
  • No destination-based cash flow tax
  • Shift toward territoriality?

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Tax Reform and Revenue Raisers

One of the biggest challenges facing lawmakers in the current tax reform process is finding a way to reduce headline tax rates in a revenue neutral way. Some revenue raisers (like eliminating itemized deductions) would raise significant revenue and simplify the tax code. Other revenue raisers come at the cost of increased complexity, at least in the short term (e.g., implementing a federal VAT or a new carbon tax). Closer inspection of ideas on the table reveals that politically popular reforms are not necessarily the largest revenue raisers. For example, there seems to be bipartisan support for taxing carried interest as ordinary income (more on that here), a relatively small revenue raiser.
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The Problem of Pass-Throughs and Tax Reform

Any overhaul of the taxation of business income must address the difficult question of how to deal with pass-throughs. Most businesses in the United States are organized as pass-throughs and, since 1998, pass-throughs have earned more income than C corporations in every year except 2005. (Read the study here.) This post explains the challenges of dealing with pass-throughs in tax reform, and outlines the various ideas on the table.

Current Law Rate Differential.  Under current law, pass-throughs are not subject to U.S. federal income tax at the entity level. Instead the owners take their shares of the pass-through’s taxable income into account for purposes of determining their own tax liability, with the character of the various items of income, gain, loss and deduction generally being determined at the level of the pass-through and flowing through to the owners.
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Details on the House Health Care Bill’s Numerous Tax Changes

On Monday night the House of Representatives unveiled legislation to repeal and replace the Patient Protection and Affordable Care Act (the “ACA”), which would reduce numerous federal taxes by eliminating almost all of the tax increases that were introduced as part of the ACA.  A copy of the bill is available here.  According to analysis released yesterday by Congress’ Joint Committee on Taxation, the bill, titled the American Health Care Act (“AHCA”), is expected to reduce taxes by approximately $600 billion over ten years.  Although the bill leaves untouched the economic substance doctrine that was codified with the ACA, the bill notably provides significant taxpayer relief by:

  • Repealing the 3.8% tax on certain net investment income under Section 1411 for taxable years starting after December 31, 2017
  • Repealing the 0.9% Medicare surtax under Sections 3101 and 1401 on wages above certain thresholds starting after December 31, 2017
  • Reducing to zero the penalty/tax on employers that do not offer qualifying health insurance, effective starting in 2016
  • Reducing to zero the penalty/tax on individuals who do not purchase qualifying health insurance, effective starting in 2016
  • Repealing the annual fees imposed on health insurance providers and certain manufacturers and importers of branded prescription drugs, effective starting in 2018
  • Delaying from 2020 to 2025 the imposition of an excise tax on certain high-value health insurance plans (commonly referred to as “Cadillac plans”)
  • Generally lowering the threshold for deductibility of medical expenses for taxable years starting after December 31, 2017 and extending through 2017 the lower threshold under current law for taxpayers aged 65 or older
  • Repealing the tax on medical devices under Section 4191 for sales after December 31, 2017
  • Repealing the limitation on salary reduction contributions for health flexible spending arrangements under Section 125(i) for taxable years beginning after December 31, 2017
  • Increasing the maximum contributions to Health Savings Accounts (“HSAs”) under Section 223 and lowering the applicable tax on distributions from HSAs includible in income for taxable years beginning after December 31, 2017
  • Expanding the definition of qualified medical expenses to include non-prescription over-the-counter medicine for purposes of HSAs, Archer MSAs under Section 220, and Health Flexible Spending Arrangements and Health Reimbursement Arrangements under Sections 105 and 106 for taxable years beginning after December 31, 2017
  • Repealing the sales tax on indoor tanning services under Section 5000B starting in 2018
  • Eliminating the limitation on deductibility of remuneration for services paid by health insurance providers under Section 162(m) for taxable years beginning after December 31, 2017

Unlike prior versions of the bill leaked to the press in recent weeks, the AHCA does not include a cap on the exclusion from income for employer-provided health insurance under current law.
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Tax Reform: A Private Equity Perspective

The Trump administration and House Republicans have each proposed tax law changes that, if enacted, would significantly impact private equity, both directly and (potentially more significantly) through the businesses in which private equity funds invest. The consequences of the proposed changes vary by industry and therefore the proposals may have an uneven impact across the private equity sector.  We highlight a few of the major proposed changes below.

Lower Tax Rates.  The House and Trump plans would cut corporate tax rates to 20% and 15%, respectively.

Treatment of Pass-Through Entities (Including, Potentially, Private Equity Management Companies).  The House plan would tax the “active business income” of pass-through entities at a maximum rate of 25%. 
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Tax Rates and Horse Trading

The House Blueprint and the President’s plan currently represent the primary visions for tax reform. Both would reduce tax rates for individuals and corporations (the House Blueprint caps the top individual rate at 33% and the corporate rate at 20%, while the President’s plan maxes out at 33% for individuals and 15% for corporations). Click here for a full comparison of the two plans. Although the administration’s position on revenue neutrality has not been entirely clear, the President’s nominee to head the Treasury Department, Steve Mnuchin, stated that the President’s tax plan would not increase the deficit after taking into account macroeconomic feedback and both House Speaker Paul Ryan (R-WI) and House Ways and Means Committee Chairman Kevin Brady (R-TX) have recently reiterated their commitment to pass a revenue neutral tax reform bill by the August recess.
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