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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Evening Update – What’s on Deck for Tomorrow

Tomorrow is set to be an exciting day in Congress for tax reform. The House of Representatives is expected to vote tomorrow afternoon on their tax bill, after clearing an important procedural hurdle earlier today.

On the Senate side, the debate over amendments began this afternoon, with the Senate Finance Committee voting down a number of amendments put forth by Democratic Senators (largely on party lines). The debate will continue tomorrow, and may extend into Friday or Saturday before the Committee votes on the Senate Mark, Senate Finance Committee Chairman Orrin Hatch said this evening. Consideration of amendments proposed by Democratic Senators is expected to take up much of the Markup time, but the Committee will also consider amendments proposed by Chairman Hatch last night (read a summary here), and may consider others.
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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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Senate Tax Proposal Establishes Base Erosion Tax

The Senate Finance Committee Chairman’s Mark (Senate Mark) released last Thursday includes a provision that would impose a so-called “base erosion tax” on deductible payments made by certain corporations to their non-U.S. affiliates in taxable years beginning after December 31, 2017.  We previously discussed a similar proposal in the House that would impose a 20% excise tax on certain payments made by U.S. corporations to their non-U.S. corporate affiliates here.

Base Erosion Tax.  The Senate Mark’s base erosion tax would apply to U.S. and non-U.S. corporations (other than regulated investment companies, real estate investment trusts and S corporations) with average annual gross receipts of at least $500 million for the prior three-year period that have a “base erosion percentage” of 4% or higher for the taxable year. 
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JCT Releases Updated Distributional Effects of House Bill

This morning the Joint Committee on Taxation released its updated estimates of the distributional effects of the House tax bill reported out of the Ways and Means Committee.

As with prior estimates of the House bill, the JCT predicts that in the later years of the 10-year budget window, taxpayers in certain income brackets will experience an increase in taxes.
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Senate Mark Changes to Employee Benefits

The Senate Mark includes a number of changes relating to employee benefit programs and qualified defined contribution plans, effective for tax years beginning after 2017.

The Senate Mark is largely consistent with the House bill in repealing certain exclusions and deductions for expenses relating to entertainment, amusement and recreation activities and moving and relocation expenses. However, the Senate Mark does not contain provisions included in the House bill repealing the deductions, exclusions or credits for qualifying employer-sponsored education expenses, employee achievement awards, adoption assistance programs and, from 2023, dependent care expenses.

The Senate Mark eliminates catch-up contributions to qualified defined contribution plans for employees age 50 or older (up to $6,000 for 2017) for any employee who received wages of $500,000 or more in the prior year.
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More on the Senate Mark’s Deemed Repatriation

Like its House bill, the Senate Mark released Thursday provides for a one-time transition tax on untaxed accumulated earnings and profits (“E&P”) of certain non-U.S. corporations. The proposal splits E&P between cash and non-cash amounts with cash taxed at a 10% effective rate and non-cash taxed at a 5% effective rate. The highlights:

Basic Framework.  Under the proposal, 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 9, 2017 or some undefined other appropriate measurement date (whichever produces more E&P). Non-U.S.
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Weekly Roundup

Last week the House Ways and Means Committee reported a tax bill out of committee for consideration on the House floor, where the GOP leadership expects it to pass on an up-or-down vote this week. View the bill as reported out of the House Ways and Means committee with our House Bill Navigator.

The Joint Committee on Taxation also released on Thursday a summary of the Senate Finance Committee’s tax reform proposals, which we have incorporated into our Senate Bill Navigator.  The Senate Finance Committee is expected to mark up its bill this week, and report it out of committee for consideration on the Senate floor after Thanksgiving.
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Comparing the House and Senate Tax Proposals Affecting Private Equity

The House and Senate versions of the Tax Cuts and Jobs Act would each have a significant impact on private equity firms, investors and portfolio companies.

We have prepared a presentation that summarizes many of the relevant provisions as they currently stand in each version and highlights their differing impact on private equity. This follows our post from last week highlighting the provisions in the House tax bill affecting private equity.
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